Currency Wars_ The Making of the Next Global Crisis - James Rickards [75]
In late 2008 and early 2009, the G20 was able to coordinate policy effectively because the members were united by fear. The collapse of capital markets, world trade, industrial output and employment had been so catastrophic as to force a consensus on bailouts, stimulus and new forms of regulation on banks.
By 2011, it appeared the storm had passed and the G20 members were back to their individual agendas—continued large surpluses for China and Germany and continued efforts by the United States to undermine the dollar to reverse those surpluses and help U.S. exports. Yet there was no Richard Nixon around to take preemptive action and no John Connally to knock heads. America had lost its clout. It would take another crisis to prompt unified action by the G20. Given the policy of U.S. money printing and its inflationary side effects around the world, it seemed the next crisis would not be long in coming.
That crisis arrived with a jolt near the city of Sendai, Japan, on the afternoon of March 11, 2011. A 9.0 earthquake followed quickly by a ten-meter-high tsunami devastated the northeast coastline of Japan, killing thousands, inundating entire towns and villages, and destroying infrastructure of every kind—ports, fishing fleets, farms, bridges, roads and communications. Within days the worst nuclear disaster since Chernobyl had commenced at a nuclear power plant near Sendai, with the meltdown of radioactive fuel rods in several reactors and the release of radiation in plumes affecting the general public. As the world wrestled with the aftermath, a new front arose in the currency wars. The Japanese yen suddenly surged to a record high against the dollar, bolstered by expectations of massive yen repatriation by Japanese investors to fund reconstruction. Japan held over $2 trillion in assets outside of the country, mostly in the United States, and over $850 billion of dollar-denominated reserves. Some portion of these would have to be sold in dollars, converted to yen and moved back to Japan to pay for rebuilding. This massive sell-dollars /buy-yen dynamic was behind the surge in the yen.
From the U.S. perspective, the rise in the yen relative to the dollar seemed to fit nicely into the U.S. goals, yet Japan wanted the opposite. The Japanese economy was facing a catastrophe, and a cheap yen would help promote Japanese exports and get the Japanese economy back on its feet. The magnitude of the catastrophe in Japan was just too great—for now the U.S. policy of a cheap dollar would have to take a backseat to the need for a cheap yen.
There was no denying the urgency of Japan’s need to cash out its dollar assets to fund its reconstruction; this was the force driving the yen higher. Only the force of coordinated central bank intervention would be powerful enough to push back against the flood of yen pouring back into Japan. The yen-dollar relationship was too specialized for G20 action, and there was no G20 meeting imminent anyway. The big three of the United States, Japan and the European Central Bank would address the problem themselves.
Under the banner of the G7, French finance minister Christine Lagarde placed a phone call to U.S. Treasury secretary Geithner on March 17, 2011, to initiate a coordinated assault on the yen. After consultations among the central bank heads responsible for the actual intervention and a briefing to President Obama, the attack on the yen was launched at the open of business in Japan on the morning of March 18, 2011. This attack consisted of massive dumping of yen by central banks and corresponding purchases of dollars, euros, Swiss francs and other currencies.