The dollar is tanking lately. From a high of around 100 in December, the dollar
index -- which measures USD against a basket of foreign currencies -- is down
about 8%, and the decline is steepening. In counterintuitive currency war terms,
that means the US is winning the latest battle.
After three years of the dollar being pretty much the only strong currency
in the world, US corporate profits are falling (because it's hard to sell things
abroad when you price them in an expensive currency) and growth is slowing
(because an economy can't expand if corporate profits are falling). Presumably
the plunging dollar will offer some relief on those fronts.
But our relief comes at a high, potentially-catastrophic price for Japan and
Europe, because a weak dollar by definition means a strong euro and yen. And
those economies are totally unprepared for their exports becoming pricier and
therefore harder to move. Here's what the yen and euro are doing while the
dollar is falling:
Japan's 2016 GDP growth forecast is an anemic 1.2%. The eurozone's inflation
rate is -0.2%. French unemployment is above 10%. The list goes on, but the
scariest stats come from Italy where some major banks are trading at less than
half of book value, implying that huge loan losses are expected.
This is clearly not the time to tighten monetary policy by raising the value
of one's currency. But that's exactly what Japan and Europe are doing. And
the sense of panic is building:
Italy,
Japan urge G7 to spend for growth
(Straights Times) - Italy and Japan want the upcoming summit of Group of
Seven (G7) leaders to send a "strong signal" of support for using flexible
budget policies to stimulate a slowing global economy, the leaders of the
two countries said on Monday (May 2).
At the start of a European tour focused on preparations for the summit,
Japanese Prime Minister Shinzo Abe said he and his Italian counterpart Matteo
Renzi shared a view that an acceleration of structural reforms in leading
economies had to be accompanied by greater flexibility on budgetary policies.
"We agreed the G7 should send a strong signal in this sense," Mr Abe said
after talks with Mr Renzi in the Italian leader's home city, Florence.
Mr Renzi said: "Japan is hosting the G7 at a time of great importance and
I am counting a lot on Shinzo Abe's leadership, particularly on the subject
of growth.
"We have an extraordinary need to seize the opportunity presented at the
G7 and we will be in the frontline supporting (Japan's efforts) to make the
summit a success."
Mr Abe is known for his "Abenomics" attempts to stimulate economic growth
through increased public spending while Mr Renzi has been the leading advocate
of loosening Europe's budgetary rules to promote recovery in Italy and other
stagnating Eurozone economies.
So far, calls for massive increases in public spending -- paid for with borrowed
funds -- have met resistance from Germany, which is happy with the status quo
and terrified of inflation. But let the yen and euro have another month like
the last one and the balance of power will shift from stability to growth.
And don't forget that the above is happening during a recovery in commodities
prices engineered by China borrowing another trillion dollars in Q1. Since
no country on Earth can continue to borrow at such a pace without spinning
totally out of control, this artificial stimulus will have to end shortly,
capping commodities and maybe sending them back down to crisis levels (thus
making bank balance sheets even uglier).
Two conclusions are inescapable:
1) No matter what Germany (or for that matter the US) thinks, a policy shift
towards aggressive growth, fueled with deficit spending, is inevitable. The
alternative is the unraveling of the eurozone and a Japanese death spiral.
Once this becomes clear (perhaps via an Italian bank collapse) opposition will
evaporate.
2) This will fail miserably because -- in case anyone anywhere hasn't noticed
-- it's been tried on a vast scale already and all it did was double, triple,
quadruple the amount of debt on the books of the various major economies. It
did not produce sustainable growth for the simple reason that debt generates
activity in the short run and inhibits activity in the long run. And we're
now living in that long run.
