Currency Wars

We
call your attention to Mish's
Global Economic Analysis today. The mid term elections loom, polls give
Republicans the edge,  Democrat
candidates shun the President, the entire economic team has been sent packing
though they ‘resigned’ what to do? 
Like any administration, blame the problem on someone else. And that is
precisely the latest strategy-blame China.

Please
click and read the column, no point in my recounting it but the idea is that if
only the Chinese currency were more valuable, the world would scurry to employ
more Americans.  As Mish says this
presumes the world wants to pay us more more money to do what the Chinese do .
The real problem is that corporate tax rates in America are too high, there are
too many unnecessary costs with American workers like social security, there
are too many  unfunded mandates in
pensions, and there is just too much uncertainty on what Congress might do
next, our case in point today.

This
sort of thing has a terrible history. 
In a similar downturn in the early 1930s Congress passed the infamous

Smoot Hawley Tariff.
Then as now the idea was that foreign competitors had unfair advantages,
Congress would level the playing field. Historians agree that the tariff only
made things worse.  Note the tariff
apparently stayed in effect until Bretton Woods in 1944. The article details
how much worse this made world trade.

Now
fast forward to the Fall of 1987. Then Secretary of Treasury James Baker was
hammering on Germany to lower its

 interest rates. German, having weathered
the collapse of its currency in the 1920s, was not about to do that. Then as
now, the US viewed Germany’s refusal as the call to ‘do something about
it.’  The stock market had been
falling already that month, the bond market had been falling since March 1987.
Baker declared that if Germany would not cooperate the US might just let the Dollar
fall. Experts later viewed this as a refusal of the US to defend its currency.
That following Monday

stocks crashed.  This wiki article does not give Baker
the credit he so richly deserves for helping this happen.  But the world took hat comment as
believing the US would not defend the dollar. Accordingly the world sold dollar
denominated assets, ie stocks.

Our
point here is that as always during periods of stagnation it is government interference
that often causes problems. This latest ‘we have had enough’ from our biggest
trading partner, and as Mish points out, buyer of Treasuries and airplanes, is
the latest in the history of government folly. This also helps explain the
recent collapse in the Dollar and UUP.

Bear
markets are a manifestation of negative social mood. Here is another example of
how mood results in precisely the wrong move at the wrong time. At least in
1930, the US was a net creditor. Now as a net debtor, such mistakes take on
even greater significance. This is especially so as the Chinese recycle our
Dollars back into US investments like Boeing.

We
are not publishing to predict an imminent 
crash. We put this out to highlight government interference in a long
history of other such failed attempts.  

This
will contribute to further UUP weakness.

This
may eventually bear on our prediction for S & P 1180. For the time being it
still stands. But such stunts speak to the necessity for vigilance in watching
the markets.