DEVALUATION OF DOLLARS UN ASAULT on DEVELOPING COUNTRIES

DEVALUATION OF DOLLARS UN ASAULT on DEVELOPING COUNTRIES
Haz, octubre 18, 2010.
QE IS GOOD FOR THE NORTH TOUGH VERY BAD FOR THE SOUTH

If in 1974 the devaluation of the foreign currencies in the south was 52.6 percentage points in relation to the US dollar, the current “quantitative easing” (QE) will create similar situation but slowly, said Hudson and other economists.

The effect will be anyway devastating for emerging economies like the Brazilian, Peruvian or Chilean booming economies. So far we got 7% in the depreciation of those latino currencies, and it will be even worse. It is time to move away from the US dollar or control our assets, debts, and row materials.

[Read more in Michael Hudson, October 17-10. Por qué los EEUU han desencadenado una nueva Guerra Mundial financiera y cómo reaccionará el resto del mundo. In www.sinpermiso.info, 17 octubre 2010. See also “World needs to stay vigilant about active depreciation of the dollar” , October 13, 2010 IN http://english.peopledaily.com.cn/90001/90780/91421/7165351.html. Or: Who fires first shot of "currency war"? October 12-10. http://english.peopledaily.com.cn/90001/90778/90858/7164048.html]

Let’s see how the neoliberal are thinking on QEs.

The Brits are easy to understand:
“If a government prints money faster than the growth of real GDP output it reduces the value of money and this invariably causes inflation (it is said in http://www.economicshelp.org/blog/economics/effect-of-printing-money-on-economy/ ).

Governments often resort to printing money when they cannot finance their borrowing by selling bonds (or security treasures in American English). This hyperinflation can be extremely damaging to an economy.” [QE policy immediately conjures up memories of hyper inflation in Wiemar Germany in 1923 and Zimbabwe in more recent times]. The other risk is that once the Central Bank releases QEs is very difficult to remove the excess liquidity when the economy recovers (it means that QEs are very temporary policies, no more than 2 years). The worst effect of printing money is that “it reduces the value of your currency. Inflation reduces the value of domestic securities making international investors leave the economy.”

However: [here comes the Brits phlegmatic mood on this issue (open http://www.economicshelp.org/blog/money/printing-money-and-effect-on-sterling/] , their reasoning goes in this way:

If printing money to be circulated into your own economy, is very bad business since it inevitably leads to increased inflation in your own country, printing more money to purchase from other countries (e.g. to repay debt or to purchase raw materials) is very good business. It means that the extra-money is simply dumped into other country, leading to higher inflation in that country and not in your own. By dumping the extra money overseas, you are indirectly creating more money in your own territory. Is this the case today?. The Brits said a naked true so far and how they will answer such question? With Yes and not, as usual.

Yes if you buy highly valued assets abroad. Not, If you print money to buy goods overseas, in this way you will effectively devaluate your currency, reducing the purchasing power of the “the pound” or the dollar. So, printing money would not solve the problem of our foreign debt.

When the north releases this QEs?

Their answer is “In a very serious recession, when demand falls so much that it is possible to increase money supply without creating inflationary pressure” (are we in the US in a serious recession?). We are in a serious chronic deflation, with a chance of a new round of deep recession. Does QEs create chances for inflation? Yes and not again. Yes if the circulation of money is so slow, as it happens during deflation, or the post 1st recession in the US; but not if it circulates fast, as it is happening in the so called BRIC countries and other developing countries. So, this money supply or QE is needed to curb the chronic deflation in the north not in the south. If there were not such “serious new recession at portas, or chronic deflation, the north would print money knowing that invariably cause inflation.

However, they said that even “in periods of falling velocity of circulation (number of times money changes hands), printing money doesn’t necessarily cause inflation” in the north, the inflation is transferred to the South, theey will pay for the crisis created in the north. But “The credit crunch can caused a fall in the velocity of circulation”. So, there is prospects of inflation in the north due to the “crunch” of dollars, and other hard currencies (not use to inflationary variatons). Besides the US, Japan is printing money again, the UK and others.

All the north is creating a sunami of hard currencies on the south with the same purpose (get all the riches of the south at cheap price), formally in the name of preventing another round of recession. Like in the other type of war, this preempting attack on the south is going to destroy the backyard in the assumption that had left alive they could destroy the north. They are going to kill “la gallina de los huevos de oro”. The result will be chaos and an invariable round of hyperinflation and its collaterals: social-political instability.

