“Economic Incompetence or Economic Warfare”

Cliff’s view, 161110

So which do prefer?The easiest way to look at the situation is to look at the people who have gained most: Germany and China.

Germany was the main protagonist in favour of setting up the European Union. Crucially the EU then went on to set interest rates which suited the Germans at that time. Germany needed a financial stimulus because it’s economy was stagnant, it’s Deutschmark rate was too strong. So they engineered low interest rates for the Euro.

Ireland which didn’t need any stimulus was happily working with interest rates of 6% but on joining the Euro could borrow money at 3%. Inevitably everyone thought Christmas had come early and the Irish Tiger leapt into action. Just like Spain the Construction Sector went into overdrive building properties well in excess of actual demand. The Banks went into overdrive lending them the money to do it. The banks should have taken a caning for being incompetent fools but the Irish government stepped in and guaranteed everything in sight. The banks that lent to the Irish banks should also have taken a caning, for example HBOS.

Germany got on with exporting goods at ‘Euro’ denominated prices which were and still are very favourable to them, so favourable it’s put UK manufacturing under pressure and cost us jobs and an adverse balance of payments, whilst being told by the Germans how clever they are.

The results at the moment are that Germany has made an absolute killing and has slaughtered the PIIGS, Portugal Ireland Italy Greece and Spain. They are all being hung out to dry by the Germans because of their low interest rate. The PIIGS have been skewered on to a spit and are being roasted alive, slowly.

If the Germans want to avoid being skewered themselves, they need to take a good hard look at the damage they have caused.

China took advantage of the internationally agreed principle of ‘floating’ exchange rates by setting a low ‘fixed’ exchange rate against the dollar and also automatically against all the other dollar currencies.

It was already being done by some minor currencies but this was the first major currency to do it and America should have responded immediately with a ‘fixed exchange rate of its own or with floating tariffs to balance any unacceptable currency flows.

The result has cost the American people nearly five trillion dollars, that’s nearly twenty thousand dollars per person. It made China’s manufacturing cheap and any imports to China from the rest of the world very expensive. That sounds like a currency war to me.

China proposes to rebalance their economics at a rate that suits China and its unemployment risks.

The Chinese need time to prepare their peoples to buy their own locally manufactured goods rather than imported goods.

America needs to act on its own current unemployment situation and to set floating tariff rates that are due and payable whenever a ship or a plane lands in the US with Chinese goods on board. This means that as the currency flows start to match then the floating tariff rates will automatically disappear.

Presumably the American objective will be to recover their five trillion dollar losses. If China has invested this money in long term ventures then they will need to find some way of funding their shortfall.

It has been noticed, though not necessarily by China, that almost every country has suffered from the depredations caused by Chinese currency war, including the less developed countries like Africa and South America.