Nations race to Devalue their Currencies to Boost Exports and Destroy Retirement Savings

Posted by PITHOCRATES - February 3rd, 2013

Week in Review

If you ever traveled to a foreign country you know what you had to do before buying foreign goods.  You had to exchange your currency first.  That’s why they have currency exchanges at border crossings and airports.  So people can convert their currency to the local currency.  So they can buy stuff.  And when traveling people liked to go to areas that have a weaker currency.  Because a stronger currency can get more of a weaker currency in exchange.  Allowing your own currency to buy a lot more in that foreign country.  And it’s the same for buying exported goods from another country.

The weaker a country’s currency the more of it people can get in exchange for their currency.  Allowing importers to buy a lot more of those exported goods.  Which helps the export economy of that nation with a weak currency.  In fact having a weak currency is such an easy way to boost your exports that countries purposely make their currencies weaker.  As they race each other to see who can devalue their currency more.  And gain the biggest trade advantage (see Dollar Thrives in Age of Competitive Devaluations by A. Gary Shilling posted 1/28/2013 on Bloomberg).

In periods of prolonged economic pain — notably the 2007-2009 global recession and the ensuing subpar recovery — international cooperation gives way to an every-nation-for-itself attitude. This manifests itself in protectionist measures, specifically competitive devaluations that are seen as a way to spur exports and to retard imports.

Trouble is, if all nations devalue their currencies at the same time, foreign trade is disrupted and economic growth is depressed…

Decreasing the value of a currency is much easier than supporting it. When a country wants to depress its own currency, it can create and sell unlimited quantities. In contrast, if it wants to support its own money, it needs to sell the limited quantities of other currencies it holds, or borrow from other central banks…

Easy central-bank policy, especially quantitative easing, may not be intended to depress a currency, though it has that effect by hyping the supply of liquidity. Also, low interest rates discourage foreign investors from buying those currencies. [Japanese] Prime Minister Shinzo Abe has accused the U.S. and the euro area of using low rates to weaken their currencies.

“Central banks around the world are printing money, supporting their economies and increasing exports,” Abe said recently. “America is the prime example. If it goes on like this, the yen will inevitably strengthen. It’s vital to resist this.”

So a cheap and devalued currency really helps an export economy.  But there is a downside to that.  In some of these touristy areas with a really weak currency it is not uncommon for some people to offer to sell you things for American dollars.  Or British pounds.  Or Eurozone euros.  Why?  Because their currency is so week it loses its purchasing power at an alarming rate.  So fast that they don’t want to hold onto any of it.  Preferring to hold onto a stronger foreign currency.  Because it holds its value better than their own currency.

When a nation prints money it puts more of them into circulation.  Which makes each one worth less.  And when you devalue your currency it takes more of it to buy the things it once did.  So prices rise.  This is the flipside to inflation.  Higher prices.  And what does a devalued currency and rising prices do to a retiree?  It lowers their quality of life.  Because the money they’ve saved for retirement becomes worth less just as prices are rising.  Causing their retirement savings to run out much sooner than they planned.  They may live 15 years after retirement while their savings may only last for 5 or 6 of those years.

Printing money to devalue a currency to expand exports hurts those who have lived most responsibly.  Those who have saved for their retirement.  Making them ever more dependent on meager state pensions.  Or welfare.  And when that’s not enough to cover their expenses they have no choice but to go without.  We see this in health care.  Where those soaring costs have an inflationary component.  With the government squeezing doctors on Medicare reimbursements doctors are refusing some life-saving treatment for seniors.  Because the government won’t reimburse the doctors and hospitals for these treatments.  Or doctors will simply not take any new Medicare patients.  As they are unable to provide medical services for free.  And with their savings gone seniors will have no choice but to go without medical care.

The United States, Britain, Europe, Japan—they are all struggling to provide for their seniors.  As China will, too.  And a big part of their problem is their inflationary monetary policies.  Coupled with an aging population.  The Keynesians in these nations have long discouraged their people from saving.  For Keynesians see private savings as leaks in the economy.  They prefer people to spend their money instead of saving it.  Trusting in state pensions and state-provided health care to provide for these people in their retirement.  Which is why the United States, Britain, Europe and Japan are struggling to provide for their seniors in retirement.  A direct consequence of printing too much money.  And not letting people take care of their own retirement and health care.

