Who wins a currency war?

Discussion in 'Economics' started by Misthos, Sep 29, 2010.

  1. Who "Wins" a Currency War?

    I want to elaborate on my post below: Currency War On! The first finance official to state the obvious: "a trade war and an exchange rate war".

    Inevitably, the question arises: Who wins a currency and trade war and how? That question in my opinion, is the wrong question. A currency war is merely a symptom of a breakdown in global trade, in other words, the allocation of the world's resources and the imbalances of surpluses and deficts. A currency war is a natural evolution of fiat money. Money needs to be devalued in order to manage the growing debt in an economy.

    But there comes a point when the debt has so outgrown an economy's ability to pay, that the devaluation needs to accelerate, or else the system collapses. But acceleration can easily become a runaway train when everyone else is doing it. Some may need to devalue to pay off debts. Others need to devalue to maintain their export based economy. Others need to devalue for both.

    As this develops, no one wins. In a currency "race to the bottom" their is no finish line. Only systemic breakdown. Watch the price of gold, that is what it is telling us.

    There is no historical lesson we can draw from concerning this currency war. Never in the history of global trade has the entire world gone on free floating irredeemable fiat money. Never.

    Central Banking, as we know it today, is barely 40 years old. Historically speaking, it is a mere experiment - a blip in mankind's thousands of years of global trade. And we also can't ignore the fact that the world, through technological advances such as the internet and computers, has attained an extremely high level of complexity. Complexity comes at the expense of resiliency and robustness, IMO.

    There is no historical precedent for what we are experiencing, in my opinion.

    There will be no winners thru devaluation. Only a systemic breakdown ends the race. But eventually, there will be a "winner" so to speak.

    The winner will ultimately emerge thru war.

    That's the closest historical precedent I can come up with.

    Sovereigns store and/or accumulate weapons and gold for a reason.... for future deployment.

  2. Gold.
  3. Me.
  4. Hey, at least the US Govt spent most of our currency on weapons and weapon systems. could come in handy during that. :eek:

  5. The point you are missing, and the point many others miss, is you shouldn't confuse growth of debt with economic growth. Our gov't is running a ~10% deficit with respect to GDP. But they speak of the economy growing ~ 2 to 3%. How is that possible? This is possible because our GDP calculations use Enron accounting. Instead of subtracting the debt from GDP, only the interest payments are subtracted. So, as long as interest rates are low, we can use debt to "grow" the GDP while our level of debt is the only thing that grows. This is more true when the debt is created out of thin air and not backed by gold.
  6. If we ran a 10% deficit, more or less, say, in 1997, would it be normal for the economy to grow merely 2-3%? And what of the resultant inflation?

    I agree with what you're saying, but I'm also taking into consideration the fact that we are experiencing extreme demand destruction without the deficit spending.

    I believe that the 2-3% growth rate, with 10% deficit spending - is a sign of extreme debt destruction/deflation.

    Imagine if the government balanced the budget in 2009 and 2010. GDP would drop significantly.

    Think of the wealth of the US as a balance sheet. A government liability ultimately becomes a private sector asset - to the penny. The government is deficit spending because there is severe wealth destruction going on in the private sector. Basically, the private sector is contracting so fast that the government has to stimulate (i.e. deficit spend) to maintain gdp.

    The question is, how long can we do this without destroying the dollar through devaluation, or the economy through malinvestment? Government spending in the long run, in my opinion, distorts an economy. The economy no longer grows organically, instead the only thing that grows is the economy's reliance on government spending.
  7. Ok. What is the source of the 1.5T? I'm saying that a lot of it is coming out of thin air. So unless ink and trees are the asset you speak of, eventually this might result in inflation because no one is losing or transferring their buying power from another asset (which would reduce the price of the asset sold) to buy these treasurys. Since no asset is being sold off and reduced in price to balance things out, inflation may result as more money is created to buy treasurys.
  8. That's silly... 10% govt deficit has very little to do with 2%-3% growth. Why on earth would you subtract govt debt from GDP? That would make accounting totally wrong.
  9. My point is valid. Let's consider the gov't as a separate corporate entity. Revenue ~ 2.2T. Spending/expenses ~ 3.7T. Net loss per year ~ 1.5T. So, why is accounting that allows a corporation with a loss of 1.5T per year to advertise a 300B profit "right"?
  10. at one point there will be collapse... it will be ugly

    gold to $10 an ounce

    extreme debt default

    US dollar worth 10 euros.

    You won't believe your eyes!
    #10     Sep 29, 2010