The market seems to fear currency wars. At least that is how mainstream media views things.
Actually, currency wars have been going on for decades disguised in other forms.
Currency Manipulation Means
- Direct Currency Intervention
- ZIRP and NIRP
- Quantitative Easing
ZIRP stand for Zero Interest Rate Policy. It younger brother is NIRP, Negative Interest Rate Policy. Their parent is central bank interest rate policy which tends to be asymmetrical in favor of easing over tightening.
All three methods are means in which central banks engage in currency wars. Yet, only point point number one is widely recognized as such.
War Raging for Decades
Properly understood, currency wars have been raging nonstop for decades.
Continuous trade wars go back to August 15, 1971. That’s when Nixon closed the gold window allowing central banks to print money at will and governments to spend at will with no effective brakes other than inflation.
Total Credit Market Debt Owed (TCMDO) now stands over $72 trillion dollars.
Inflation has been nonstop, and much higher than reported because governments and economists do not see asset bubbles, inducing housing bubbles as inflation.
The result is the third major bubble since 1999.
Trump Accuses China of Currency Manipulation
Trump is correct.
China directly manipulates its currency. So does the Swiss national Bank and so has the Bank of Japan.
Indirectly the Fed sought a cheaper US dollar with ZIRP and QE policies which the EU soon followed.
The EU is now the global leader in NIRP and QE.
China does not allow the yuan to float.
The yuan may be hugely overvalued and could crash if China actually floated it. Chinese State Owned Enterprises (SOEs) are all bankrupt, and Chinese banks are in worse shape than US banks.
Periodically, China has artificially strengthened the yuan and capital controls to stop capital flight.
So what would happen if China simultaneously floated the yuan and stopped capital controls? A crash perhaps?
If so, Trump would get the opposite response that he wants.
Global Currency Wars
The important point is not Yuan manipulation per say, but a major step up in currency wars led by the EU and China.
Trump wants the US to join the party.
The Fed will do just that, forced by Trump’s tariff policy and actions by the ECB.
How to Stop the Wars
Stopping the currency wars (and trade wars at the same time) is easy enough in theory. Revert to the gold standard.
But expect the opposite: More financial repression and more NIRP led by the EU and Japan with Trump pressuring the Fed to follow.
Gold vs Faith in Central Banks
If you believe faith in central banks has peaked this cycle, acting on that belief should be easy.
Meanwhile, please note that a Global Manufacturing Recession Has Started.
The trade war escalation will make matters far worse.
Recession is at hand.
Mike “Mish” Shedlock