Tuesday, August 11, 2015

Trying to ride the currency tiger?

China's decision yesterday to officially devalue its currency by 1.9% against the US dollar has sent shock waves through world markets.  It's a very significant development.  The Telegraph reports:

China has had a torrid time of late: its stellar growth has slowed down and its stock market has been in turmoil for the last few months, with stocks plunging by 32pc after a high earlier this year.

According to data released over the weekend, exports and factory gate prices both collapsed in July. China watchers were expecting a prompt response from the authorities - but a currency devaluation was not anticipated.

The official explanation provided by the People’s Bank of China (PBoC) on Tuesday stated that the move was a “one-off” adoption of a market-based approach to setting the yuan's value.

But to many, the decision looks an awful lot like an attempt to stimulate the economy.

. . .

The PBoC has lowered interest rates four times since November to support the Chinese economy, which is expected to grow at around 7pc this year - the slowest expansion since 1990. But with the yuan devaluation, it looks like China has reached for stronger measures to support its GDP.

Amy Yuan Zhang, an economist at Nordea, said: "Beijing has adopted a 'whatever it takes' approach to prevent growth falling too much below the 7pc target for this year."

. . .

Tyler Cowen, of George Mason University, said: “Take this to be a signal of Chinese weakness. Overall this is a sign of surrender to the market."

There's more at the link.

The real significance of this step is that China has officially joined the 'currency wars' that are presently plaguing the world economy.  As Bloomberg points out:

“In a weak global economy, it will take a lot more than a 1.9 percent devaluation to jump-start Chinese exports,” said Stephen Roach, a senior fellow at Yale University and former Morgan Stanley non-executive chairman in Asia. “That raises the distinct possibility of a new and increasingly destabilizing skirmish in the ever-widening global currency war. The race to the bottom just became a good deal more treacherous.”

. . .

“The devaluation signals the PBOC’s eagerness to join the global currency wars,” Credit Agricole CIB strategists led by Valentin Marinov wrote in a note Tuesday. “With the competitive devaluation gaining momentum but global trade slowing, the latest yuan devaluation could be seen as likely to force other central banks to consider similar measures before long.”

A gauge of Asian currencies headed for the biggest drop since 2008 on Tuesday. Taiwan’s dollar slid to a five-year low, while Korea’s won fell to the weakest level since 2012. The yuan fell 1.8 percent to 6.3231 a dollar in Shanghai. It earlier declined 2.1 percent.

“A stable yuan had served as an anchor of some sorts for the rest of Asia,” said Khoon Goh, a strategist at Australia & New Zealand Banking Group Ltd. in Singapore. “This is no longer the case.”

Again, more at the link.

This has huge significance for the US economy.  The dollar is still the yardstick of world trade, but it's under increasing pressure from China and the Eurozone.  An expanding currency war will have profound international implications, particularly for US fiscal policy.  After all, it's not as if our economy's in great shape to begin with!  As Paul Craig Roberts reminds us:

In 1994 the Clinton regime stopped counting long-term discouraged workers as unemployed. Clinton wanted his economy to look better than Reagan’s, so he ceased counting the long-term discouraged workers that were part of Reagan’s unemployment rate. John Williams (shadowstats.com) continues to measure the long-term discouraged with the official methodology of that time, and when these unemployed are included, the US rate of unemployment as of July 2015 is 23%, several times higher than during the recession with which Fed chairman Paul Volcker greeted the Reagan presidency.

An unemployment rate of 23% gives economic recovery a new meaning. It has been eighty-five years since the Great Depression, and the US economy is in economic recovery with an unemployment rate close to that of the Great Depression.

The labor force participation rate has declined over the “recovery” that allegedly began in June 2009 and continues today. This is highly unusual. Normally, as an economy recovers jobs rebound, and people flock into the labor force. Based on what he was told by his economic advisors, President Obama attributed the decline in the participation rate to baby boomers taking retirement. In actual fact, over the so-called recovery, job growth has been primarily among those 55 years of age and older. For example, all of the July payroll jobs gains were accounted for by those 55 and older. Those Americans of prime working age (25 to 54 years old) lost 131,000 jobs in July.

Over the previous year (July 2014 — July 2015), those in the age group 55 and older gained 1,554,000 jobs. Youth, 16-18 and 20-24, lost 887,000 and 489,000 jobs.

Today there are 4,000,000 fewer jobs for Americans aged 25 to 54 than in December 2007. From 2009 to 2013, Americans in this age group were down 6,000,000 jobs. Those years of alleged economic recovery apparently bypassed Americans of prime working age.

As of July 2015, the US has 27,265,000 people with part-time jobs, of whom 6,300,000 or 23% are working part-time because they cannot find full time jobs. There are 7,124,000 Americans who hold multiple part-time jobs in order to make ends meet, an increase of 337,000 from a year ago.

. . .

Clearly, this is not an economy that has a future.

More at the link.  Bold, underlined text is my emphasis.  (I might add that I support John Williams' figures at shadowstats.com - they're far more trustworthy than the 'politically correct' statistics produced by the federal government.)

An economy resting on such parlous foundations is in no shape to handle a medium- to long-term currency war.  If China continues to aggressively weaken its own currency to support its export-driven economy, there's no telling where this might take world trade . . . but it probably won't be good news as far as we're concerned.



Old NFO said...

Shadowstats is a great resource! :-)

Judy said...

"China's decision yesterday to officially devalue its currency by 1.9% against the US dollar..."

To paraphrase, China devalue their currency against nothing or as I like to call our currency, unicorn farts.

freddie_mac said...

Best analysis I've ever found about unemployment/labor participation rate, etc. (and how the gov't games those numbers) is Abbott and Costello's routine about unemployment.

Anonymous said...

Suprisingly a currency War and decrease in trade with China could benefit greatly western economies. Apart from Germany the vast majority of Western economies run huge trade deficits with China. This has been allowed to happen by repeatedly turning a blind eye to currency manipulation. If finaly the penny is going to drop that we are being taken for Chumps then some of those 6m US jobs and probably as many in non German EU Countries will return.
In the UK we see dailey the cost of this with Chineese individuals and companies buying up large swaithes of London and our industrial base. The funny thing is its the biggest housing buble ever seen which will not effect the population of the UK as all the money is from overseas when the bubble bursts.
Global Trade was supposed to benefit all, all it has achieved is to benefit from 1970 onwards developing or down right poor countries in Asia and South Ameica at the expense of Blue Collar jobs in the west, the supposed jobs mirracle in high value manufactoring, R&D and crative industries never happened, why because those countries benefitting took the very sensible decision to limit copy right, steal ideas and ban certain types of trading including in financial services.
Hence maybe a global trade war which a currency trade war would be, would cause damage but in the long run may be beneficial.
The Ginge in the UK.

Anonymous said...

How do you know they're not preparing colony/ bug out positions? If they buy it, they "own it". If they start stockpiling trucks/ loudspeaker systems/troops(Tibet), bend over...kyagb.