This morning’s key headlines from GenerationalDynamics.com
- Quantitative easing in U.S., Japan raises concerns of ‘currency wars’
- Strengthened euro currency raises tensions
- Hugo Chávez devalues Venezuela’s bolivar currency by 32%
Quantitative easing in U.S., Japan raises concerns of ‘currency wars’
Venezuela’s bolivar currency was devalued by 32%
Many historians believe that America’s 1931 Smoot-Hawley Tariff Law,designed to “save American jobs” by making it expensive to importpreviously cheap goods from other countries, like Germany or Japan.Instead of saving American jobs, the law triggered retaliatory tariffwars around the world, dramatically reducing the amount of world tradebetween countries, actually costing jobs.
Today’s politicians are very well aware of what happened in the 1930s,and, except for a few skirmishes, have avoided imposing trade tariffsduring the current financial crisis. However, human nature being whatit is, there’s concern that countries are trying to do the same thingin a different way, by devaluing their currencies. A central bankdoes this by “turning on the printing presses” and using techniquessuch as quantitative easing to make more money available. If onecountry does this, then its currency will become cheaper relative tothe currencies of other countries, and this will improve exports,since that country’s manufactured goods will be cheaper in othercountries. For example, America’s Federal Reserve has been floodingthe markets with $85 billion per month in new “printed” money, andplans to continue doing so for a while. Japan’s central bank has saidthat it plans to do something similar. Of course, if all countriesdevalue their currencies, then you have “currency wars,” and no onebenefits. Bloomberg
Strengthened euro currency raises tensions
Talk of “currency wars” has been increasing because the euro currencyis gaining strength against other currencies. On Monday, the value ofa euro rose to $1.34, when it was close to $1.20 not too many monthsago. This is making European exports extremely expensive in America,while making American exports cheap in Europe. It’s also splittingthe euro zone countries down the middle, along the same lines as thesplit over bailing out Greece and Spain. France and the southerncountries want the European Central Bank (ECB) to “print” a lot moremoney to bail out countries that need it, devaluing the euro currencyat the same time. But Germany, the Netherlands, Austria andLuxembourg and opposed to bigger bailouts and also to devaluing theeuro. Reuters
Hugo Chávez devalues Venezuela’s bolivar currency by 32%
Venezuela’s President Hugo Chávez, who is recovering from cancersurgery in Havana, ordered his government to weaken the exchangerate for the bolivar currency to 6.3 bolivars per dollar from4.3 bolivars per dollar. This is the fifth devaluation in nineyears, and it follows a spending spree last year that helpedChávez win reelection, but also tripled the fiscal deficit andincreased inflation.
The devaluation, which was announced on Friday and is effective onWednesday, is already having dramatic effects. Venezuelansexperienced panic buying of televisions and airline tickets over theweekend, and also stocked up on groceries for fear thatinflation-based food price increases. The weaker exchange rate willgive the central government an additional 84.5 billion bolivars ($13.4billion) in revenue, mostly from oil sales done in dollars. On theother hand, foreign companies that sell products in Venezuela canexpect a sharp decline in earnings, when their sales in bolivars areconverted back to dollars. This includes a wide range of companies,including Avon Products, Coca-Cola, and Mexico-based Gruma SAB, theworld’s largest tortilla maker. Analysts said that while the latestdevaluation was expected and necessary, it still did not bring theofficial exchange rate anywhere close to the black market, meaning yetanother round of devaluations was likely before long. Bloomberg and Reuters
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