Currency Wars_ The Making of the Next Global Crisis - James Rickards [73]
The United States had won round one of the currency wars. Like a heavyweight boxing match between the United States and China, it was round one of what promised to be a fifteen-round fight. Both boxers were still standing; the United States had won the round on points, not with a knockout. The Fed was planted in the U.S. corner like a cut man ready to fix any damage. China had help in its corner too—from QE victims around the world. Soon the bell would toll to start round two.
When the principal combatants use their weapons in any war, noncombatants soon suffer collateral damage, and a currency war is no different. The inflation the United States had desperately sought not only found its way to China but also to emerging markets generally. Through a combination of trade surpluses and hot money flows seeking higher investment returns, inflation caused by U.S. money printing soon emerged in South Korea, Brazil, Indonesia, Thailand, Vietnam and elsewhere. Fed chairman Bernanke blithely adopted a “blame the victim” approach, saying that those countries had no one to blame but themselves because they’d refused to appreciate their currencies against the dollar in order to reduce their surpluses and slow down the hot money. In the anodyne language of central bankers, Bernanke said:
Policy makers in the emerging markets have a range of powerful . . . tools that they can use to manage their economies and prevent overheating, including exchange rate adjustment.... Resurgent demand in the emerging markets has contributed significantly to the sharp recent run-up in global commodity prices. More generally, the maintenance of undervalued currencies by some countries has contributed to a pattern of global spending that is unbalanced and unsustainable.
This ignored the fact that many of the commodities that residents of those countries were purchasing, such as wheat, corn, oil, soybeans, lumber, coffee and sugar, are priced on world, not local, markets. As consumers in specific markets bid up prices in response to Fed money printing, prices rose not only in those local markets but also worldwide.
Soon the effects of Fed money printing were felt not only in the relatively successful emerging markets of East Asia and Latin America, but also in the much poorer parts of Africa and the Middle East. When a factory worker lives on $12,000 per year, rising food prices are an inconvenience. When a peasant lives on $3,000 per year, rising food prices are the difference between eating and starving, between life and death. The civil unrest, riots and insurrection that erupted in Tunisia in early 2011 and quickly spread to Egypt, Jordan, Yemen, Morocco, Libya and beyond were as much a reaction to rising food and energy prices and lower standards of living as they were to dictatorships and lack of democracy. Countries in the Middle East strained their budgets to subsidize staples such as bread to mitigate the worst effects of this inflation. This converted the inflation problem into a fiscal problem, especially in Egypt, where tax collection became chaotic and revenues from tourism dried up in the aftermath of the Arab Spring revolutions. The situation become so dire that the G8, meeting in Deauville, France, in May 2011, hastily arranged a $20 billion pledge of new financial support to Egypt and Tunisia. Bernanke was already out of touch with the travails of average Americans; now he was increasingly out of touch with the world.
It remained to be seen whether the G20 could divert the United States from its runaway fiscal and monetary policies, which were flooding the world with dollars and causing global inflation in food and energy prices. For its part, the United States sought allies inside the G20 such as France and Brazil to apply pressure on the Chinese to revalue. The U.S. view