China Concerned About QE & Currency War

Past Friday, China’s commerce minister Chen Deming expressed his concerns about the loose monetary policies by the major Western regions (source). Speaking not only for China, but for the whole group of emerging economies, Mr. Chen focused on the spill-over effects. As Western economies embark on excessive money creation, they push down the value of their currency leading to inflation and asset bubbles in foreign (emerging) markets.

Although Mr. Cheng did not target explicitly one specific country in his speech, Bloomberg notes that Japan was fast to defend itself. It shouldn’t come as a surprise, as geo-political tensions between both countries have been heating up recently. Moreover the Yen has fallen to a multi-year low, and has decreased 16% since November 2012.

The aim of Gold Silver Worlds is not to simply report news, but rather to provide the truth behind the facts. In the following paragraphs, the currency war expert Jim Rickards explains the background of the Chinese reaction, and puts it in the perspective of the ongoing currency crisis.

In fact, it all starts with the Fed and the Treasury who want a cheaper dollar (it is clear from their monetary policy, their actions and speeches). They try to get it through quantitative easing, although they do not really succeed in it. Up until now the dollar remains fairly strong, because every time there is a panic, it goes with a “flight to quality”.

Before 2009, China was trying to duplicate the old Bretton Woods system by pegging their currency to the dollar. The underlying idea is that the two largest economies in the world (one of the largest bilateral relations worldwide) fix their exchange rates. That has benefits for investors, manufacturers, exporters,  importers, as they would have some certainty about the exchange rate.

Starting in 2009, the US made clear they wanted to cheapen the dollar, and started printing money (QE). It did not result in inflation in the US, but rather inflation was exported abroad (for instance to China). As the two currencies were fixed, but the US started printing, China needed to print money as well in order to maintain the exchange rate. At a certain point in 2011, the Chinese let their currency go up. Amazingly, right after they did it, their inflation, trade surplus and economy “cooled off”. So the exchange rate was pegged at a new level. That’s when the Fed announced QE3, and the same process started all over.

“The US policy makers think they are doing the right thing, but they are not” says Jim Rickards. A lot of people think that the Fed wants a lower dollar to promote exports. Jim Rickards believes that assumption is not correct. The real reason why the Fed wants a lower dollar is that they are eager to import inflation from abroad in the form of higher import prices (as the US imports are higher than their exports).

The author of the book “Currency Wars” notes that the dollar has been stronger than the Fed would like. The consequence of this? The Fed will print even more money. “What I think will happen is that the dollar maintains its value, so they will keep on printing, until very suddenly and unexpectedly, there will be a loss of trust in the dollar (and all paper currencies). It happens not overnight, but it can happen very quickly.”

A couple of months ago, Jim Rickards simulated the escalation of the currency war. See the video here.  Coincidence or not, frightening or not, the scenario he describes comes already very close to what is happening today.

Any coincidence that China is stockpiling massive amounts of physical gold?

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