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The
meeting of the Asia-Pacific Economic Cooperation (APEC) group in Singapore
may provide an opportunity to reflect on the direction that the U.S.
Administration is now taking in international relations and economic affairs.
Despite talk of a strong U.S. dollar by Treasury Secretary Timothy Geithner
during his trip to Asia, as well as President Barrack Obama’s comments
while in China, events surrounding APEC may be instructive for understanding
the potential for the further currency devaluation, a slower global economic
recovery, and higher gold prices.
In
the recent economic crisis, central banks have accommodated government
stimulus programs to increase liquidity and avoid a financial catastrophe. As
the crisis recedes, central banks have accordingly attempted to reign in
excess liquidity and achieve currency stability and resume economic
growth. The Federal Reserve Bank appears less optimistic about growth,
unconcerned about inflation, and continues to maintain easy money
policies. Interestingly, domestic economic policy within the U.S.
appears designed to accommodate a change of national priorities willingly
contrary to currency stability and determined to drive down the U.S. dollar.
The
decline has complicated trade by nations seeking recovery and economic growth
by resuming exports against the headwind of a falling U.S. dollar. As markets
seek equilibrium, nations prevented from a return to economic stability may
have no choice but to protect their domestic economic interests by pursuing
protectionist activities or devaluing their own currency. This suggests
higher gold prices from a global perspective, not only the in the U.S., as
easy money policies in the U.S. are exported to the world.
First
Shots of a Trade War Likely Blanks
Sniping
between the U.S. and China over trade following the recent economic crisis
appears to be transitioning from talk into action, including increased
duties. Like causes of and reasons for most wars, the discontent is
widespread and mutual. Fortunately, the number of sectors impacted, or
total level of trade impacted, is relatively minor compared to U.S.-China
trade in the aggregate.
As
trade has liberalized over the decades and nations are increasingly dependent
on export, any trend toward protectionism is reminiscent of actions leading
to the Smoot-Hawley Tariff Act of 1930 that contributed to both the depth and
length of the Great Depression. While significant parallels come to mind in
comparing the current financial downturn with the Great Depression, it could
be that growing international agitation may be more a dysfunctional form of
diplomacy, laying out new boundaries and alliances, rather than taking a
match to institutionalized global free trade.
Nations
dependent on exports recognize protectionism as the nuclear option.
Accordingly, they rely on their central banks to intervene and support the
U.S. dollar to maintain currency stability and maintain the competitiveness
of their exports. Intervention may be successful in the short-run as a global
arbitrage strategy, but it is compromised if a dominant currency, the U.S.
dollar in the present situation, is bent on a path of devaluation as a means
to either reduce domestic consumption or increase exports. Foreign central
banks contemplating intervention are faced with a devil’s choice of
buying increasingly worthless currencies or devaluing their own currency in
order to boost their exports.
The
Yin-Yang Relationship of U.S.-China Relations
The
situation becomes problematic for developing nations dependent on exports to
the U.S. when China, a dominant world exporter, has pegged their currency to
the U.S. dollar. China has succeeded in setting up and accommodating a
falling U.S. dollar by its capacity to absorb large quantities of U.S.
Treasuries. The U.S. has benefited by purchasing cheaper goods and
effectively exporting its inflation to China. By fixing its currency to the
U.S. dollar, and enjoying a comparative advantage for low operating costs,
Chinese goods become more competitive in U.S. markets, basically closing
other nation’s exports out. This hybrid form of protectionism, not
universally as destructive as the Smoot-Hawley Tariff Act, may certainly
appear so from the perspective of other non-Chinese exporting nations.
China
has become equally more significant in world affairs and the U.S. has become
equally less significant. The U.S. and China seem to be approaching a
yin-yang relationship at the exclusion of others in the world economy. The
yin-yang relationship is a balance of opposites contained within a dynamic
setting. China is successfully moving from a communist system while
absorbing positive classic-liberal economic attributes of capitalism.
Conversely, the U.S. is moving unsuccessfully from a functioning capitalist
system to the anemic form of European socialism. China has successfully
combined a lassie-faire economic approach with a uniquely American Protestant
work ethic, while in the U.S., politicians and academia are attempting a
“Great Leap” backward assuaged by consumerism and a sense of
entitlement that is simply lazy. For the time being, the yin-yang
relationship will hold as long as these two nations “complete each
other.” While the yin-yang characterization of U.S.-China
relations is a snapshot of a balanced relationship, statements made by both
Secretary Geithner and President Obama suggest that the present situation
cannot be sustained indefinitely.
U.S.
