Hanami celebrations under the cherry blossoms in Ueno Park, Tokyo (Photo credit: Wikipedia)
According to the South China Morning Post (“Japan stimulus will start currency war, say Chinese economists”),
“The Bank of Japan will double its monetary base to 270 trillion yen (HK$22.1 trillion) by March 2015.”
Doubling their monetary base?! In just 2 years?! That’s an average of 50% increase per year! Ohh, the beasts! The damn Japs are inflating the yen and starting another currency war!! Oh-Em-Gee!!!
According to the St. Louis Federal Reserve bank, between A.D. 1971 (when the dollar went off the gold standard) and September of 2008, the U.S. monetary base increased steadily from about $100 billion to $900 billion. That’s an increase of about $800 billion (800%) over 37 years—an average increase of about 22% per year.
Thus, even in “good times,” the US monetary base could be expected in increase by 22% per year.
However (also according the St. Louis Fed), during the “bad times” since September of 2008, the U.S. has increased its monetary base from about $900 billion to today’s $3 trillion. That’s an increase of over 230% in 4.5 years—an average of about 50% per year—just like Japan’s current proposed increase.
Q: If it’s OK for the US to increase its monetary base by an average of 50% per year for over 4 years, why are the Japanese castigated for increasing their monetary base by 50% per annum for the next two years?
A: In essence, Japan is being condemned for devaluing the yen over the next 2 years at an annual rate very similar to the US devaluation over the past 4.5 years. More, Japan is being accused of starting a currency today by doing exactly what the US has done for the past 4.5 years.
So, if there’s a currency war, is it being started now, by Japan? Was it started in 2008 by the U.S. under the guise of Quantitative Easing? Or did a global currency war actually begin in A.D. 1971 when the US abandoned the gold standard?
“Many of China’s top economists are livid at what they view as an effective currency devaluation [inflation] by Japan and are calling on the People’s Bank of China to retaliate by weakening the yuan to defend itself in what they see as a new currency war.”
Have you ever heard of any man, organism or institution that could “defend itself” by becoming “weaker”? I have not.
Nevertheless, economists report no danger or inherent contradiction in a policy that advocates economic “strength” through monetary “weakness”. To me, a policy of “strength through weakness” is either inherently stupid or, more probably, an outright lie intended to deceive.
If some persons or institutions are going to be “weakened” by inflation in order to “strengthen” the nation, who are those persons/institution?
Justification
The justification for currency war seems to be “trickle-down economics”. If Japan inflates its currency, its multi-national corporations will sell more Japanese products to foreign countries; those corporations will make more profits; and, eventually, those profits will “trickle down” to Japan’s workers in the form of more jobs and/or higher wages. If government allows the rich to get even richer, sooner or later some of those riches will “trickle down” to the peasants.
That’s a nice theory. There’s similar theory that every December 24th, a fat man dressed in red will deliver free toys to all the good little girls and boys. But is there any more evidence to support the trickle-down theory than there is to support the Santa Claus theory?
I don’t think so. Rich people are rich because they know the value of money. The pursue money. They nearly worship money. Therefore they won’t spend a nickel that won’t earn them a dime.
Poor people, people on the other hand, have no idea of the value of money and will therefore waste what little they have and seldom escape poverty.
Contrary to the trickle-down theory, if you give more money to the rich, they’ll simply keep more. If you want to stimulate the economy, give the extra money to the poor and middle class. They’ll generally waste it in short order, and it will then fall into the hands of the rich. But the rich will be forced to compete among themselves to acquire the wealth of the poor and middle class rather than simply seek a subsidy or grant from the government under the guise of the “trickle down theory” and being “too rich to fail”.
As a result of increased competition among the rich to get the money of the poor and middle class, the poor and middle class may benefit by seeing products that are lower cost and higher quality.
But currency wars don’t give more money to the poor and middle class. Instead, those groups are impoverished by the resulting inflation intended to give more money to the rich. Probable result of currency war? Higher domestic prices, lower quality and a declining standard of living.
Currency Wars
The Daily Bell (“Is Japan’s Devaluation an Attack on China?”) suggested that Japan’s doubling of its monetary base was intended to “start a currency war aimed at least in part at China.”
We’re all encouraged to believe that “currency wars” are waged by one country against another country. I believe that belief is basically a bunch of Kabuki.
Yes, one nation’s currency war may be intended to bolster its own exports and thereby cut into the sales of another nation’s exports. But that cut in sales for foreign countries is more a consequence of currency war than an objective.
Currency wars aren’t aimed at foreign countries—they’d aimed at a nation’s own people.
Proof?
Q: Who are the principle casualties of a currency war?
A: The people of the nation conducting currency war.
Why? Because currency wars are fought by means of increasing a country’s monetary base in order to inflate that nation’s currency and thereby make it less valuable.
For example, if the US engages in “currency war” against the “evil” Japs, the US will inflate the fiat dollar, thereby reducing the fiat dollar’s value (purchasing power) and making US exports “cheaper” and more attractive on the global market.