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FT138: “High gas prices mean high food prices.” —Old Pithy

Posted by PITHOCRATES - October 5th, 2012

Fundamental Truth

We use Diesel Fuel in our Ships, Trains and Trucks to move Food from the Farm to the Grocery Store

People don’t like high gas prices.  When the price at the pump goes up more of our paycheck goes into the gas tank.  Or, more precisely, in everyone’s gas tanks.  For even if you don’t drive a car when gas prices go up you’re putting more of your paycheck into the gas tanks of others.  Thanks to oil being the lifeblood of our economy.  And unless you’re completely self-sufficient (growing your own food, making your own clothes, etc.) everything you buy consumed some petroleum oil somewhere before reaching you.

Gas prices go up for a variety of reasons.  The purely economic reason is the market forces of supply and demand.  When gas prices rise it’s because demand for gasoline is greater than the supply of gasoline.  Which means our refineries aren’t producing enough gasoline to meet demand.  And the purely economic reason for that is that they are not refining enough crude oil.  Meaning the low supply of gasoline is due to the low supply of crude oil.  Which brings us to how high gasoline prices consume more of our paychecks even if we don’t drive.  The reason being that we just don’t make gasoline out of crude oil.  We also make diesel fuel.

Diesel fuel is a remarkable refined product.  It just has so much energy in it.  And we can compress an air-fuel mixture of it to a very small volume.  Put the two together and you get a long and powerful power stroke.  Making the diesel engine the engine of choice for our heavy moving.  We use it in the ships that cross the ocean.  In the trains that cross our continents.  And in the trucks that bring everything to where we can buy them.  To the grocery stores.  The department stores.  To the restaurants.  Everything in the economy that we don’t make for ourselves travels on diesel fuel.  Which is why when gas prices go up diesel fuel prices go up.  Because of the low supply of oil going to our refineries to refine these products.

Oil is at a Disadvantage when it comes to Inflation because you just can’t Hide the Affects of Inflation in the Price of Oil

And there are other things that raise the price of gasoline.  That aren’t purely economical.  But more political.  Such as restrictions on domestic oil drilling.  Which reduces domestic supplies of crude oil.  Political opposition to new pipelines.  Which reduces Canadian supplies of crude oil.  Special ‘summer’ blends of gasoline to reduce emissions that tax a refinery’s production capacity.  As well as our pipeline distribution network.  Higher gasoline taxes.  To pay for roads and bridges.  And to battle emissions.  The ethanol mandate to use corn for fuel instead of food.  Again, to battle emissions.  All of which makes it more difficult to bring more crude oil to our refineries.  And more difficult for our refineries to make gasoline.  Which all go to adding costs into the system.  Raising the price at the pump.  Consuming more of our paychecks.  No matter who is buying it.

Then there is another factor increasing the price at the pump.  Inflation.  When the government tries to stimulate economic activity by lowering interest rates they do that by expanding the money supply.  So money is cheaper to borrow because there is so much more of it to borrow.  Hence the lower interest rates.  However, expanding the money supply also causes inflation.  And devalues the dollar.  As more dollars are now chasing the same amount of goods and services in the economy.  So it takes more of them to buy the same things they once did.  One of the harder hit commodities is oil.  Because we price oil on the world market in U.S. dollars.  So when you devalue the dollar it takes more of them to buy the same amount of oil they once bought.

Oil is at a particular disadvantage when it comes to inflation.  Because you just can’t hide the affects of inflation in the price of oil.  Or the gas we make from it.  Unlike you can with laundry detergent, potato chips, cereal, candy bars, toilet paper, etc.  Where the manufacturer can reduce the packaging or portion size.  Allowing them not to raise prices to reflect the full impact inflation.  They still increase the unit price to reflect the rise in the general price level.  But by selling smaller quantities and portions their prices still look affordable.  This is a privilege the oil industry just doesn’t have.  They price crude oil by a fixed quantity (barrel).  And sell gasoline by a fixed quantity (gallon).  So they have no choice but to reflect the full impact of inflation in these prices.  Which is why there is more anger about high gas prices than almost any other commodity.

Perhaps we can lay the Greatest Blame for the Current Economic Malaise on the Government’s Inflationary Monetary Policies

Current gas prices are hitting record highs.  And this during the worse economic recovery following the worst recession since the Great Depression.  Gas prices and the unemployment rate are typically inversely related to each other.  When there is high unemployment people are buying less gasoline.  This excess gasoline supply results in lower gas prices.  When there is low unemployment people are buying more gasoline.  This excess demand for gasoline results in higher gas prices.  These are the normal affects of supply and demand.  So the current high gas prices have little to do to with normal economic forces.  Which leaves government policies to explain why gas prices are so high.

