Currency Wars, Trade Wars…World Wars?

Trend forecaster, Gerald Celente, has a mantra he repeats every time in his interviews: “Crash, Depression, Currency Wars, Trade Wars, World Wars.”

In November 2010, The Federal Reserve announced a second round of financial stimulus known as “Quantitative Easing” or QE2. Immediately, Chen Deming, China’s Minister of Commerce, said that the Fed’s policy of devaluing the US dollar is causing Japan, South Korea and Thailand to intervene in the currency market, which will escalate into an all  “currency war.” Later, Guido Mantega, Brazil’s Finance Minister used the same words to describe the Fed’s monetary policies. Not too long ago, on November 20, 2012, Mantenga declared that QE3 “will reignite the currency wars with potentially drastic consequences for the rest of the world.”

What exactly is the Fed trying to accomplish with all of these rounds of financial stimulus?

Seeking Alpha has an excellent article on this topic titled Currency Wars: U.S. Attack

Doubling down on QE3, the Federal Reserve (Fed) Chairman Bernanke tells China and Brazil: allow your currencies to appreciate. One does not need to be a rocket scientist to conclude that Bernanke wants the U.S. dollar to fall. Is it merely a war of words, or an actual war? Who is winning the war?

[…] QE3, as it was announced last month, is the Fed’s third round of quantitative easing, a program in which the Fed is engaging in an open-ended program to purchase Mortgage Backed Securities (MBS). To pay for such purchases, money is created through the strokes of a keyboard

[…] Through the rules of fractional reserve banking, this cash can be multiplied on to create new loans and expand the broader money supply. The money used for the QE purchases is created out of thin air, not literally printed, although even Bernanke has referred to this process as printing money to illustrate the mechanics.

“Helicopter” Ben at work. The article continues:

Why call it a war? It was Brazil’s finance minister Guido Mantega that first coined the term, accusing Bernanke of starting a currency war. Here’s the issue: like any other asset, currencies are valued based on supply and demand. When money is printed, all else equal, supply increases, causing a currency to decline in value

[…] It becomes a war because someone’s weak currency is someone else’s strong currency, with the “winner” being the country with the weaker currency. The logic being a weaker currency promotes net exports and GDP growth. If the dollar is debased through expansionary monetary policy, there is upward pressure on other currencies. Those other countries like to export to the U.S. and feel squeezed by U.S. monetary policy.

Bernanke speaking at an IMF sponsored seminar in Tokyo pointed to the other side of the coin: if China, Brazil and others don’t like his policies because they create inflation back home, they should allow their currencies to appreciate. But these countries are reluctant as stronger currencies lead to a tougher export environment.

No wonder Deming and Mantega are furious. If the Renmimbi and Real gain value, their exports will become expensive; if both currencies lose value, inflation will take place. Brazil, just like China, has decided to play hard ball.

The Washington Post reports:

When the Brazilian economy began to stall last year, officials in Latin America’s largest country started pulling pages from the playbook of another major developing nation: China.

They hiked tariffs on dozens of industrial products, limited imports of auto parts, and capped how many automobiles could come into the country from Mexico — an indirect slap at the U.S. companies that assemble many vehicles there

[…] The country’s slowdown and the government’s response to it is a growing concern among U.S. officials worried that Brazil may be charting an aggressive new course — away from the globalized, open path that the United States has advocated successfully in Mexico, Colombia and some other Latin American nations, and toward the state-guided capitalism that the United States has been battling to change in China. As the world economy struggles for common policies that could bolster a still tentative recovery, the push toward protectionism by an influential developing country is seen in Washington as a step backward

[…] Brazilian officials insist the measures are a temporary buffer to help their developing country stay on course in a world where they feel under double-barreled assault from cheap labor in China and cheap money from the U.S. Federal Reserve’s policy of quantitative easing.

Mantega doesn’t mix words. For him “The US, Europe and the UK are more protectionist than Brazil.” The main difference between these two countries is that Brazil, unlike China, is in good terms with the rest of Latin America, whereas China is having a hard time getting along with its Asian neighbors.

Please consider First Japan, Then India, Now Vietnam; China Unfriending Everyone

Is history repeating itself? Was 2008 the 1929 of our time? Are we following the same historical pattern: crash, depression, currency wars, trade wars, world wars?

Read Central-bank currency wars conjure images of the 1930’s trade wars, and watch this interview with Gerald Celente, and make your own conclusions:

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