The Whole World at Currency War

Back in December I wrote about the currency wars going on among many countries in theworld. Please consider Currency Wars, Trade Wars and World Wars? and Great Britain and Switzerland at Currency War. 

Last week Zero Hedge published and excellent article Currency Wars Often Lead to Trade Wars, Which In Turn Can Devolve Into Hot Wars. The amount of sources, which confirm that many countries are now engaging in currency devaluation is just staggering:

The Global Currency War Is Escalating According to numerous high-level insiders, we’re in a dangerous global currency war:

And Japan’s escalation of the currency war has caused leaders in the Eurozone (more), Norway, Sweden, South KoreaTaiwan, Columbia, Mexico, Peru, ChileVenezuela and many other regions to devalue or consider further devaluing their currencies. China may be joining as well.  (And James Rickard and Reggie Middleton think that Germany’s demand for its gold is part of the currency war.)

We’ve been in a global currency war for years.

As the Wall Street Journal asked in 2010:

Beggar-thy-neighbor currency devaluations proved ruinous for the global economy in the 1930s. Is the world setting off down the same slippery slope again?

Yes, we are.”

At this point is almost impossible to be skeptical about this issue anymore. On Friday, Venezuela decided to join the party too by devaluing its currency, the Strong Bolivar. The Wall Street Journal made an excellent analysis of what Venezuela, or any other country can expect, of this currency devaluation in the coming months:

The move will help narrow the Venezuelan government’s budget shortfall, but will also spur inflation that is already among the world’s highest—highlighting the increasingly difficult trade-offs faced by Mr. Chávez after a more than a decade of populist economic policies

The devaluation was widely expected sometime this year after the government ramped up spending in 2012 ahead of October’s presidential election…The spending helped Venezuela’s economy to grow by more than 5%, but also deepened the budget shortfall to anywhere from 8% to 17% of annual economic output, depending on the estimate.

Reckless spending once again.

It also drove a shortage of dollars as Venezuelans anticipated their bolívars would soon be worth less and began snapping up greenbacks on the black market, where the value of the bolívar has slid to 18 per dollar.

A lack of dollars needed to buy imports also has led to widespread shortages of some staple foods, such as cornmeal, chicken and sugar, spurring discontent.

Is this 1992?

The move should ease the fiscal gap by giving the government more in local currency terms for every dollar it earns in oil exports through state oil giant Petroleos de Venezuela, one of the world’s biggest oil companies….

The move will raise the cost of imports, and Venezuela’s economy—hit by widespread nationalizations during the Chávez years—is increasingly dependent on imports.

For all the talk of “Revolution,” the fact is that Latin America hasn’t changed that much.

Alberto Ramos at Goldman Sachs estimated Venezuela’s inflation will rise to 30% this year as a result.

[…] Among the biggest losers of the devaluation are foreign companies hoping to repatriate dollars home, Mr Naím said. The Venezuelan government has held up providing dollars to many companies, and will now give them fewer dollars for their sales in local currency terms.

Very Clever by the way.

The moves are partly meant to breathe new life into struggling local industry—weighed down by widespread nationalizations and price controls—by giving them a chance to compete against imports.

But the step is unlikely to boost competitiveness unless the government overhauls the rest of its policies, including price controls and other measures…

The currency move is likely to set the stage for a showdown in coming days between retailers and the government, which is keen to prevent the devaluation from feeding through to price increases that could erode consumers’ buying power and the popularity of the Chávez government.

All the words in boldface are mine.

As they say, the more the things change, the more they’ll stay the same. What Venezuela, and many other countries are doing, is to save their finances by printing more cheap money, in the hope that exports, somehow, can rescue their unproductive and heavily indebted economies. This was the approach followed by the majority of Latin American governments in the 80′s and 90′s: get in debt, spend, devalue the currency, cut social spending, boost exports, and make exporters very rich. That was the “Neo-Liberal” model so criticized by the “New Left” in Latin America. And look who’s doing exactly the same thing right now: Hugo Chavez. Isn’t this ironic? Don’t you think? And guess who will end up paying the price of this economic lunacy?

Despite drivel from ignorant sources, currency wars don’t help the average person.

Quantitative easing – the main lever to depreciate currency – hurts the little guy and only helps the super-elite.

Former Secretary of Labor Robert Reich points out that a weak dollar makes everyone poorer … and any new jobs created by a a policy of devaluation are low-wage jobs.

This video shows Venezuelans fighting over flour in a local supermarket:

The video was posted in January of this year. Investment Watch has a good compendium of what Venezuelans have been going through since 2012. Keep in mind 2013 has just started and because of his health, Chavez hasn’t made a public appearance since November 15, 2012.

Please consider the following interview with the always controversial, Gerald Celente, on Fox Business:

and listen to renown investor Jim Rogers on the current currency crisis.

The Intell Blog

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