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Beggar Thy Neighbor

Posted by Larry Doyle on October 5, 2010 12:17 PM |

So much has happened along our economic landscape over the last two to three years that it is hard to weigh the magnitude and depth of many of the developments. That said, the simple fact is the tectonic plates underlying our global economy have shifted massively as a result of the enormous financial earthquake of 2008. While global governments and central banks have performed varying degrees of  triage to save states, nations, and regions, the movements of the plates are continuing along under the surface. To that end, what is the economic reality now bubbling above the surface given the shift in our tectonic plates below? Let’s navigate and review the reality known as Beggar Thy Neighbor, defined by our friendly Investing primer as, 

An international trading policy that utilizes currency devaluations and protective barriers to alleviate a nation’s economic difficulties at the expense of other countries. While the policy may help repair an economic hardship in the nation, it will harm the country’s trading partners, worsening its economic status. 

I first broached this topic in early 2009 given developments in eastern Europe. At that point I wrote The Weakest Link Is Weakening. The driving forces behind this economic reality may be downplayed by central bankers but the fact is government officials and those running for political office are actively pursuing policies that promote this reality. I believe that style plays very much into the populist rage that is sweeping our nation and throughout the world. 

We see evidence of this shifting of the tectonic plates in the Financial Times today. The FT writes, Brussels Says Currency Moves Could Undermine Revival,  

Europe’s fledgling economic recovery could suffer if the euro is further undercut by other currencies, the European Union’s economics chief warned, as China rebuffed fresh pleas to allow the renminbi to strengthen.

Olli Rehn , Europe’s commissioner for economic and monetary affairs, issued the warning amid growing concerns that moves by other nations to restrain their currencies in order to boost exports was taking its toll on Europe’s competitiveness.

Do not think for a second that Europe is the only region concerned about the relative values of the global currencies. Many paid political advertisements here in the United States address the topic of outsourcing jobs which are inherently tied to the value of our greenback. This concern is primarily directed at our dollar relative to the Chinese yuan (renminbi). On this note, the FT writes,

Mr. Rehn, along with Jean-Claude Trichet, president of the European Central Bank, and Jean-Claude Juncker, chairman of the eurozone group of finance ministers, repeated their call for China to allow “an orderly, significant and broad-based appreciation” of its currency.

But Mr Wen, who did not attend the press conference, did not agree, according to Mr Juncker. On Monday, the Chinese leader issued a statement calling instead for “relative stability” in global exchange rates.

Mr Juncker described the encounter as “open, frank but nevertheless friendly.” Both sides, he said, agreed that a currency war would be destructive and was to be avoided.

China’s exchange rate policy has not stoked the same anger in Europe as it has in the US, where Congress recently passed legislation allowing it to sanction countries that artificially undervalue their currencies. That divergence is in part owing to the fact that Europe does not suffer the same yawning trade deficit as the US.

A currency war and subsequent trade war are not necessarily foregone conclusions but we would be wise to closely monitor developments in this space as the tectonic plates continue to gradually push in this direction.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Lou

    Fabulous insights. Ben Bernanke and Tim Geithner are certainly willing to sacrifice the value of the dollar in hope of forestalling further economic decline.






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