A New 'Salvo' in the Currency Wars
A new 'salvo' in the currency wars... China is devaluing again... The markets don't believe the Fed... P.J. O'Rourke: What book every investor needs to read...
Last night, China devalued its currency – the yuan – to a five-year low versus the U.S. dollar...
Regular Digest readers may recall that the global market panics last August and again this January were largely blamed on similar moves by China. But today's news didn't have the same effect...
There were no signs of panic. Major stock markets around the world rallied... while traditional "safe haven" assets like U.S. Treasurys and gold declined.
What accounts for the change? There are a couple of likely explanations.
First, the devaluations last summer and winter were relatively large.
In August, China weakened the yuan 1.9% against the U.S. dollar. This was the largest single-day move in the yuan in at least 20 years. In January, China devalued the yuan another 1.5% over a one-week period.
Today's move was just 0.3%.
Perhaps more important, both earlier moves fixed the yuan at dramatic new multiyear lows versus the dollar. Today's devaluation did push the yuan to a new five-year low against the dollar, but just barely... and it follows several similar small moves over the past few months.
In short, China may have learned a lesson from its earlier devaluations. It appears to believe it can gradually weaken the yuan to help its economy, without spooking markets again and causing more money to flee the Chinese economy.
If this trend continues – and the yuan hits significant new lows versus the dollar – we could soon see if China is right.
Of course, China isn't alone in the "currency wars."
All the world's major governments are following the same playbook. They're all using insane policies like quantitative easing and negative interest rates to actively devalue their currencies to make their exports cheaper to the rest of the world... and allow them to pay off their massive debts more cheaply.
But there are no winners in these wars... While some currencies may appear to strengthen versus others for periods of time – like the U.S. dollar has recently – they're all circling the drain. It's truly a "race to zero."
As we've noted for years, paper currencies have a perfect historical record... Not one has ever lasted.
This is why we've urged everyone to own some gold. Sooner or later, the world will lose faith in manipulated fiat currencies... and you don't want to have all your savings in paper money when it does.
We've been covering the Federal Reserve's recent pronouncement that a June interest-rate hike is "back on the table." But it appears the market still isn't convinced...
Despite a long list of Fed officials insisting a rate increase is likely next month, the market's odds of a June hike are just 32%, according to the CME Groups's FedWatch tool.
Some folks believe it's a worrisome sign that the Federal Reserve is losing credibility. As JPMorgan Funds' Chief Global Strategist David Kelly told the Wall Street Journal this week...
On multiple occasions in recent years, when the Fed had an opportunity to wean the economy off extraordinary monetary stimulus, it shied away from it at the last minute.
The Fed worries that markets will react badly if it raises rates unexpectedly. It would like to be able to guide market expectations. However, this guidance will only be followed if Fed communications have credibility...
Having now worked hard in recent weeks to explain why June is on the table, provided the data remain relatively healthy, not following through with a rate hike in three weeks would only further undermine whatever credibility the Fed has left.
In other words, the Federal Reserve may have painted itself into a corner...
Even some of the Fed's staunchest supporters are beginning to question it. If it reverses course at the last minute again, it may lose what little credibility remains.
On the other hand, if it does raise rates, it could catch the markets off guard... and look incredibly foolish if it's forced to lower them again if the markets head south.
Be sure to read to the end of today's Digest, where we're featuring a bonus essay from best-selling author and contributing editor P.J. O'Rourke...
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May 25, 2016
Books That Aren't About Investing That Every Investor Should Read, Part I
Having investments is like having kids. You want them to grow and prosper with liberty and responsibility. You don't want them ruined by bad ideas, like getting a "Feel the Bern" face tattoo.
That's why good investors care about more than just the markets. They care about the freedom that makes those markets work, and the wisdom behind the freedom. Good investors also care about the things that threaten freedom, such as foolish politics and ideology.
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Nobel Prize-winning economist Milton Friedman (1912-2006) possessed the wisdom behind the freedom. He was the leading free-market economist of the 20th century and maybe of all time.
Academically, his most important work was proving the importance of a rational monetary supply and showing the disastrous results of irrational political meddling with money.
Here is Friedman on what caused the Great Depression:
The Fed was largely responsible for converting what might have been a garden-variety recession, although perhaps a fairly severe one, into a major catastrophe. Instead of using its powers to offset the depression, it presided over a decline in the quantity of money by one-third from 1929 to 1933... Far from the depression being a failure of the free-enterprise system, it was a tragic failure of government.
