From Currency War to Trade War

Two things were said yesterday which give me pause for thought.

First, this from Bloomberg,

“At the end of the day, there is nothing the Brazilian government can do to fight against the record low yield levels in developed economies,” Bank of America Corp. said in a note to investors. “The government has engaged in an impossible war.”

“Nothing the Brazilian government can do…an impossible war”  OK.  And then echoing the same martial sentiment Soc. Gen. analyst Gaelle Blanchard said in another Bloomberg article,

“They’ve lost the war before its even started. Money wants to go somewhere and the yield is in emerging markets. You can’t stop that unless you can also stop broad-based dollar weakness.”

These statements ring alarm bells for me.  Because you have to put yourself in the other person’s shoes for a second.  Something the self declared victors rarely think to do.  What are the emerging markets supposed to do?  Just roll over, surrender and say – “Well gosh and darn. And we were doing so well too!”

Someone might have said of western economies in late 08-09, that there was nothing we could do. But then our governments did, rightly or wrongly (and I happen to think they were very wrong) some quite extraordinary things.  So who is to say that the emerging economies of Brazil, India, Indonesia, Thailand S. Korea Turkey and others won’t do some extraordinary things of their own?

Analysts should spend less time being smug and more time thinking.

It is stupid and ridiculous to say to them – you mustn’t do this or that because ‘it would be unwise’.  We have done nothing but vastly unwise things for two years. And we are continuing to do them more and more even now that we see the consequences of those actions causing entirely predictable havoc in emerging markets.

We see the results and what do we say? We say, “Tough. You can’t do anything about it. Lie back and think of America.”

Well Brazil’s Finance Minister Mr Mantega, just cancelled attending the G20. Rather pointedly both he and the head of Brazil’s Central Bank cancelled at the last minute and have NOT offered any excuse.  Mr Mantega, you may remember, is the one who declared we are in a currency war.

Rather than rush off to the G20 to grovel Mr Mantega decided to increase to 6 percent, Brazil’s tax on foreign investments on bonds and various funds , that it only just recently doubled from 2 to 4% percent.

India is considering the same. But according to insiders probably won’t just yet.  India may be happier than other emerging markets to allow more of an inflow. But Turkey, Thailand and S. Korea and others already are or are seriously considering it.

As I have noted a couple of times IF they were able to stem the in rush of cheap dollars and Yen then that hot money would back up under pressure in the countries of origin and cause absolute havoc. BUT, I also agree with the analysts when they say, the emerging countries may just not be able to stem the flow.

The problem is, with near zero interest rates at home there is both an abundance of dirt cheap cash about (more when QE starts again) AND not very many places that money can find a BIG return. And the investors need a BIG return to off-set the continued losses from decomposing securities.

The solution to the problem is for all that cheap money to roam the world looking for a market that does have growth which it can then absolutely flood with money. That money forces its way in to any market that looks good. Buying up and bidding up bonds and anything else it can gain access to and inflate.

The stocks and bonds rise, taking the local currency with them, creating great paper profits for the speculators and massive turbulence for the local economy.  Which is the text book description of a bubble.  Even the World Bank has warned of the danger and rather hilariously cautioned the emerging market governments to ‘take steps’.  Which brings us back to the smug analysts saying there aren’t any steps the emerging markets can take.

Which in turn brings me to my point – thankfully.

True, there is very little anyone can do to stop the electronic flow of yen and dollars and maybe Euros as well, oozing into a market. That being so we are left with what they can do.  If you can’t stop the money coming in, you can still stop the physical goods.

So if I were any of the countries getting their currency screwed, their exports made more expensive and their stock markets and bonds getting pumped with dollar and yen steroids, I would target the imports from all those hot-money countries.  I would HALT the oh-so-precious export led growth those countries are depending on. With a TRADE WAR.

If you can’t win a currency war, then don’t fight it. Fight a war you can win.  If their currencies are fair game for us.  Our exports are fair game for them.  And we are super vulnerable. If those countries put huge tariffs on our exports, then we get no export-led growth and we die.

Now before all the free trade zealots report me to the Inquisition for un-western thoughts – and tell me ‘you can’t win a trade war’, and how ‘unwsie it would be’ — before anyone says a word – I know.  But doing unwise, selfish and potentially globally ruinous things is what WE have been doing for two years.  Why shouldn’t other people get to be stupid and selfish?

If, as seems likely, the US and Japan, perhaps followed by Europe as well, flood the world with yet more cheap QE’d money, what are vulnerable countires supposed to do?  Nothing? Lose a currency war or fight a trade war?

If I were Brazil and the others I would not hesitate.