The looming battle for currency advantage

The US and Europe are committed to lowering their currencies in order to gain competitiveness and new wealth, already bossing China to float the artificially low yuan. Australia could be caught in the crossfire.

When US president aspirant Mitt Romney fired a broadside at China during the third debate he was engaged in a much deeper game – the global currency wars. And those looming wars will affect the strategies of whoever wins the 2012 US election.

In the last day or two I have had the chance to speak to players in the currency wars – and here in Australia we had better understand what is going on because we are we are being lined up to be one of the biggest casualties of the currency wars. Last night we saw how quickly our dollar rose as a result of carbon induced inflation.

In Europe it is now clear that European Central bank President Mario Draghi was right in declaring that whatever is required to keep the European community together will be done.

It will be necessary to transfer large amounts of German wealth across to troubled European countries but the bulk of those transfers will take place after the German election next year – but even then it will concealed to prevent German backlash.

Meanwhile, the avalanche of money printing in Europe is designed, in part, to keep the euro low and, if possible, to send it even lower. This is already creating enormous wealth for German and northern Italian manufacturers. Germans are exporting especially designed Mercedes to China and this would not be possible except for the money printing that has helped create the lower euro.

In other words, via the currency Germany will create part of the wealth needed to fund the rest of Europe, or at least that is the plan. So that’s the first cannon shot in the currency wars.

The US is now loading its cannons because Americans are also anxious to keep the US dollar as low as they can.

The Americans have chosen the same weapon as in Europe to help achieve this aim – a massive money printing exercise. Now it’s true that the US faces a fiscal cliff which is going to be an unpleasant experience. But when that is past, the enormity of the American gas revolution and the constant migration from Mexico and other countries from the south will underwrite the US prosperity.

But like Europe, to achieve that much needed prosperity the US needs to keep its currency from rising and low interest rates and money printing are vital weapons in its armoury.

But who are the countries that will suffer from the global currency war that is taking place to generate wealth for Europe and the US?

Of course it is the countries who are not money printing and whose currencies are being artificially boosted because ‘sound’ financial measures are being embraced.

Australia is one of the most vulnerable nations on earth in this game and Switzerland is not far behind us. The Swiss are trying to overcome the problem with various mechanisms, with limited success. Japan will probably also cop it in the neck but the real pressure is on China. That is why Romney said what he did.

No matter who wins the presidential election, the fact that it is so close means that the winner will place incredible pressure on China to lift its currency as part of the price of access to the growing American market.

This currency war is a deadly affair and I am not sure how Australia can avoid being a casualty. Very clearly we are going to have to lower interest rates – and if the global war gets out of hand then we too will be forced into doing things that we wouldn’t otherwise contemplate, including helping the businesses that are set to be decimated by the global war.

I must add that that pressure will apply to whichever party wins the next Australian election.