Will A Stronger Dollar Cause a Trade War with Europe? | bambinoides.com " />

Will A Stronger Dollar Cause a Trade War with Europe?

Markets have not been slow to see through the hollowness of the European Central Bank’s announced (on December 8) curtailment of the pace of money printing planned for April next year. The ECB plans to reduce its “stimulus” from 80 billion euros per month down to 60 billion euros per month. But, it plans to do this for nine months before any further review — rather than the usual 6-month fixed period until further review.

Sixty billion is a huge number and the persistence of the ECB in sticking to its radical policy suggests that Chief Draghi, and ultimately Chancellor Merkel, are deeply anxious about the dangers of financial crisis ahead which could rock the status quo in Europe. The potential triggers to crisis include first and foremost Italy — but also the looming elections in Holland, and most importantly France. 

Everyone and their dog in the marketplace realizes that an EMU (European Monetary Union) debt crisis before the German elections next Autumn could sink Chancellor Merkel.

There is a deeper problem here.

It is becoming clear that even beyond Europe’s election season, “monetary normalization” may well not be feasible.

To understand this, we should realize that monetary normalization in any real sense (not the Bernanke-Yellen-Fischer sense of embarking on minute highly broadcast rate rises whilst leaving everything else unchanged) has three main components:

First, the restoring of monetary base to the pivot of the monetary system, meaning a big shrinkage in the central bank balance sheet; second, a freeing of interest rates from central bank manipulation; third, the repeal of the 2% permanent inflation target in favor of stable prices in the long run (but not short run).

Markets realize that the US may go down this road under the incoming Trump administration, at least until the next crash and recession. The exact timing of entry could depend on when Chief Yellen retires or resigns. But the starting point is a detail, and in any case, the new administration can give a strong signal of intent by its choice of two Fed governors early in the New Year and its nomination of the new chief to be. An announcement is widely expected by mid-year.



How the US Might Normalize Monetary Policy

Information could emerge by then about how monetary normalization in the US is to proceed. Most likely, this will involve the White House brokering a deal between the Fed and Treasury whereby the former swaps its portfolio of long-maturity treasuries (and possibly mortgage backed securities) with the latter in exchange for short-maturity T-bills, which can then be sold off rapidly in the markets in an open market operation which would shrink the monetary base.

True, Ms. Yellen and Mr. Fischer would not contemplate such a deal, as it appears to run contrary to much-vaunted central bank independence. But a deal is patently practical between two Trump nominees — at the Fed and Treasury respectively — and it would be widely approved of by many who are enthusiastic about sound money.

Problem: any intimation of such a deal and path ahead would send the dollar up against those currencies where no such normalizati
on is practical — demonstrably Europe. And of course China is a whole different topic, but any monetary normalization in China is light years away given the huge financial risks there.

So Germany, with the largest trade surplus on Earth (its current account surplus next year could reach 9% of GDP), becomes a candidate country for naming and shaming in the semi-annual report put out by the Treasury on currency manipulation. And in the past, Germany has been mentioned as a possible candidate for that list though not actually put on it. China in its defense of huge trade imbalances is quite ready if the past is any indication to point to Japan and Germany as offenders which should also be brought into the discussion.

But this time round Japan is in a different situation.

What About Japan? 

It is well within the realm of the politically possible that PM Abe and his central bank Chief Kuroda would copy the US example in organizing a swap to bring down the monetary base (the two parties would be the BoJ and the Ministry of Finance). And before then there is widespread expectation that the BoJ will move away from its present pegging of long-term rates at zero (via potentially huge but volatile intervention financed by money printing). This would most likely happen in two stages (first moving the peg upward, then abandoning it).

The over-riding priority for Tokyo could be solidifying the strategic alliance with Washington not least in view of the rising geo-political dangers related to China and the vacuum now remaining after the collapse of the Trans-Pacific Trade deal.

Is it possible that the ECB and Berlin could have second thoughts about monetary normalization in the context of a threatened trade war with the US?

Yes they are sure to have second thoughts, but what can they do?

