Obama: U.S. Must Address Currency Rates

Hail the Forex Trader in Chief!

On China, Obama says US must address currency rates
(Jeff Mason, 2/3/2010 Reuters)

"WASHINGTON, Feb 3 (Reuters) - President Barack Obama said on Wednesday China and Asia would be a huge market for U.S. exports going forward but it would be important to address currency rates to ensure American goods were not facing a disadvantage.

""One of the challenges that we've got to address internationally is currency rates and how they match up to make sure that our ... goods are not artificially inflated in price and their goods are artificially deflated in price," Obama told senators from his Democratic party.

""That puts us at a huge competitive disadvantage.""

In other words, Obama wants U.S. dollar to depreciate vis-a-vis Chinese yuan and other Asian currencies.

How is he going to achieve that? Chinese yuan is currently pegged to the U.S. dollar. Barring catastrophe (natural or man-made), U.S. dollar would continue to decline as long as Obama and his government are intent on spending out of recession. But since Chinese yuan is pegged to the US$, Chinese yuan would depreciate in tandem with the dollar.

So how is he going to force China to abandon the peg?

By lecturing the Chinese officials? By slapping tariffs on Chinese imports as a penalty until they abandon the peg?

The former would be scoffed at by the Chinese, the latter would probably damage the U.S. more than China. I'll keep thinking of other ways, but this administration has so far shown little understanding of how things work in the reality-based world, which doesn't quite work by decree. In order to figure out what this administration may do, I would have to think like them...

Maybe Mr. Obama could ask Mr. Chavez and ask him how his currency reform is doing. He could also learn from Argentina's Ms. Kirchner about how to raid people's retirement accounts and grab reserves at the central bank.

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Financial Crises Brewing in Latin America

Venezuela's Hugo Chavez devalues the currency (bolivar) by 50%. And Argentinian President Cristina Kirchner wants to seize bank reserves at the country's central bank.

Constitutional Showdown in Argentina (MARY ANASTASIA O'GRADY, 1/10/2010 Wall Street Journal)

"Argentine President Cristina Kirchner's firing of the country's central bank president last Wednesday has provoked a constitutional crisis, not unlike the one that rocked Honduras last summer. As with then-Honduran President Manuel Zelaya, Mrs. Kirchner has tried to run roughshod over her nation's laws. She blithely ignored legal protections of bank independence.

"Not surprisingly, central banker Martín Redrado refused to go and challenged her reason for sacking him: his refusal to hand over to her $6.6 billion in bank reserves.

"In response, Mrs. Kirchner issued a decree to amend the bank's charter so that she could push Mr. Redrado out "legally." A federal judge then issued an injunction in favor of Mr. Redrado, and on Friday he returned to his bank post. The same judge froze the bank's reserves so Mrs. Kirchner couldn't take them. The constitutional battle lines were drawn.

"Mrs. Kirchner's insistence that the central bank's assets should be at her disposal is noteworthy. It reflects a primitive view, not unknown even in the U.S., that the role of a central bank is to print money for the government's use. Yet it is nonetheless surprising that even after the nation has suffered so much inflationary agony, it is still possible for an Argentine politician to pursue this line of reasoning without risk of being tarred and feathered." [emphasis is mine] (The article continues.)

Primitive, maybe, but that's exactly what the first central bank was set up for: to print money for the government's use, and that government was Britain in 1694. The reason why a politician like her is not "tarred and feathered" is because the general public remain ignorant of how the monetary system works. Many people, including Venezuela's Chavez, believe more money, however fiat, means wealth.

To be precise, "bank reserves" that the above article talks about is not the required reserves or excess reserves that you see on the Federal Reserve balance sheet but "foreign exchange reserve". "Mr. Redrado [central bank governor] argues that Congress should decide on whether the payment should be made and says he is defending the bank's independence." (Argentina's Bad Timing by Richard Barley, 1/12/2010 Wall Street Journal)

Maybe what we are witnessing in Latin America is the beginning of of an end of the central bank franchise and of fiat money. For now it's a wishful thinking on my part.

But in Venezuela, Mr. Chavez believes he can force the price to stay low, while he basically doubles the money supply. In the U.S., Mr. Bernanke has doubled the monetary base which could more than double the money supply, and he has been buying up agency bonds and MBS at the behest of the Obama administration to force down the mortgage rates.

In Argentina, Ms. Kirchner thinks the nation's banks including the central bank are her checkbook account to pay for her pet government projects. In the U.S., President Obama is reportedly thinking about a levy on financial institutions to replenish TARP fund and to help balance the budget. Not even a lip service to cutting government spending here. (See the story from AP.)

Now the difference between the U.S. and "primitive"-thinking Venezuela and Argentina is getting very cosmetic.

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