Environmental concerns have greatly increased regulatory policy.  Increasing regulatory compliance costs.  Which has greatly discouraged the building of new refineries.  And making it very difficult to build new pipelines.  Which tax current pipeline and refinery capacities.  A problem mitigated only with their restriction on domestic oil production.  The current administration has pretty much shut down oil exploration and production on all federal lands.  Reducing crude oil supplies to refineries.  These environmental policies would send gas prices soaring if the economy was booming.  But the economy is not booming.  In fact the U-6 unemployment rate (which counts everyone who can’t find a full time job) held steady at 14.7% in September.  So an overheated economy is not the reason we have high gas prices.  But the high gas prices may be part of the reason we have such high unemployment.

Perhaps we can lay the greatest blame for the current economic malaise on the government’s inflationary monetary policies.  Inflation increases prices.  Especially those things sold in fixed quantities priced in dollars.  Like oil.  And gasoline.  The price inflation in refined oil products is like a virus that spreads throughout the economy.  Because everyone uses energy.  Especially the food industry.  From the farmers driving their tractor to work their fields.  To the trucks that take grain to rail terminals.  To the trains that transport this grain to food processing plants.  To the trucks that deliver these food products to our grocery stores.  From the moment farmers first turn over their soil in spring to the truck backing into to a grocery store’s loading dock to consumers bringing home groceries in their car to put food on the table fuel is consumed everywhere.  Which is why when gasoline prices go up food prices go up.  Because we refine gasoline from the same crude oil we refine diesel fuel from.  Oil.  Creating a direct link between our energy policy and the price of food.

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After the Fed says they will Print More Money (QE3) Egan-Jones downgrades U.S. Sovereign Debt

Posted by PITHOCRATES - September 16th, 2012

Week in Review

Back when the Congress and the White House were battling it out to raise the debt limit the final compromise to raise the limit caused Standard and Poor’s to lower the U.S. sovereign debt rating for the first time in history.  The Left blamed the Republicans for refusing to raise taxes.  As if the excessive spending had nothing to do with it.  Well, another credit agency is downgrading the U.S. sovereign debt rating.  And this happened after the Fed announced QE3.  And nothing else (see Egan-Jones downgrades U.S. rating on QE3 move by Wallace Witkowski posted 9/14/2012 on Market Watch).

Egan-Jones Ratings Co. said Friday it downgraded its U.S. sovereign rating to AA- from AA on concerns that the Fed’s new round of quantitative easing, or QE3, will hurt the U.S. economy. The ratings agency said the Fed’s plan of buying $40 billion in mortgage-backed securities a month and keeping interest rates near zero does little to raise GDP, reduces the value of the dollar, and raises the price of commodities.

QE3 is Keynesian stimulus.  Printing money.  Which according to Egan-Jones won’t help the economy.  Apparently the people at Egan-Jones aren’t Keynesians.  Like in the Obama administration.  And at the Fed.  QE3 will devalue the dollar and raise prices.  While it may cause some short-term stimulus it will only make things worse in the long run.  Because of that inflation.  And it doesn’t address the real drag on the economy.  The anti-business policies of the Obama administration.  The biggest one being Obamacare.  With Taxmageddon right up there with it.  It’s the high taxes and costly regulatory policies that are holding back economic growth.  And devaluing the dollar doesn’t help these problems.  It only compounds them.  By raising prices.

QE3 will take a bad economy and make it worse.  Making the recession longer.  And the eventual recovery more painful.  Just like every recovery after a long period of inflation.  Just like after the Seventies.  Just like after the Nineties after the dot-com bubble burst.  Just like now after the subprime mortgage crisis.  There is a pattern here.  Easy money leads to irrational exuberance.  (Reckless spending encouraged by cheap money.)  And very unpleasant recoveries.  We got out of the early Eighties recession by cutting taxes.  Not with inflationary monetary policies.  We got out of the early 2000s recession by cutting taxes.  Along with some inflationary monetary policy.  The recovery wasn’t as long lasting as it was following the Eighties.  Now they are only proposing inflationary monetary policy without any tax cuts.  Which is why the Great Recession lingers still.  Proving tax cuts stimulate.  Not inflationary monetary policy.

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