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Currency Devaluation: The Crushing Vice of Price
Currency Devaluation: The Crushing Vice of Price
Devaluation has a negative consequence few mention: the cost of imports skyrockets.
When stagnation grabs exporting nations by the throat, the universal solution offered is devalue your currency to boost exports. As a currency loses purchasing power relative to the currencies of trading partners, exported goods and services become cheaper to those buying the products with competing currencies.
For example, a few years ago, before Japanese authorities moved to devalue the yen, the U.S. dollar bought 78 yen. Now it buys 123 yen–an astonishing 57% increase.
Devaluation is a bonanza for exporters’ bottom lines. Back in late 2012, when a Japanese corporation sold a product in the U.S. for $1, the company received 78 yen when the sale was reported in yen.
Now the same sale of $1 reaps 123 yen. Same product, same price in dollars, but a 57% increase in revenues when stated in yen.
No wonder depreciation is widely viewed as the magic panacea for stagnant revenues and profits. There’s just one tiny little problem with devaluation, which we’ll cover in a moment.
One exporter’s depreciation becomes an immediate problem for other exporters: when Japan devalued its currency, the yen, its products became cheaper to those buying Japanese goods with U.S. dollars, Chinese yuan, euros, etc.
That negatively impacts other exporters selling into the same markets–for example, South Korea.
To remain competitive, South Korea would have to devalue its currency, the won. This is known as competitive devaluation, a.k.a. currency war. As a result of currency wars, the advantages of devaluation are often temporary.
But as correspondent Mark G. recently observed, devaluation has a negative consequence few mention: the cost of imports skyrockets. When imports are essential, such as energy and food, the benefits of devaluation (boosting exports) may well be considerably less than the pain caused by rising import costs.
…click on the above link to read the rest of the article…
Ragin’ Contagion: When Debtors Go Broke, So Do Mercantilist Exporters
Ragin’ Contagion: When Debtors Go Broke, So Do Mercantilist Exporters
Papering over the structural imbalances in the Eurozone with bailouts or bail-ins will not resolve the fundamental asymmetries in trade.
Beneath the endless twists and turns of Greece’s debt crisis lie fundamental asymmetries that doom the euro, the joint currency that has been the centerpiece of European unity since its introduction in 1999.
The key imbalance is between export powerhouse Germany and its trading partners, which run large structural trade and budget deficits, particularly Portugal, Italy, Ireland, Greece and Spain.
Those outside of Europe may be surprised to learn that Germany’s exports ($1.5 trillion) are roughly equal to the exports of the U.S. (1.6 trillion), and compare favorably with China’s $2.3 trillion in exports, given that Germany’s population of 81 million is a mere 6% of China’s 1.3 billion and 25% of America’s population of 317 million.
German GDP in 2014: $3.82 trillion
Chinese GDP in 2014: $10.36 trillion
U.S. GDP in 2014: $17.42 trillion
Germany’s dependence on exports places it in the mercantilist camp, countries that depend heavily on exports for their growth and profits. Other (non-oil-exporting) nations that routinely generate large trade surpluses include China, Taiwan and the Netherlands.
While Germany’s exports rose an astonishing 65% from 2000 to 2008, its domestic demand flatlined near zero. Without strong export growth, Germany’s economy would have been at a standstill. The Netherlands is also a big exporter (trade surplus of $33 billion) even though its population is relatively tiny, at only 16 million. The “consumer” countries, on the other hand, run large current-account (trade) deficits and large government deficits. Italy, for instance, runs a structural trade deficit and its total public debt is a whopping 137% of GDP.
Here’s the problem when debtor/importer eurozone members such as Greece go broke and default: Who is left standing to buy all the mercantilist exporters’ goods? Ultimately, much of those goods were purchased with debt, and when debtor nations default, the credit spigot is turned off: no more borrowing, no more money to buy Dutch, German and Chinese exports.
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China Could Face “Sharp” Rise In Capital Outflows If Stocks, Economy Lose Momentum
China Could Face “Sharp” Rise In Capital Outflows If Stocks, Economy Lose Momentum
We’ve written quite a bit over the past two months about capital outflows from China. Last week for instance, we documented how the country saw its fourth consecutive quarter of outflows in Q1, bringing the 12 month running total to some $300 billion. Why, beyond the obvious, is this a problem for China? Because pressure is mounting to devalue the yuan as the currency’s peg to the recently strong dollar is becoming costly for the country’s export-driven economy.
