Tuesday, October 5, 2010

Whole Global Currency System In State of Jeopardy: Hypocrisy

Germany's Der Spiegel comments on the current chaotic currency markets, where all industrialized nations are in a race to the bottom. Protecctionism in disguise.

Der Spiegel warns about U.S. bill H. R. 2378, "... bill imposing punitive tarifs on countries that undervalue their currencies is set to unleash a new trade war between the US and China. But in fact the whole global currency system is in a state of jeopardy."

Today the 16 countries of the euro zone asked China to let its currency appreciate. They told Chinese Prime Minister Wen Jiabao that the renminbi's "effective exchange rate remains undervalued."

"Given China's important role we do think that a significant and broad-based appreciation of the renminbi would promote a more balanced growth to the benefit of both China and the global economy,"

H. R. 2378 -- Currency Reform for Fair Trade Act" was on the agenda of the US House of Representatives late last Wednesday afternoon. Fair trade -- who could object to that?

Der Spiegel says the bill sounds like war. "International trade is a high-stakes, cutthroat business. And every time we simply talk, the other side acts. And every time they act, an American loses a job," said Xavier Becerra, a Democratic congressman from California. Timothy Murphy, a Republican from Pennsylvania, went one step further: "We are about to lose our position as a global leader when next year China overtakes us as the biggest manufacturer in the world. The trouble is that China has never really accepted the basic rules of fair trade."

"There was one verbal attack right after the other, for roughly an hour. Speaker after speaker condemned the alleged "currency manipulators" from China..."

"The bill calls for the US Department of Commerce to start imposing -- even without approval by US President Barack Obama -- punitive tariffs on certain countries. The initiative specifically targets countries that have "a fundamentally undervalued currency," "persistent global current account surpluses" and very large currency reserves -- in other words, China".

The interesting aspect is that other countries say that the U.S.'s currency is devalued, case in point: Brazil, whose currenvy has appreciated the most in the last year.

We track all currency ETFs live here.

As the bill passed the House by a vote of 348 to 79, Der Spiegel continues: "The trade conflict between Beijing and Washington has thus entered a new, acute phase. One month before the high-stakes mid-term congressional elections, America's representatives, alarmed by nearly 10 percent unemployment and a gloomy economic outlook, have rediscovered an old friend: protectionism.

American Hypocrisy

"There is, however, also a fair amount of hypocrisy behind the latest American initiative. Nobody has controlled the currency markets as much as the US has in the past. The US Federal Reserve still continues to print dollars to finance skyrocketing government debt. The fact that this erodes the value of the US currency is something that the Americans seem not to care about. Of course, this makes imports into the US more expensive, but it also makes American exports cheaper and enhances the competitiveness of US companies".

"Nothing is as it should be on the global currency markets. It seems as if the world has been turned upside down -- and has become very dangerous. Indeed, for better or for worse, the well-being of entire countries depend on the value of these currencies, meaning that instability on the currency markets also threatens the structure of the global economy".

"If the exchange rates are manipulated, imbalances increase and problems become more marked -- until they ultimately escalate. That would threaten to spark a currency crisis that could bring down entire economies".

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