How Does Quantitative Easing Work? Haz octubre 19-2010

Again the Brits are easy to understand. I’ll paraphrase them critically.
http://www.economicshelp.org/blog/economics/effect-of-printing-money-on-economy/

1. The Central Bank CB creates reserves. This is creating money electronically. Basically, the Bank just decides to inflate its cash reserves usually in an amount equivalent of their GDP. It is assumed that if the increase in money supply is lower than the real GDP growth, then inflation can be averted. The case is that now the US is printing beyond such cannon since the intention is sending this money abroad.

2. With this extra cash the CB will buy a range of government gilts (securities) and private sector assets such as corporate bonds [that is, it will clean or buy the toxic debts of US banks. In other words, the CB will subsidize again the private sector with a different type of bail out. To prevent that the private sector will take advantage as in previous bail outs, the Central Bank will control the money and if they behave bad another TARP will come. The capital have to be moved abroad asap, and private speculator will have all the protection to go abroad and buy debts like the one in Greece or other resources and get huge profits enough to pay back the money to the CB. It is the CB that will control the convertibility of foreign currencies into devaluated dollar. This money is going to BRIC countries. They have to share the responsibilities of the current recession, said Tim Geithner

3. With the part of the QE for domestic consumption (30% of the total, speculate some economists) the private banks will sell their toxic debts to the Central Bank and see an increase in their cash reserves. It is expected that “With these cash reserves they should be more willing to lend money to boost the domestic economy”.

4. While buying their own debt the CB and private banks (buying government bonds and toxic debts at a devaluated price of 1%], the Central Bank will later increase the value of bonds purshased since their long term interest rates will go down. This fall in long term interest rates also has a reflationary effect (it will curb the effects of deflation, is said in http://www.investopedia.com/terms/r/reflation.asp).

HOW ALL THIS MESS STARTS?Let’s read again Michal Hudson above “Por qué los EEUU han desencadenado una nueva Guerra Mundial financiera y cómo reaccionará el resto del mundo”( www.sinpermiso.info, 17 octubre 2010) and also http://www.economicshelp.org/blog/economics/effect-of-printing-money-on-economy/

In early September, news that the U.S. Federal Reserve released a second round of “quantitative easing” (trillion of devaluated dollars at 1% interest rate) started to make headlines.// This second phase of quantitative easing has been widely viewed "an atomic bomb" since the Fed's will inject further huge liquidity into the U.S. economy, though it is expected that 70% of this sunami of dollars will invade foreign markets .

This inflationary policy will make easy for US investors to buy bonds or any debt or resources abroad at cheap price a resealed at higher price , this rampant cycle of speculation will create chaos at two levels, finances (currency parity) and at the level of international trade. The quantitative easing should not bother any other countries much if the U.S. dollar not been the dominant international reserve currency.

But given the "exorbitant priviledge" the U.S. has long enjoyed as a currency hegemony, it is no surprise that the move worries other countries with a prospect of them being flooded with cheap U.S. dollars.

The U.S. dollar has been weakening since mid-September against other currencies such as the Singapore dollar, the Thai baht, the Malaysian ringgit and the Indonesian rupiah.

The Japanese yen also hit its highest in 15 years against the U.S. dollar last Friday on New York market. Japan took to public intervening in the forex market for the first time since 2004. There are market speculations that the Thai government might intervene publicly.

At this point is appealing the title Currency war or wealth stealing? By Li Hong, the one who coined “currency war” (.http://english.peopledaily.com.cn/90002/96743/7160702.html. Oct9-10.) He said, Economists and insiders warn of breakout of a global "currency war", which risks hijacking a nascent world recovery and sending many economies back to instability and contraction. The next day the Brazilian minister of economy voiced loudly “we are at war”.

With the U.S. Federal Reserve almost certain to extend its "quantitative easing" monetary policy by printing and throwing more dollar bills into the broad economy, countries such as Japan, China, India and in the euro-zone will feel an increasing pinch of the weakening greenback. The counter-measures may include "learning experiences" by some central banks, including the Bank of Japan, to supply more yen papers and dilute its value at the market. The European central bank could decide to do the same, too, said Hudson.