Certain phrases, such as “trust me” or “I’ve got this,” often raise red flags. When a seemingly smooth contractor assures you, “trust me, your kitchen will be finished before Christmas,” skepticism is warranted. You can bet it won’t be completed until late spring.
Similarly, when an overwhelmed client states, “I won’t need your services for now; I’ve got this,” brace yourself for a frantic call by 5 PM on Friday. “This is way more than I can manage,” they’ll plead, “please handle it.”
On Monday, during a market storm, the Chinese yuan fell to over 7 per dollar for the first time in more than a decade. U.S. Treasury Secretary Steven Mnuchin seized this moment to label China a “currency manipulator.”
Mnuchin’s reasoning seems to hinge on the idea that China manipulated its currency by not sufficiently intervening in foreign exchange markets to support the yuan. Ironically, his definition excludes direct interventions made to uphold a centrally planned price that aligns with his interests. Go figure!
In an effort to bolster confidence in the yuan and counter accusations of being a malicious currency manipulator, the People’s Bank of China (PBOC) unveiled a yuan fixing plan. Specifically, the PBOC will sell 30 billion yuan ($4.2 billion) worth of offshore bills in Hong Kong on August 14. This strategy aims to drain liquidity from offshore markets and thus strengthen the yuan against the dollar.
But why bother?
Cooperative Currency Debasement
The state of the world in 2019 resembles a manufactured illusion. A towering heap of debt, layered upon more debt, has created a financial system that is precariously misaligned with the actual economy. Central bankers tirelessly endeavor to manipulate counterfeit money and foreign exchange rates to prevent the entire structure from crashing down.
To keep this precarious system upright, as George W. Bush would put it, the chief strategy employed by central bankers is currency debasement. By inflating their currencies, they aim to stabilize asset prices and corporate operations that are reliant on low-interest credit. Without ongoing currency debasement, the entire debt structure risks collapsing, and assets and businesses could be sold off for mere pennies.
Although such liquidation might be necessary to align prices and businesses with economic reality, the path to achieving that would be fraught with disruption. Numerous businesses would be forced to close indefinitely, leading to soaring unemployment rates.
Moreover, central planners are acutely aware that debt deflation and liquidation would unseat today’s wealthy and powerful elite, reducing many to impoverishment. This is precisely why they are determined to stave off such an outcome.
However, the act of currency debasement requires careful handling. Major global central banks must work together, coordinating their efforts to ensure a semblance of stability while debasing their currencies.
Arriving at a Distinctly Ugly State
The crux of the matter is that all central banks engage in currency manipulation to maintain an acceptable financial environment. Yet, above all, they need to inject liquidity into credit markets via debasement to elevate asset prices and delay a substantial liquidation event. Ultimately, these tactics face certain failure.
For one thing, they overlook the fact that foreign exchange markets consist of more players than just central bankers. These markets are vital for international trade and are utilized by large investment funds to hedge against sudden devaluations. Speculators also exploit perceived price differences, often as a direct result of central bank interventions.
Add a currency war to the mix and escalate the trade conflict, and maintaining this manufactured reality becomes increasingly challenging. Eventually, it will become impossible to prevent a downslide. Before that occurs, things are bound to escalate into a particularly ugly state.
On Thursday, President Trump took to Twitter to advocate for more currency manipulation:
“As your President, one would think that I would be thrilled with our very strong dollar. I am not! The Fed’s high interest rate compared to other countries is keeping the dollar strong, making it harder for our outstanding manufacturers like Caterpillar, Boeing, and John Deere to compete fairly.
“With significant Fed Cuts (there is no inflation) and no quantitative tightening, the dollar will enable our companies to prevail against any competition. We possess the greatest companies in the world, and no one comes close. Unfortunately, the same cannot be said for our Federal Reserve. They have miscalculated at every turn, yet we continue to win. Can you imagine what would happen if they actually got it right?”
Indeed, we can envision various outcomes. We can foresee that when the Fed heeds Trump’s requests for substantial rate cuts, the aftermath will diverge significantly from his expectations.
Instead of revitalizing American businesses, it could drown them under an overwhelming tide of debt. After that, we’ll witness a dramatic decline.
Sincerely,
MN Gordon
for Economic Prism
Return from Getting to a Special State of Ugly to Economic Prism