I'd like to hear what Friedman would say now that the "tragic failure of government" is going in the opposite direction – expanding "the quantity of money" by insane proportions. I bet he'd blister some central bankers' ears.
However, the most important thing Friedman ever wrote for the general public was Free to Choose (which he co-authored with his wife Rose, who was also an economist with a degree in philosophy as well).
The Friedmans explain why the free market is good for everybody – rich, poor, minorities, majorities, the disadvantaged, and those who the politicians tell us have so many advantages that regulatory agencies and the IRS need to take some away.
Well, good for almost everybody. The free market distributes power to individuals. The free market is not good for politicians. They want that power for themselves.
Free to Choose originally accompanied a 10-part PBS series of the same name, which began broadcasting in January 1980.
(The series is still watchable, if you aren't distracted by Milton's disco-era burgundy blazer with foot-wide lapels and his necktie knot the size of a softball.)
After a decade of "stagflation" and idiotic economic policies from Richard Nixon, Gerald Ford, and Jimmy Carter, America was suddenly exposed to clear and concise common sense about what marketplace freedom means.
What it means is every freedom that we have. Freedoms are physical things. All the physical goods and services of the world (including freedom of speech and belief) are traded in a marketplace of some kind.
When the marketplace is free, the Friedmans say, then "an exchange between two parties is voluntary [and] it will not take place unless both believe they will benefit from it."
When the marketplace is not free, the exchange doesn't have to be voluntary. The exchange could take place under threat of force, even though you know you won't benefit from it. You could be sold into slavery.
The second message of Free to Choose is that we should avoid, as much as we can, all kinds of government interference in free markets – including (and sometime especially) "beneficial" government interference.
We live in a democracy and freely elect the people who govern us. So we may think that government actions are extensions of our own freedoms. The Friedmans warn us to be careful about thinking that way...
Every accretion of government power for whatever purpose increases the danger that government, instead of serving the great majority of its citizens, will become a means whereby some of its citizens can take advantage of others.
And don't think poor people are the exception...
The poor tend to lack not only the skills valued in the market, but also the skills required to be successful in the political scramble for funds.
Even when we have "good government," we're giving up our individuality. We have to conform to what the government tells us to do. That isn't going to make everybody happy. In the free market, all parties are unanimous about the deal being a good deal. In the un-free market produced by government threat of force, somebody's getting a raw deal...
The ballot box produces conformity without unanimity; the marketplace [produces] unanimity without conformity... That is why it is desirable to use the ballot box... only for those decisions where conformity is essential.
The third message is that economic "fairness" is equal parts sham and danger...
A society that puts equality of outcome ahead of freedom will end up with neither equality nor freedom. The use of force to achieve equality will destroy freedom, and the force, introduced for good purposes, will end up in the hands of people who use it to promote their own interests.
I put it differently at my house. I have a teenage daughter whose continual response to the problems of life is to say – or rather, to whine – "That's not fair!"
One day, I'd had too much and snapped. I told her, "You're cute. That's not fair. Your family is pretty well-off. That's not fair. You were born in the United States of America. THAT'S not fair. Honey, you'd better get down on your knees and pray to God that things don't start getting 'fair' for you!"
Free to Choose was written more than 35 years ago, but instead of seeming out of date, it reads like something you hope somebody will write tomorrow.
The Friedmans used a number of then-current public-policy issues to make their points. Every one of those issues is still with us and causing more trouble than ever – cradle-to-grave welfare programs, pollution (as "climate change" was called back then), workers' rights, consumers' rights, income inequality. They titled one chapter "What's Wrong With Our Schools?" and another – about to become all too relevant again – "The Cure for Inflation."
The only part of the book that feels old is the last chapter, "The Tide Is Turning." It begins...
The failure of Western governments to achieve their proclaimed objectives has produced a widespread reaction against big government.
This reaction didn't last.
The tide, sad to say, has turned again, flooding our political system with all the muck, slime, and raw sewage of liberalism, socialism, and populism that we've seen this election season.
With no Ronald Reagan on the horizon, who knows when it will be Morning in America again? As necessary as Free to Choose was in 1980, we need it more right now.
Regards,
P.J. O'Rourke
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