Here’s Soc Gen’s Albert Edwards on the subject:
In the current deflationary environment the Chinese authorities simply can no longer tolerate the continued appreciation of their real exchange rate caused by the dollar link.
And from Barclays:
Amid slowing inflation and rising outflows, the costs of limiting CNY weakness are growing – including the unintended effect of placing more stress on CNY market liquidity and interest rates, rendering liquidity easing efforts less effective.
And here is how we summed up the situation last month:
China is suddenly finding itself in an unprecedented position: it is losing the global currency war, and in a “zero-sum trade” world, in which global commerce and trade is slowly (at first) declining, and in which everyone is desperate to preserve or grow their piece of the pie through currency devaluation, China has almost no options.
At issue is the fact that expectations about the direction of the yuan may be contributing to capital outflows and any indication on the part of Beijing that devaluation is in the cards could exacerbate the problem. Now, data from SAFE suggests nearly $24 billion left China in March alone. Here’s more, via Bloomberg:
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Canada-China Ties Deepen With Renminbi Trading Hub
Canada-China Ties Deepen With Renminbi Trading Hub
China’s growing global financial influence has skeptics, requires reforms to keep pace
Canada and China officially opened the first North American renminbi trading hub in Toronto on Monday, March 23, amid other initiatives that are poised to give the Asian power greater financial influence internationally. These developments give skeptics ongoing concerns about China’s ultimate objectives and are not limited to those regarding its control of yuan trading, capital market reforms, and lack of transparency.
The hub was the result of several months of work since Prime Minister Stephen Harper brokered a deal for Canada to be the first such trading center in North America. Through the Industrial and Commercial Bank of China (ICBC), the designated clearing bank, making and receiving payments in renminbi, also known as the yuan, is now easier for Canadian businesses.
For certain, this is good news for Canadian businesses that can now lower their costs in renminbi transactions, principally instead of using the U.S. dollar as a go-between. It increases the global competitiveness of Canadian firms that deal with Chinese firms. It also bodes well for the Canadian banks that can roll out more products, such as renminbi deposit accounts, and earn fees.
“A rapid build-up of expertise in renminbi liquidity could have significant benefits for our world-class financial industry,” said Canada’s finance minister Joe Oliver on Monday. “This is an opportunity for Canada’s financial sector, but also for China’s.”
Canadian exports to China have more than quadrupled since 2003, totalling $78 billion in 2014, and foreign direct investment between the two nations has gone up more than seven-fold between 2005 and 2013, to a total of $21.5 billion. China, the world’s second-largest economy, is Canada’s second-largest trading partner after the U.S.
The Canadian Housing Bubble Has Begun To Burst
The Canadian Housing Bubble Has Begun To Burst
Don’t look now but slumping crude prices are hitting the Canadian housing market like a freight train. Energy accounts for 10% of Canadian GDP and around 25% of exports and the swift fall in oil prices is having a profound effect in the nation’s oil producing regions. Take Calgary for instance, where single-family home sales fell 34% last month. As the following chart shows, Alberta derives some 30% of its provincial revenues from energy royalties and as one TD analyst quoted by the Calgary Herald recently noted, “the effects of significantly lower oil prices had already turned up in resale activity, with sales in Calgary and Edmonton down more than 40 per cent and 30 per cent respectively, from October to January [and] as resale activity slows, prices usually follow.”
Depressed crude prices will create a $7 billion annual revenue shortfall for the province while GDP growth, which had been running at around 4%, is expected be just under half that this year, withsome analysts predicting the economy will contract. Here’s CIBC’s outlook for instance:
The Alberta government’s own assessment of the economic situation is deteriorating rapidly.
From the Alberta fiscal update:
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Next Up: China Will Be Joining The Global Currency Wars
Next Up: China Will Be Joining The Global Currency Wars
Japan and the Eurozone have already (re-) discovered the power-button of their printing presses, but these countries might soon be joined by China. China’s prime minister has announced on Sunday he thinks it will be very difficult for China to keep its economic growth rate at the expected 7% level. That could result in some more worries on the financial market as the 7% level is already a guidance wich was revised downward from the previous expectations of an economic growth of 7.4%. Keep in mind the 7% growth rate would be the lowest economic expansion in approximately 25 years for the Asian country.
