This Saturday, International Monetary Fund(IMF) policymakers failed to head off a forex war. China's top central banker, Zhou Xiaochuan, rejected demands for a quick yuan revaluation, declaring that Beijing would reform gradually, rather than engage in any kind of shock therapy. The yuan would move slowly toward an equilibrium level. Zhou argues that any sudden and sharp revaluation of the yuan would put a lot of Chinese companies in the export sector out of business, triggering massive job losses and social unrest.
Basil Venitis declares the forex war has already erupted! The Fed is flooding the world with cheap dollars. American current monetary policy acts as a competitive devaluation against emerging-market currencies. There is a currency war, but there is nothing we can do about it. The USA should act more responsibly in face of the present economic situation and not simply find a scapegoat in order to please US voters. USA Inc. is bankrupt, that's the short and long of it. It's following the route of a lot of other has-been empires. The global currency system is lopsided and controlled by China. Yuan will eventually stabilize at a higher rate, but it will be China that will decide when and how it revalues Yuan.
The velocity of circulation of money in the economy has plummeted to its lowest level in half a century. Money that people don't spend does not cause inflation. It also does not stimulate the economy. Banks have cut back on lending, despite all the billions of dollars and euros that were dumped into them in the name of stupidus stimulus. Consumers have also cut back on spending. For the first time, more gold is being bought as an investment to be held as a hedge against a currently non-existent inflation than is being bought by the makers of jewelry. There may not be any inflation now, but eventually that money is going to start moving, and so will the inflation.
China's success is due to low-cost manufacturing. This is attributed to a combination of cheap labor, good infrastructure, medium level of technology and skill, high productivity, favorable government policy, and an undervalued exchange rate. China is so adroit in melding diplomacy, jawboning, and action to keep the value of its currency low that you have to feel something approaching compassion for its plodding adversaries from the U.S., Europe, and Japan.
China's latest well played move is its pledge to use some of its massive foreign currency reserves to support Greece, which will eventually default. While China does have an interest in global economic stability, especially stability in currency regimes, this was not a move primarily motivated by a regard for European solidarity or even the principle that cheaters deserve a second chance.
Fiscal troubles in the euro area mean a volatile and most likely weakening euro. By contrast, support from a large outside player like China is likely to strengthen the euro against the dollar, to which the Chinese authorities have pegged their own currency at a rate generally accepted to be considerably undervalued. A weak euro means that Chinese exports to the euro zone become more expensive, hence the support, which is cheap at the price, because, after all, Greece is not currently issuing bonds and talk is, the last time it traded on the exchanges, fetching absolutely nothing.
Venitis muses China is in a finacial position to buy all Greek State assets! Looking for a Fourthreichian foothold, China has already bought the port of Piraeus. Due to Greek financial meltdown and expected bankruptcy of Greece, all Greek assets are at extremely low prices. These underpriced assets can be easily bought at even lower prices with proper kickbacks to Graecokleptocrats! Greece can easily become the gateway of China to Fourth Reich.
No country or currency zone could escape the maelstrom of an international forex war, as all countries are interconnected via their exchange rates. This is partly what makes it so dangerous when a country devalues its currency to boost its economy. If one side secures such a competitive advantage for itself, it automatically puts the other side at a disadvantage. If the other side reacts with a devaluation, this triggers a downward spiral where everyone is the loser. Such a fateful development is a deflationary spiral, a term from a dark, bygone era of economic history. It's a term which suddenly appears to be relevant again.
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