Currency Wars seems inevitable as Global Economic Faultlines grow Deeper

Global Imbalances back to pre-Lehman Days

Global Imbalances are growing deeper by  the day as the world returns to its unsustainable pre-Lehman days of Unbalanced Trade.Trade Surplus countries like Germany,Japan and China are again Exporting much more than they are Importing.The US has again become the world’s punching boy in terms of Trade Deficits running up a Deficit of around $50 Billion in  a single Month.These Imbalances were the major cause of the Global Financial Crisis with cheap money fueling the Subprime Crisis.German Exporters are making Hay as the Euro has declined while China’s Yuan Appreciation is just a Head Fake to keep the US Lawmakers at Bay.China’s Currency is  supposed to be 40% undervalued to the Dollar.With $2.5 Trillion in Foreign Reserves,China has a massive Currency Headache.Its efforts to diversify away from Dollar Assets has led to protests from Japan and Korea which themselves prefer a cheap currency to promote their Export Dependent Business Model

Budget deficit on pace to hit $1.3 trillion – Yahoo

The federal government is on track to record the second-highest deficit of all time with one month left in the budget year.

The deficit totaled $1.26 trillion through August, the Treasury Department said Monday. That puts it on pace to total $1.3 trillion when the budget year ends on September 30, slightly below last year’s record $1.4 trillion deficit.

Soaring deficits have become a major issue with voters heading into the midterm elections. Republicans say the deficits illustrate the growth of spending under Democrats and show their poor handling of the economy.

Currency Wars are Inevitable

With World Demand Running Low and Unemployment High,Every Country wants to Export away its Problem which is an impossible outcome.The Trade Surplus Countries are too addicted to change their ways to more domestic consumption while Deficit Countries will have to mend their profligate ways.The USA -China Trade Relationship which is the most important in the world right now is facing increasing frictions.China has refused to appreciate its currency and discrimination against foreign companies has increased.US Unemployment has increased the Protectionist Rhetoric with Indian Outsourcers facing the brunt.Already voices against Chinese predatory trade practices are growing stronger.Its only a matter of time before China faces stronger action as pressure on politicians grows.Japan’s Currency has touched a 15 Year High against the Dollar and  even higher against the Euro.It has made the Japanese Exporters like Hitachi cry blue murder as South Korea and China take away their business.The Japanese government is under increasing pressure to intervene to manipulate the currency.However this might instigate its main trading partners besides failing to devalue the Yen.The Swiss have been quietly trying to devalue their currency without much success as it touches new highs against the Euro.

Emerging Markets facing Currency Volatility

Smaller Emerging Markets like Thailand,Malaysia,Indonesia have been rocked by the currency volatility.Some of them have imposed currency and capital controls to stop the influx of huge inflows of Foreign Capital.The near zero rates in Developed Nations is driving a New Bubble with yield hungry investors flocking to even a modicum of growth.Hot Money has already led to one Asian Crisis in 1997 and this time it could be even be bigger.India has received a huge inflow of FII money in 2009 and 2010 leading to its stock markets touching new highs and Inflation in the Double Digits.

Summary

The Above Problems are clearly not sustainable and the longer they go on the harder will be the landing.The solutions are not easy and the international coordination required even harder to achieve.However US can’t continue to run the monstrous deficits and China can’t keep running $250 Billion Surpluses every year.Zero Interest Rates are creating another Super Sized Bubble in Commodities and Emerging Markets.While I can’t predict how this game will end,one thing that is certain is that the End Game will not be Pretty.