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Saturday, October 9, 2010

Currency Wars, Trade Sanctions and its Impact on You

All the major exporting countries are in a race to devalue their currency to ensure their exports stay in demand globally.  If a country can improve exports then GDP and jobs improve, showing growth as a nation.  As reported in an earlier post, the Bank of Japan interceded a few weeks ago in the currency market devaluating their currency in one swift action (which has been totally retraced and then some already).  This action was an attempt to ensure their exports (as Japan is totally dependent on exports as a country) continue to grow or do not slow.  Europe wants to make sure there currency isn't too strong because they want to continue to enjoy abundance in exports.  Meanwhile, China has been purchasing more Yen and Euro strengthening them stating that they are trying to diversify their portfolio.  The U.S. is printing money like it was going out of style in an effort to pump the economy, stock market and the TBTF banks wallets, which is further devaluating the U.S. Currency (see dollar index below).
If you look at the major currencies the dollar has devaluated against every major currency.  Remember the first part of the currency pair (pair like EUR/USD) is the currency that your going long and the 2nd in the pair your going short.  So if you look at the EUR/USD chart below it is going up and to the right, which means that the EUR is gaining strength vs. the USD.  In the USD/JPY below, it is going down and to the right, which means the USD is losing strength vs. the JPY (or Japenese Yen).
The IMF is now getting in the picture warning all nations to stop this currency war as it is doing nothing but hurting an already fragile global economy.  In an article in the Huffington Post entitled "IMF Chief Warns Against 'Currency War' " IMF managing Director Strauss Kahn says:
"We are gathering at a pivotal moment facing a very uncertain future.  Growth is coming back but we all know that it is fragile and uneven."
Strauss-Kahn said he saw a particular threat to the recovery from a breakdown in cooperation among nations, emphasized by growing talk of currency wars.
Canadian Finance Minister James Flaherty told reporters that the global economy would be the loser if nations followed "beggar-thy-neighbor" currency policies where one country tries to get an advantage over another by lowering its currency, making its exports cheaper.
Now the U.S. is looking to sign a bill that would impose a tariff on all imports from China to offset this currency imbalance.  Now, before you go thinking this is a great idea, read on to see how it impacts you.

Impact of import tariffs on you: In a prior article, I said that this was the wrong time to impose import tariffs, as we have no real agricultural and manufacturing base to sustain ourselves as a country.  I suggested that we put stimulus money (if you must spend to stimulate the economy) into building new factories, infrastructure and funding farmers to grow food for human consumption again, so this nation can employ and feed ourselves.  We are at an important juncture in our countries life, in which the US people are the major consumers in the world and we are also the major importers to those countries that are thriving off our imports.  Before we decided to take action, lets make ourselves self-reliant again.  I was listening to a podcast by Jack Spirko (Survival Podcast, about self-reliance not living in a cave) and he points out that if import tariffs are imposed on China ( our main importer of food and cheap stuff i.e. everything in Walmart) that the U.S. consumer will be the ones that pay, not China.  I'll add to that and say that maybe this is the plan anyway.  This could be another method of siphoning off money from the U.S. consumer into the government, giving them more money to spend.  See for China's currency to actually be equal in value to the U.S. it would have appreciate by 40%.  Using an example from Jack Spirko, if you get a product that normally costs $50 and then you add transportation, handling and markup for the stores lets say it is now $100.  Well the tariff would only apply to the $50, so a tariff of $20 would be added now making that product cost $120.  Seems like a great plan to tax the U.S. consumers further without actually calling it a tax.  As you can see this in no way impacts China as they aren't paying it.  Long term China would be effected as U.S. consumers try to  find new ways to get those basic living products (that could be a long and painful process).

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