Beggar Thy Neighbor Policies, Currency Wars

Foreign currencies have been on Fire since the Fed started telegraphing its second round of Quantitative Easing. The Rest of the World has begun bitching its head off about their excessively high currency valuations, and rightly so. To alleviate the currency imbalances that the Fed has just amplified, it had better initiate its QE 2 program at the Nov FOMC meeting. If the Fed kicks the can into the Dec FOMC meeting, the currencies wars will worsen as investors will have to continue discounting the Feds QE program. Might as well get this over with for cry eye. Headlines this weekend have been littered with calls for policymakers to do something about this “beggar thy neighbor” policies of the Fed to remedy US economic woes. From Bloomberg Finance Leaders Call for IMF Role in Averting Protectionist `Currency War' From Moody's, IMF, G-20 Must Confront Global Disequilibrium and A Return to Competitive Devaluation? Note the headlines do not point to the US/Fed as being the bad actors here that must confront the global disequilibrium. And if you read the articles behind the headlines you will find some evidence of finger-pointing at the Chinese. Certainly the Chinese are exploiting some beggar thy neighbor policies as well. But the finger-pointing at China is exaggerated and oversimplifies the increasing global currency imbalances being amplified by the Fed. From FT Leaders pledge cooperation on currencies we learn this pledge is much ado about nothing.This is nothing but political posturing towards a problem that has no painless solution to it. At least the IMF managing director Dominique Strauss Kahn was candid enough about this fact acknowledging “that the communiqué issued by the Fund's governing body was short on substance. ‘The language is ineffective,' he said, adding “policy has to be adapted”. “There is only one obstacle, which is the agreement of the members,” said a frustrated Mr Strauss Kahn who had hoped to wrap up the reform package at the weekend…“I'd say agreement will be found in the coming weeks,” he said, not quite willing to admit that in a couple of weeks the Fed will start its QE program and once underway some sort of agreement of the members will be possible. Meanwhile, Geithner was deflecting attention away from the US beggar thy neighbor policies onto the IMF and China. “The IMF must strengthen its surveillance of exchange-rate policies and reserve accumulation practices,” he told the IMF's ministerial steering committee. “[E]xcess reserve accumulation on a global scale is leading to serious distortions in the international monetary and financial system, and is inhibiting the international adjustment process.” Geithner comments were clearly alluding to China's abusive exchange rate policy and a call to action for the IMF. FT's Martin Wolf interviewed George Soros on these currency wars this weekend, and is an important clip to watch. Soros underscores how this whole mess can lead to serious trade wars and protectionism as well as many countries adopting capital controls as a way to deal with the global imbalances that are being amplified by beggar thy neighbor policies being pursued by China and the US. Soros concludes this could end badly, much like the global stagnation of the 1930s. http://video.ft.com/v/628821310001/IMF-official-G20-must-agree-to-stop-currency-war As it stands right now, there is no end in sight to the upward pressures on the Yen and other foreign currencies. Some sort of accord or crisis will have to emerge to alleviate the increasing upward pressures on these currencies. The Yen chart below shows the currency fast approaching its April 1995 record high. I don't see any signal on the chart that suggests a trend reversal anytime soon. See 4 Strong Buys here for free.