The Danger of a Currency War

verfasst von Amanito, 01.10.2004, 12:14

-->The Danger of a Currency War: (Sept. 28, 2004)



Right after the warning about the danger of a hasty dollar devaluation in this space, news has come in to let us worry about the eruption of a currency war that will lead to a substantial devaluation of dollar and the destruction of the current order of the globalization.



This time the danger is not coming from some unnamed US high officials as the case of the previous warning, but come from China. In an editorial (see: http://www.chinadaily.com.cn/englis...c/2004-09/28/content_378317.htm) on China Daily, the diversification of Chinese Government's vast and dominantly dollar denominated foreign currency holding away from Dollar but into Yen and Euro is urged in order to avoid

the unavoidable collapse of US Dollar.



If China is going to sell a significant portion of its dollar holding for Yen, say 200 billion dollars, then Japan must immediately buy those dollars by selling yens, otherwise Dollar will collapse immediately against Yen and the previously mentioned danger of a hasty devaluation of Dollar becomes reality.



The same thing will happen if China sells its dollars for Euro. The fact that China holds enormous amount of dollars is the result of its policy to peg its currency, Yuan, to Dollar at a fixed rate so that China can maintain its low labor cost advantage, attract vast amount of capitals from Japan and Taiwan (US is a capital importer, all the investments of US corporations into China are nothing more than the recycling of capital borrowed from

Japan and Taiwan), manufacture goods and export them to US, a major link for US to run up such a trade deficit.



In pursuing this kind of policy, the sure-to-come dollar-collapse risk is what China should have known and must shoulder.



If Japan is forced to shoulder the burden of holding dollars alone, then very soon Japan will be forced to buy up one trillion dollars or more within a year, a political suicide even for almighty Japanese financial bureaucrats.



If Japan let Yen (and Europe let Euro) rise because of China's dollar selling, whereas Chinese Yuan continues to be pegged to Dollar, then Chinese goods will flood Japanese and European markets. With US imports from Japan and Europe plumetting due to the collapsing dollar against those currencies (thanks to China's dollar selling), both Japan and

Europe must turn their huge trade surpluses into huge trade deficits, with

China continuing to racking up huge capital inflow and exclusive position as the suppliers of manufactured goods to the whole world.



Certainly Japan and Europe are not like [the] US that has wantonly used run away trade deficits to temporarily boost US consumption by sacrificing the future financial health of the country.



We must note an under reported recent incidents in Spain; a group of out of job shoe factory workers resorted to terrorist-like tactic to attack a Chinese shoe distributor and burned down truck loads of made-in-China shoes. We can expect that the whole order of globalization will crumble down quickly and a depression will hit the whole world, including China, if Dollar collapses suddenly due to the diversification of dollar holding by the Chinese Government.



A more unthinkable but highly likely scenario in case China starts to diversify a non-negligible amount of its vast dollar holding into Yen and Euro is for Japanese Government, or Euro Central Bank, to announce its desire to diversify a certain portion of its even larger dollar holding into Chinese Yuan.



Though it is not easy to buy vast amount of Yuan on an open market, hot money will do the trick for Japanese Government in that occasion. Chinese Yuan will feel an enormous pressure to upward revaluate, and Chinese Government will end up buying more dollars to keep Yuan pegged to Dollar than the dollars it wants to diversify!



The consequence of such an outright currency war between China and Japan, and possibly between China and Europe will lead to an outright collapse of Dollar and a certain worldwide depression since during such a currency war both sides want to sell Dollar for something else.



Ironically there is a safe thing that China can diversify into. That is gold. However, the world wide gold market is thin. If China wants to convert several hundred billion US dollars into gold, the price of gold will skyrocket to the delight of gold bugs. When China finishes with the gold buying, then the price of gold will fall back, causing China heavy capital loss. But the venture into gold by China will not disrupt the balance on currencies and will have a minimum effect on the globalization scheme.



source: Chi Kwan Chen @ http://www.forcastglobaleconomy.com

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gesamter Thread:

• The Danger of a Currency War - Amanito, 01.10.2004, 12:14
  • Re: Faber sieht die Kommunisten einen starken Dollar bevorzugen - kingsolomon, 01.10.2004, 14:55
    • und die USA täten ohne Unterhosen dastehen ;-) (o.Text) - LenzHannover, 01.10.2004, 16:00
      • oder um es mit Marc Fabers Buch sinngemäß zu sagen: - LenzHannover, 01.10.2004, 16:45
        • Re: das Buch wurde übrigens von Toby übersetzt! (o.Text) - kingsolomon, 01.10.2004, 20:41
      • Tag der Wahrheit, denn - Amanito, 01.10.2004, 18:38
    • Re: Faber sieht die Kommunisten einen starken Dollar bevorzugen - Amanito, 01.10.2004, 18:42
  • Re: The Danger of a Currency War - Popeye, 01.10.2004, 17:22
    • Re: The Danger of a Currency War / Märchen, genau... - - Elli -, 01.10.2004, 17:35
      • Re: einstweilen führen die Amis mit dem"Altpapier"noch ordentlich Krieg im Irak - kingsolomon, 01.10.2004, 20:46