Atlantic Currency War From German Perspective: The United States Lived On Borrowed Money For Too Long

Monday, November 08, 2010

An interview with German Finance Minister Wolfgang Schäuble guarantees an entertaining week with wild FX swings. Schäuble bashes not only Ben Bernanke's QE2 in German weekly "Der Spiegel" but also lambasts Treasury Scretary Geithner for blaming Germany's trade surplus for America's economic woes.
The World Bank dropped another bombshell, essentially recommending a Bretton Woods 3 with gold as a "reference point" for valuations. Read on to find out why a gold standard would be the last life ring for the ailing dollar and could see the USA and several European countries as the winner in the coming real currency war between gold and fiat money.
Schäuble in his own words on transatlantic competitiveness:
The German export successes are not the result of some sort of currency manipulation, but of the increased competitiveness of companies. The American growth model, on the other hand, is in a deep crisis. The United States lived on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial companies. There are many reasons for America's problems, but they don't include German export surpluses.
His other bombshell concerns QE2, essentially saying that Fed Chairman Ben Bernanke is not motivated by reason:
I seriously doubt that it makes sense to pump unlimited amounts of money into the markets. There is no lack of liquidity in the US economy, which is why I don't recognize the economic argument behind this measure.
Schäuble may be right that US corporations sit on cash hoards, but QE2 will flow exclusively into Geithner's revival of Weimar economics in his desperate effort to save Wall Street.
Morgan Stanley noted immediately after the announcement of QE2 that the "money" is earmarked to support Treasuries almost all along the curve. The chart implies that investors shun longer dated maturities, realizing that record low yields do not fit into times of a crumbling US economy.

GRAPH: The Fed will bolster 5- to 10-year maturities, essentially buying all the net issuance of US government debt. Chart courtesy Morgan Stanley.
In terms of Ponzinomics the Fed does the right thing in trying to create a financial perpetuum mobile based on ever expanding credit: The Treasury prints bonds which it exchanges for the "money" the Fed prints.
As long as everybody believes in the illusion that it will work; it will. I doubt it though, as history lacks a successful example where a nation printed its way out of debt.
QE2 can also be seen as an attempt to hold down risk premiums i.e. interest rates. The coming wave of government bond issues in what is wrongly called the 1st world will guarantee a yield race to the upside as investors will emphasize the risks in their buy-side analysis.
One does not need a calculator to see the disparity between a disastrous financial environment on both sides of the Atlantic while interest rates hover at record lows. Recent explosions in Greek and Irish spreads are only an appetizer of what is to come next year.
The Wall Street Journal has this number of the week.
$10.2 Trillion in Global Borrowing

GRAPH: Next year, fifteen major developed-country governments, including the U.S., Japan, the U.K., Spain and Greece, will have to raise some $10.2 trillion to repay maturing bonds and finance their budget deficits, according to estimates from the International Monetary Fund. That’s up 7% from this year, and equals 27% of their combined annual economic output.
So "major-developed"countries will have to borrow more than a quarter of GDP just to survive another 12 months. The WSJ sees a crunch coming:
...there’s reason to be concerned that governments’ appetite for borrowing could ultimately push up interest rates, or worse.
For one, government borrowers are tapping into smaller international capital flows. The total amount of foreign portfolio investment sloshing in across advanced countries’ borders averaged about 3.8% of global GDP in the twelve months ended June, compared to an average 9.5% in the eight years leading up to the recession.
This bond bubble is about to bust and it may be for this reason that the
World Bank Calls For A Gold Standard
After the French-directed IMF raised eyebrows with this paper (pdf) on a global reserve currency called Bancor last April, the American head of the World Bank, Robert Zoellick, shook the pillars of the Keynesian fiat money system in an opinion piece in the Financial Times where he recognized that gold is used as a monetary asset again. In his proposal for a global monetary reform Robert Zoellick recommends a gold standard as the ultimate global monetary base:
The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today. 
Zoellick's proposal may be the last arrow in the claws of the American Eagle. After a decade of unparalleled gold sales under the Central Bank Gold Sales Agreement by European central banks the USA is by far the biggest gold holder in the world, the table below from the World Gold Council shows.
World Official Gold Holdings June 2010
Taking it from this table, a return to a gold standard would mostly benefit the USA and those European countries with the biggest financial problems. As the ultimate question in this process centers on the revaluation of gold reserves another global Northwest-Southeast conflict is pre-programmed. The currency wars are full on but in the end gold will prevail over paper.


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