The unfolding currency war that currently dominates the financial press has its causes firmly rooted in US monetary policy deployed since the credit crunch and the ensuing global financial crisis according to analysts at “EurasiaTrade”. The failure of Bear Stearns, Lehman Brothers and Merrill Lynch, the astonishing relegation to practical insolvency and subsequent nationalization of mortgage financing giants Fannie Mae and Freddie Mac as well as the bailouts of AIG, GM and others called for an unprecedented effort to plug the huge holes in the good ship America’s hull.
Interest rates slashed to zero, TARP (Troubled-Asset Relief Program), $1.25trn worth of quantitative easing, the Federal Reserve’s discount window, the TALF (Term Asset-Backed Securities Loan Facility) and other attempts were made to stabilize the financial system and then rebuild the US economy. “All these bailouts and stimulus took their toll on the US dollar and, as a result, it has weakened significantly since 2007. The trouble is, because the US is the largest trading partner for several major economies around the world, it has had the effect of making their exports to the US proportionally more expensive. Seeing as those countries have an obligation to provide an environment conducive to economic growth that’s every bit as valid as America’s, they have taken steps to protect their economies”, said a “EurasiaTrade” analyst. Whilst the scale of the US efforts have been unmatched by all with the exception, perhaps, of the United Kingdom, the net effect has resulted in the currencies of America’s main trading partners to fall in concert with the US dollar but this is appears to be of less concern to US authorities than the fact that China’s currency, the renminbi or yuan, remains undervalued against the dollar despite relentless pressure from Washington.
China, they say, is intervening in the FX market to keep the yuan cheap and hurting US exports by making them more expensive to buy in China. The “EurasiaTrade” analyst explained, “Well what on earth did the Americans expect China to do? They have to protect their economy too. We don’t agree with suggestions that China played its part by simply accepting US T-Bonds and agency debt in return for cheap goods instead of calling time on America’s excessive borrowing. Your local electrical store isn’t going to tell you to stop buying LCD televisions from them using your credit card because they think you’re running the risk of becoming tapped out, are they?” “EurasiaTrade” says they expect the situation to worsen in the coming months as investors begin to lose patience with US monetary profligacy and demand higher yields for holding US debt. The US is headed for austerity whether it likes it or not; it’s just a matter of whether it goes quietly or not. After all, nobody likes a complainer.