There is no European Finance Ministry with which all the bad loans and bonds in the ECB balance sheet can be swapped for T-bills. And if the German, French, or Dutch finance ministries were to step up to the task, their governments would have to recognize the huge losses to date in ECB interventions to “do whatever tit takes to save EMU.”

And so it is not just popular elections that now challenge the status quo in Europe. Trade war lurks not far behind. And this is a challenge not just for the modern Chancellor Metternich and the European status quo, but also for global prosperity.


Source: Author: Brendan Brown | Mises Institute





The views expressed are not necessarily those of the publisher or bambinoides.com. Images accompanying posts are either owned by the author of said post or are in the public domain and included by the publisher of the blog bambinoides.com on its initiative.

Leave a comment

You must be Logged in to post comment.

© 2012-2017 - Copyright - bambinoides.com is not liable for the content of external web pages

© 2012-2017 - © Copyright / Copyright Disclaimer Under Section 107 of the Copyright Act 1976, allowance is made for "fair use" for purposes such as criticism, comment, news reporting, teaching, scholarship, and research. Fair use is a use permitted by copyright statute that might otherwise be infringing. Non-profit, educational or personal use tips the balance in favor of fair use. / Derechos Reservados & CLÁUSULA DE EXENCIÓN DE RESPONSABILIDAD: bambinoides.com (El BLOG), tiene un carácter divulgativo, informativo y de entretenimiento, poniendo a disposición de todos, informaciones, noticias, reportajes, material audio-visivo y gráfico de contenido variado y sugestivo con el único interés de provocar un sano debate entre amigos e interesados. De no ser especificado, los artículos, comentarios y/o introducciones son escritos y propiedad de Antonio-"Bambino" Maldonado-Boschetti (indistintamente con siglas AMB - ◊◊B◊◊). Además, en EL BLOG se evidencian vínculos y se divulga información originaria de numerosas fuentes por lo que ni El BlOG ni Antonio-"Bambino" Maldonado-Boschetti son particular y específicamente responsables del contenido de aquellas.-- USO JUSTO (Fair Use): Descargo de Responsabilidad: bambinoides.com y/o Antonio-"Bambino" Maldonado-Boschetti (AMB/◊◊B◊◊) no es (son) propietario de la mayor parte de los audios-vídeos que forma parte de la Galería de Vídeos de bambinoides.com los cuales pertenecen a numerosos autores, artistas y/o productores. Aviso y reclamo que los derechos de autor bajo la sección 107 del Copyright Act 1976 (USA) permiten el uso y divulgación de este material con “USO JUSTO” para propósitos tales como crítica, comentario, noticias, enseñanza, becas e investigación. El “USO JUSTO” (Fair Use) es un uso lícito y permitido por la Ley de Derechos de Autor, que de lo contrario podría constituir una violación. El uso sin fines de lucro, educativo, noticioso o informativo, o personal inclina la balanza a favor del “uso justo" por parte de bambinoides.com.-- La información y el contenido "multimedia" publicado por EL BLOG son de carácter público, libre y gratuito. Pueden ser reproducidos con la obligatoriedad de citar la fuente: http://www.bambinoides.com y a cada autor en particular. -- Los comentarios y reacciones de los lectores publicados en los "posts" son de la entera responsabilidad de quien los emite; EL BLOG intenta implementar un mecanismo de auto regulación y/o puede decidir no publicar comentarios que constituyan abuso o que lesionen el buen gusto y los derechos de otros. -- Se pueden enviar colaboraciones gratis directamente a bambino@bambinoides.com quien se reserva el derecho de publicación.
All photos accompanying posts are either owned by the author of said post or are in the public domain and included by the blog bambinoides.com on its initiative.

Creative Commons Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License. Bambinoides.com está disponible bajo una licencia “Creative Commons” Reconocimiento-No comercial 4.0. Cualquier reconocimiento debe ser a bambinoides.com y a cada autor/publicación en particular.

WP-Backgrounds Lite by InoPlugs Web Design and Juwelier Schönmann 1010 Wien
Confrontando la información, - el pasado y el presente...
"Estudia el pasado si quieres pronosticar el futuro" (Confucio)
“La historia es en realidad el registro de crímenes, locuras y adversidades de la humanidad” (E. Gibbon)