Currency Devaluation: A Race to the Bottom?

Includes: CYB, GBB, UDN, UUP
by: Tactical Investor

It is a wise person that adapts themselves to all contingencies; it's the fool who always struggles like a swimmer against the current.

-- Source Unknown

The US criticizes China over its reluctance to let the yuan appreciate, and indirectly blames some of its woes (increasing budget deficits) on China's keeping the yuan pegged to the dollar. Let’s stop for a moment. Is this not the pot calling the kettle black? The US is debasing its currency at a mind boggling rate, printing new dollars to the tune of 1 plus trillion a year, and yet we have the nerve to call on China to revalue its yuan?
If the US wanted to put an end to this nonsense it would simply follow a course that would ensure the dollar becomes stronger. This, in turn, would drive the value of the yuan up as it is pegged to the dollar.
Clearly, the US does not favor stronger dollar policy, for its actions speak louder than its words. The bandits in Congress want to print all the money in the world, and then they want other nations to let their currencies appreciate. China is too smart to fall for this game and the US is no longer the big bad wolf that can huff and puff and blow all the straw houses down. Now, many of the houses are built with brick and steel and so no matter how hard this big bad wolf blows the Chinese house is not going to fall down.
One must remember that the one that controls the purse strings is the one that is in command, and at this point China with its huge holding of US treasuries appears to be in charge. Thus the US can make a lot of noise but China will not listen because they know that all they have to do is threaten to unload their treasury holdings (they do not even have to really sell them) and it could have a severe impact on the U.S. markets.
The story below clearly indicates that China is not going to be bullied into allowing its currency to appreciate against the dollar.

A Commerce Ministry spokesman repeated Chinese complaints that Washington was acting unreasonably by expecting other countries to raise their value of their currencies in order to boost U.S. exports. The United States and other trading partners complain Beijing keeps the yuan undervalued and are pressing for it to rise. "Politicizing the exchange rate issue is not helpful to coordination among all parties in the course of fighting the global financial crisis," spokesman Yao Jian said at a news briefing.

A group of 130 U.S. lawmakers wrote to President Barack Obama on Monday demanding that he take action, adding to pressure ahead of an April report in which the U.S. Treasury has the option of declaring Beijing a currency manipulator. That would set the stage for a complaint to the World Trade Organization and possible sanctions.

On Sunday, Premier Wen Jiabao denied the yuan was undervalued and said foreign pressure was unhelpful. He said Beijing plans to reform its exchange rate system but the currency will be kept at a "stable and balanced" level.

Yao rejected suggestions the yuan's exchange rate was to blame for the Chinese trade surplus or the U.S. trade deficit with China. Critics say the yuan is undervalued by up to 40%, giving China's exporters an unfair price advantage. Full Story

The Chinese have adopted the mantra that "if you cannot beat them, you might as well join them," and they achieved this by pegging the yuan to the Dollar.
Every nation is using every means at their disposal to devalue their currencies. Just look at the pound. Not to too long ago it took two U.S. dollars to buy one British pound; today it takes only a 1.50.
Vietnam decided to devalue its currency twice in a matter of three months and did so three times in the last two years.

Vietnam's central bank declared Wednesday that it would devalue its currency, the dong, by 5.44%, effective Thursday. The central bank will also increase its key interest rate from 7% to 8%, effective on December 1. Speaking on the topic, economist Tai Hui said, "We have seen a significant amount of devaluation pressure on the dong in recent weeks. The rate hike is there to support the dong."

Trading band of the dong will also be curtailed from current 5% to 3%, effective Thursday. As per an estimate, Vietnam's reserves have dropped from $22 billion at the start of 2009 to about $16.5 billion. On November 12, Vietnam lifted an 18-month old ban on gold imports to check panic buying that had dragged the dong down.

This is the third time in the last two-year period that Vietnam has devalued its currency. Previous attempts to check a long term slide in the currency had shown little effect. Full Story

The race to the bottom that we spoke of several years ago is now picking up steam as each nation competitively devalues its currency to gain a trading edge over its neighbor. In such an environment, one has to move into hard assets as they offer the best means to protect against this outright theft. One of the simplest ways to do this is to move into precious metals. There are more complex and highly rewarding strategies that involve taking positions in lumber, oil, etc., but for those who want a simple and effective way to protect themselves from currency debasement (inflation and possibly hyperinflation) the answer is to take a position in bullion (Gold, Silver, Platinum, etc.). The time to take action is now for once the storm starts it might be too late; an ounce of prevention is worth a pound of cure.

The weather-cock on the church spire, though made of iron, would soon be broken by the storm-wind if it did not understand the noble art of turning to every wind.

Heinrich Heine,1797-1856, German Poet, Journalist

Disclosure: Positions in Gold and Silver bullion

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