The situation might get worse before it gets better as for instance investment, consumption ànd production growth levels have fallen to multi-year lows which is obviously an extremely bad sign. A slowing growth rate of the Chinese economy will have an impact that will be felt all over the world despite the prime minister trying to shrug it off saying he’s more interested in a quality growthinstead of hard numbers and continues to make more excuses.
It’s however unlikely the Chinese government will allow the economy to grow at a much slower rate than the eyed 7% and it will definitely use all possibilities to make sure it meets its reduced target. The Chinese are already flexing their muscles and have patted themselves on the back they haven’t used their monetary bazooka since the global financial crisis.
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The Monetary Illusion Again in Trade
The Monetary Illusion Again in Trade
Just as a follow-up to further highlight and emphasize the “monetary illusion” of currency devaluation in this closed environment, the yen’s returned devaluation against the “dollar” more recently has renewed confusion (or intentional misdirection) about what Abenomics is supposedly accomplishing. Taken solely from the perspective of the Japanese internally, exports to the US are once more growing, and doing so rather sharply. December’s year-over-year gain, in yen, was almost 24% while January came in at an equally robust 16.5%.
Taken by themselves without context, it would seem great fortune and monetary capability to gain in exports at such huge growth rates. But, as I have shown time and again, what goes out of Japan is matched by what comes in to the US. For all that buzz over huge export growth, nothing much shows up on this end.
Both months were positive in “dollars” but barely and thus no actual growth took place. Economists and central bankers even concede the disparity, but don’t much care about it. They simply assume that Japanese exporters now flush with more yen will hire more workers and pay the ones they have even more, igniting that virtuous circle of “aggregate demand.” In reality, why would they do that?
…click on the above link to read the rest of the article…
UK trade deficit narrows after oil price falls
UK trade deficit narrows after oil price falls
The falling price of oil helped to narrow the UK’s trade gap with the rest of the world in November to its lowest since June 2013, official figures show.
The Office for National Statistics (ONS) said the UK’s deficit in goods and services was £1.4bn in November, compared with £2.2bn in October.
But it said this reflected a fall in the value of imports rather than an increase in export activity.
Imports fell £1.1bn in the month, which included a £0.7bn fall in oil imports.
The price of Brent crude oil has fallen by more than 50% since August. The drop has been blamed on oversupply, in part as a result of increased domestic oil production in the US, and slowing demand, particularly in China.
The UK’s £8.8bn deficit in goods was partly offset by its £7.4bn surplus in the supply of services.
The trade gap represents the difference between the value of goods and services we export around the world against the value of those we import.
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BEIJING WE’VE GOT A PROBLEM « The Burning Platform
BEIJING WE’VE GOT A PROBLEM « The Burning Platform.
The Chinese stock market hit a four year high today at 3,020. This is up 53% since the middle of 2013 low and up 48% in the last six months. I guess this must mean the Chinese economy is operating on all cylinders. If you think so, you’d be wrong. Barron’s interviewed a no-nonsense woman who has lived, worked and analyzed China from within since 1985. Anne Stevenson-Yang has spent the bulk of her professional life there working as a journalist, magazine publisher, and software executive, with stints in between heading up the U.S. Information Technology office and the China operations of the U.S.-China Business Council. She’s now research director of J Capital, an outfit that works for foreign investors in China doing fundamental research on local companies and tracking macroeconomic developments.
This lady is about as blunt as you can get about Chinese fraud, lies, mal-investment, and data manipulation. The entire Chinese economic miracle is a fraud. The reforms are false. The leaders are corrupt and as evil as ever. The entire edifice is built upon a Himalayan mountain of bad debt.
The slave labor manufacturer for the world’s mal-investments since 2008 make Japan look like pikers.
China, for all its talk about economic reform, is in big trouble. The old model of relying on export growth and heavy investment to power the economy isn’t working anymore. Sure, the nation has been hugely successful over recent decades in providing its people with literacy, a decent life, basic health care, shelter, and safe cities. But starting in 2008, China sought to counter global recession with huge amounts of ill-advised investment in redundant industrial capacity and vanity infrastructure projects—you know, airports with no commercial flights, highways to nowhere, and stadiums with no teams. The country is now submerged by the tsunami of bad debt that begets further unhealthy credit growth to service this debt.
The BLS should take lessons from the Chinese government in data falsification. But, the American MSM dutifully reports the Chinese data as if it was real. Faux journalism at its finest.
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