So, let’s suppose that, in the name of “currency war,” the US gov-co caused enough inflation to reduce the dollar’s value/purchasing power by 10%. By inflating the dollar, American exports become 10% less expensive and therefore more competitive on the global market. Multinational corporations manufacturing products in the US would see their profits and share of global market grow.
Q: But, just how does inflation cut the price of American exports?
A: Primarily, by reducing the value of the dollars paid to the American workers.
If gov-co uses inflation to cut the value of the dollar by 10%, an American worker who was making $30/hour will see his pay cut by 10%. Ohh, he’ll still be paid a nominal $30/hour, but he’ll only receive $27/hour in purchasing power.
Seemingly international currency wars cause domestic inflation which causes a national wage reduction. Currency wars cut labor costs. When the average American worker is paid less for his labor, the average multi-national corporation, its stockholders and executives can make more profits. When the US causes 10% inflation, it causes virtually every American worker to suffer a 10% pay cut.
More, 10% inflation causes every retiree to take a 10% cut in their pensions. Prices go up 10%, but the retirees’ monthly pensions lag behind.
National Debt
10% inflation also causes a corresponding decline in the actual magnitude (purchasing power) of the national debt. If the national debt is only $16 trillion and the government causes 10% inflation, the real size of the national debt (in terms of purchasing power) might also be reduced by as much as $1.6 trillion. That’s nothing to sneeze at.
But, as the national debt grows, the potential impact of 10% inflation also grows. For example, if the national debt is actually over $200 trillion (as claimed by the Congressional Budget Office) and the government causes 10% in inflation, the real size (purchasing power) of the national debt might be reduced by as much as $20 trillion. In one year. That’s big bucks.
Thus, the larger the national debt, the greater the incentive—even necessity—for government to repudiate that debt by inflating the fiat dollar. If the national debt is only $16 trillion, the government might not inflate the dollar. If the national debt is actually over $200 trillion, you can bet that inflation will cause significant inflation.
By means of just 10% inflation, the gov-co might cause a 10% reduction in the standard of living of almost every American who doesn’t understand that inflation is organized crime (theft) committed against the people by their own “benevolent” government. Currency war and the resulting inflation may be great for corporations exporting products to foreign countries—but it’s terrible for the average American workers, retirees and creditors.
So wake up. When your government inflates the dollar, you are being robbed . . . by your own government. Therefore, stand up, scream, shout and protest.
Insofar as a nation’s workers, retirees and creditors bear the brunt of the losses caused by currency war, those people must be the true, intended targets of “currency war”.
Nevertheless, the Daily Bell observes that,
“It is indeed possible to hypothesize that Japan’s current policy is intended to confront China and therefore is being used as a monetary ‘weapon of war’.”
Again, I disagree that hypothesis. China is not Japan’s real target.
“War” is traditionally waged against a foreign nation.
“Currency war” is primarily waged against a nation’s own people.
Therefore, I’d say that increasing the monetary base and inflating a nation’s currency is not a “weapon of war” (against foreigners) so much as a “weapon of genocide” because that “weapon” is primarily directed by a government against its own people.
• I guarantee that as Japan inflates the yen, Japanese workers will be paid less and Japan’s standard of living will fall. I guarantee that as Japan’s stand of living falls, so will their people’s life expectancy. That decline in life expectancy may not be dramatic but it will be measurable. Therefore, by means of “currency war,” the Japanese government will cause the premature deaths of millions of elderly Japanese.
As those elderly Japanese die, so will the pension obligations of Japanese companies and/or Japanese government.
Thus, currency war is not only waged to cut the costs of labor, it’s also waged to: 1) cut the expense of keeping the promises to feed the no-longer-productive/profitable retirees; and 2) cut the cost of repaying the government’s national debt to its creditors.
Even so, insofar as Japan engages in currency war, the “popular opinion” (ignorant opinion) of the Japanese people will probably be that the “currency war” is being waged against China, South Korea or even the US. But Japan’s currency war (inflation) will be primarily directed against the Japanese people since they’ll be the primary losers of both income and life expectancy in that “war”.
• Likewise, when the US increases the monetary supply by 200% over 4 years, the American workers are the “casualties” who suffer the losses in pay, jobs, standard of living and life expectancy.
Each nation’s government wants its people to believe that it’s waging currency war against some foreign country. But, actually, every government’s currency war is primarily against its own people.
In the name of fighting China, Japan will conduct “currency war” against the Japanese workers and retirees. In the name of fighting Japan, the US will conduct “currency war” against American workers and retirees. In the name of fighting the US, China will conduct “currency war” (inflation) against the Chinese people.
Currency war is largely political theater intended to conceal a government’s determination to reduce the income of the vast majority of its own people.
The nation that engages in currency war reduces its own national debt and impoverishes its own people.
Therefore, Ask not for whom the currency war tolls; the currency war tolls for thee.