Prestige and Economic Policy Pales Under International Scrutiny
The
yin-yang model appears to explain the previously harmonious U.S.-China
relations, but Secretary Geithner’s comments as stated in his letter to
the Wall Street Journal (November 12, 2009; A-23), reveal the yin-yang of his
own thinking that is out of balance with the reality of economics and
international relations. He appears to be seeking a balance of
“partnership of common interests to produce strong growth” and
“open markets” but warns other nations to “spur greater
growth of private demand in their own economies.” In other words,
nations wishing to export cheaply produced goods should buy their goods
themselves. He later explains that this is because “U.S. households
[will] save more and the U.S. reduces its fiscal deficit.” U.S.
households may expect to have less disposable income available to consume
fewer goods as they will be paying higher taxes in years to come.
Interestingly, the devaluation of the U.S. dollar increases the cost of
imports, which is an indirect form of taxation on U.S. consumers.
Comments
in the letter by Secretary Geithner included statements that appear at odds
with reality or the direction of U.S. domestic policies. He seemed to
lecture other nations on the “importance of strong financial regulation
and fiscal balance,” but this is strange coming from a U.S. treasury
official. Additionally, he suggested that durable growth would emerge from
“flexible labor markets” yet this doesn’t fit with the
preference shown to union-workers by federal intervention in auto industry,
card check legislation, and a high minimum wage. He offered a suggestion that
“economies must strengthen health and retirement benefit schemes, thus
reducing the need for high precautionary saving that contributes to global
imbalances.” This statement suggests that wealth accumulation in
the U.S. is at the root of the problem and that redistribution of wealth in
the U.S. would be part of international “rebalancing.”
President
Obama’s trip to Asia is highly significant and imperial, but the town
hall format seems to be growing tired. Asian nations, including China,
are looking for direction and are growing impatient as they hope the U.S.
takes action to stop the decline of the U.S. dollar. President
Obama’s priorities are managing global climate change and the reduction
of nuclear weapon proliferation, albeit unilaterally, by the
self-emasculating Cap and Trade legislation and disarmament. As the U.S.
steps out on the ice, other nations may be whispering, “You go
first.”
In
the yin-yang dynamic, some characteristics will remain opposites. President
Obama’s suggestion of a more open Internet in China seems to be a
non-starter. The simplicity of the yin-yang reality is that some things will
never mix. Even the suggestion, while not attending the anniversary of the
Berlin Wall, creates more questions than answers regarding his Wilsonian view
of cooperation among nations. In any event, once the show in Asia draws
to a close, it is unlikely that the direction of the U.S. economy will remain
unchanged.
President
Obama, with characteristic optimism befitting the Monroe Doctrine, projects a
positive vision of international cooperation. While APEC was clearly not the
level of a League of Nations, it was important for investors to take note of
Asian nations seeking to reduce bubbles forming in their own economies due to
devaluation of the U.S. dollar and abandonment by investors. President Obama
can’t be blamed for hoping for a breakthrough moment, but most of the
world outside of Washington simply wants to get back to work and earn a wage
in a currency it can trust.
The
Dow and Other Bubbles From Loose Money
Monetary
easing by the Fed has certainly brought a smile to Wall Street, but this has
not trickled down to the rest of the U.S. The Fed remains clearly focused on
employment numbers as its primary support for maintaining near zero interest
rates. There appears to be growing consensus among Fed presidents,
economists, and business that a recovery is being pushed further into the
future. While some unemployment is slowing, new jobs or business creation
remains scarce. Banks remain skittish and are bracing themselves against
either additional write downs or Congressional meddling and intrusion.
Congress anxious for a quick fix looks eager to propose additional stimulus
programs or a rehashed Community Reinvestment Act. Higher taxes from the
lifting of the Bush tax cuts and from health-care reform appear certain.
Stabilizing of corporate earnings are due more to cost cutting than to
increasing revenues. It is becoming increasingly difficult to believe that
markets are forward looking.
A
stagnant U.S. economy is reason enough for monetary easing, which should lead
to further dollar devaluation and higher gold prices. Should other
nations be unable to stimulate domestic spending, the loss of markets from
the devaluation of the U.S. dollar will have functionally the same impact as
a tariff, with potentially disastrous consequences for both developing and
developed nations alike. They too may be forced to resume monetary
easing to protect their own domestic export constituency, which may increase
the supply of currency world-wide and lift gold prices from most any
perspective.
Mike Niehuser
Beacon Rock Research.com
Also
by Mike Niehuser
Mike Niehuser is the founder of Beacon Rock
Research, LLC which produces research for an institutional audience and
focuses on precious, base and industrial metals, and substitutes, oil and
gas, alternative energy, as well as communications and human resources. Mr.
Niehuser was nominated to BrainstormNW magazine's list of the region's top
financial professionals in 2007.
Mr. Niehuser was
previously a senior equity analyst with the Robins Group where he was a
generalist and focused on special situations. Previously he was an equity
analyst with The RedChip Review where he initially followed bank stocks but
expanded to a diverse industry range from heavy industry to Internet and
technology companies.
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