Friday, February 15, 2013

Japan breaking ranks from G-20 in race to bottom

The other 19 countries in the G-20 are upset that Japan has devalued their currency faster than they.  All the countries are manipulating their currencies for devaluation.  They are trying to do it in an orderly, concerted way to reduce the risk of shock to the global financial system.  While everyone is proceeding to the exits in an orderly fashion, the sight of one person sprinting would create panic.

G-20 Seeks Common Ground on Currencies After Yen Split

If all the countries devalue their currencies together 1) none will gain an 'unfair' advantage in the export market 2) the loans to another country will not lose value.  For example if the Yen devalues 15% versus all other currencies, Japanese exports are that much lower cost to importers which give Japan an 'unfair' advantage.   And those countries that made loans to Japan (denominated in Yen) would lose 15% because the Yen that is used to pay back the loans would be worth 15% less than the Yen that Japan borrowed.  This is a hypothetical example because I think that Japan is actually in a net creditor position.  Japan has loaned out more than it has borrowed from other countries.  So think of Spain, or Italy, or France instead of Japan.  If Italy devalued the Lira all the German, US and Chinese banks that loaned Italy money would realize huge losses.  Yes, Italy is part of the Euro now and the Lira does not exist anymore which complicates the situation.  However until recently, the countries of the Euro were not obligated to cover each others debts even though the debts were all denominated in Euros.  

Countries are devaluing their currencies because they are bankrupt and there are two ways out.  The first way is to declare bankruptcy and pay all your creditors 60 cents on the dollar or whatever you can afford.  Iceland did this a couple years ago.  Countries often do this by issuing a new currency.  The second is to devalue the currency so that the value required to pay their debts is less.  An example: the country of Bennistan borrows 100 Bens from its citizens to finance a war and bail out its banks.  Bennistan agrees to pay back the debt in 30 years.  At the time a 100 Bens will purchase 100 barrels of oil and 10 ounces of gold in the global market.  15 years later it is clear that Bennistan will not be able to pay back these 100 Bens when they are due.  Over those first 15 years Bennistan continued to borrow more and more money.  Now Bennistan decides to create or print 100 new Bens and use these to pay off the debt coming due.  The global market sees the Bens are worth less than before because there are now more Bens for the same Bennistan economy.  So the rest of the world demands more Bens for their exports.  A 100 Bens will now buy only 50 barrels of oil and 5 ounces of gold in the global market.  The citizens of Bennistan get paid back the Bens that they loaned their country, but by the time they get their money back it is worth less.  It has less purchasing power.  

It takes only 4% inflation to lower purchasing power by 50% in 10 years.  Many of the citizens of Bennistan do not realize that they have indeed loaned their country a lot of money.  They have not purchased Bennistan treasury bills.  They have agreed to be paid their retirement benefits (social security and medical) many years after earning it, which is in all practicality the same as loaning their country the cost of these benefits.

Today in the USA we've seen oil and gold costs in US dollars increase dramatically over the last 10 years.  Retail prices for gas are up from about $1.50 per gallon to over $3.50 today.  Gold bullion is up from about $350 per ounce to over $1,600 today.  Interestingly, gold and oil prices have been pretty flat over the last 2 years.

No comments:

Post a Comment