Tags: greek | germany | europe | debt

There Are No Winners in Global Currency Games

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Tuesday, 10 Feb 2015 07:30 AM Current | Bio | Archive


The G-20 meeting of Finance Ministers and Central Banks Governors in Istanbul, Turkey, will conclude where as usual there will be a lot of talk and wishful thinking, but at the end of the day we should expect, as always, at these kinds of gatherings very little action, which of course doesn’t include promises or good intentions.

I’m not saying Dante’s inferno related proverb is applicable here: “The road to hell is paved with good intentions,” but keeping it in mind shouldn't hurt either.

In the already leaked draft of the final communique, the G-20 gives a gloomy assessment of the global economy as a whole, saying growth is uneven and trade growth slow while at the same time many economies (the big exception is the United States) are facing also the risk of prolonged low inflation and weak demand.

Only to cite a few phrases of the draft of the communique: “…In some countries, potential growth has declined, demand continues to be weak, the outlook for jobs is still bleak, and income inequality is rising … some advanced economies with stronger growth prospects (read the U.S.) were moving closer to policy normalization … In an environment of divergent monetary policy settings and rising financial market volatility, policy settings should be carefully calibrated and clearly communicated to minimize negative spillovers ... while in reference to the need for flexible exchange rates the G20 should “stick to our previous exchange rate commitments.”

On the latter point, my standpoint remains: “Seeing is believing.”

Long-term investors should remain vigilant and certainly not fool themselves by accepting so-called plausible/credible currency exchange (band) agreements that in the end and most of the time come down to nothing more than a “game"” where logically no optimum solutions exist.

Yes, flexible currency regimes exist mainly so that the concerned economies can avoid their respective domestic prices and wages have to bear the full burden of adjustments to bilateral imbalances.

Today we are irrevocably sliding into a widespread conflictual environment, for not saying “widespread currency war zone” that has been, and still is created by all these Quantitative Easing (QE) programs that all these central banks are running and even amplifying further more because their economies require particularly drastic policy (re-)settings to restore their respective domestic equilibriums, but that in the end probably will lead (you could call that QE collateral damage) to a very "rare" synchronized boom and bust of historic proportions.

I’d like to add here I expect, but that’s my personal opinion, China also to start once again weakening its currency for strictly domestic reasons as they will try to avoid, and do whatever it takes, coming too close to a too low inflation environment.

The just released inflation data out of China show that the consumer price index (CPI) plunged to a 5-year low in January on a yearly basis to 0.8 percent and was down from 1.5 percent the month before. The producer price index (PPI), which measures the change in the price of goods purchased and sold by producers, tumbled for the 35th month in a row to negative -4.3 percent on a yearly basis and extending its negative slide from -3.3 percent the month before. The Chinese PPI has been constantly negative since March 2012.

In clear language all this implies Chinese authorities have little choice left than to ease their monetary conditions for trying to avoid a full blown deflation situation as is already reflected by the producer price index (PPI), and which, in case their monetary easing would cause (and it probably will) a too important weakening of their currency, this could put them on collision course over what’s covered under “currency manipulation nation” terms with the U.S.

And yes, then it is: “Here we go again!” which would be bad for everybody.

Finally, it’s still way too early for trying to establish a first view on what the consequences could be for a wide range of investments, in case Greece would leave the European Monetary Union.

Above all we’ll have to wait and see what comes out of the several meetings that are scheduled over the next few days.

Maybe, it could help long-term investors to refresh our memories on how the Greek debt problems got finally the attention of the markets notwithstanding their problems had been going on for years and years.

It all really began when on January 6, 2010 (yes, now 5 years ago), ECB Executive Board member Jürgen Stark (German nationality) said in an interview: “The markets are deluding themselves when they think at a certain point the other member states will put their hands on their wallets to save Greece,” and investors suddenly realized there wasn't an “implicit” guarantee for the debt of the Eurozone peripheral nations.

Thereafter it has taken two and a half years to calm investors down and reestablish confidence when on July 26, 2012, ECB President Mario Draghi stated during a speech to the Global Investment Conference in London: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

From hindsight, but that's my personal opinion, the ECB's QE program that was announced just before the Greek elections could have been put in place not only to combat too low inflation, but also to ring-fence the EZ for serious troubles that could arise because of Greece.

As said here before, nobody knows if Greece and the European policy makers will come to some kind of a compromise or not during the coming days or weeks.

If not, and let’s hope it doesn’t come to that, but if it does, watch out… it will be fasten “Greek” belts, you can be sure of that!

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HansParisis
Nobody knows if Greece and the European policy makers will come to some kind of a compromise or not during the coming days or weeks.
greek, germany, europe, debt
957
2015-30-10
Tuesday, 10 Feb 2015 07:30 AM
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