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Rouble a spectator in currency drive to the bottom
Published: 08 October, 2010, 18:11
Edited: 10 October, 2010, 18:54
TAGS: Markets, Crisis, Currencies, Russia and the global economy
With Finance ministers and heads of the Central banks calling for a halt to the currency wars, experts say commodity rich Russia remains a safe harbor.
One issue is set to dominate the annual meetings of the IMF and World Bank in Washington this weekend – the currency wars, which threaten to undermine all the work that's been done to restart the global economy.
The new weapon is not bombs or mines – it’s the economic equivalent of napalm, with critics saying it could lay waste to the global economy. Countries lower their currencies to gain competitive advantage, but kill global trade in the process. And everybody can’t devaluate their currencies all at once, say Kenneth Rogoff, Professor of Economics at Harvard University.
“There’s no question that global demand is low. There’s not enough room for everybody to grow their way by exporting. That’s the norm – when you have a financial crisis, in a region or in a country, your exchange rate goes down. That’s one of the things that helps heal you. Now not everyone can grow that way – the whole world can't.”
Governments are making matters worse by printing cash and slashing the worth of paper money. China and the U.S. are the leaders in this currency war, with the US having announced a new round of money printing and driven down its currency this way.
Chinese Premier Wen Jiaboa has warned that pressure to revalue the Yuan would result in social instability and economic disruption in China.
Russia is a spectator in this war. Its exports of gas and oil are priced in dollars while the rouble tends to follow the oil price. This makes the rouble a much safer currency, according to Aleksey Zabotkin, head of investment strategy at VTB Capital.
As the US and the EU push for a yuan revaluation the risk for the coming year is that currency wars will slow global growth.
“Russian exports aren’t dominated by tradable goods, tradable manufactured goods – they are dominated by commodities where the relative competitive advantage of Russia is there regardless of the exchange rate. So, in this respect the absolute exchange rate is of a lesser significance for Russia than to the countries like China.”
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Discussing economy is a subject frought with danger. Hence, a non-expert tends to be intimidated by the concepts that experts brandish. The problem is, after a while, even a non-expert catches on --- nobody really knows what is going on. Expert theories have been proven so wrong time and again. Having learned to be cautious, one cannot but become aware of the inconsistencies and contradictions. For example, it has been adopted almost as a mantra, that Russia needs to diversify, which has been mostly interpreted as development of export-bound manufacturing. Yet, this appears to be the last thing Russia needs in the era of export being seen as a salvation to economic woes to 90% of the world. With economies addicted to export, such as Japan, China, India and others that are in consumer goods production, reorientation can come with difficulties. And what kind of reorientation, as there is no one size fit all. Russia is in a very good spot, in that it needs to crank up manufacturing of goods for its own consumption. Less money spent on imports is more money saved for its other needs. Clearly, importing is the most logical path in a number of products, but not all. Yes, it further diminishes the world trade volume, but it contributes to the restructuring of world trade that is long overdue. Increase in the cost of energy would be beneficial as well; much of the shipping around the world, trading in low-cost goods will become unprofitable. Increased production of food closer to home would help the environment by reducing shipping carbons, and increasing quality. The most difficulties I see for Japan that desparately needs to export, and US that has little domestic production capacity, and too dependent on imports. Unfortunatelly, both Japan and US have high debt-to-GDP ratio to help each other.
As Russia and Brazil need to export manufactures, and not just raw materials, the forced devaluation of Asian currencies (yuan, yen and won) is hurting Russia and Brazil more than anybody else. So there has to be an Accord between the U.S., Eurozone, Canada, the U.K., Russia and Brazil to buy Asian currencies (yuan, yen and won) avoiding the present devaluation race from Asian currencies. None of us want a World devaluation which leads towards Recession. It is very dangerous. Devaluation of Asian currencies (yuan, yen and won) have destroyed European and American industrial corporations during the last decades, ending with one industry after another. Only Germany has been successful to resist that forced Asian devaluation. And Germany did it thanks to fixed exchange rates in the Eurozone. But now that many Eurozone nations are in recession Germany also needs to export manufactures to Asian countries, first of all China (also Japan and S.Korea) So an agreement between U.S., Russia, Eurozone, Brazil, U.K. and Canada to buy yuans, yens and wons is the only possibility to avoid the present trend towards a World Recession.
The Boom and Bust of the Capitalist process has added to the amplitude of the average bust with an exploding Global financial bubble. Meanwhile the other side of this production process raises the temperature around the planet. As stellar commodity production launches the first of many extinction threats to the human species(I'm not counting any of the new threats that are bound to emerge once the weapons of capitalist states become capable of initiating nuclear winters etc). On this basis whatever the New World order looks like I'm sure any reanimated Dinosaur would recognize it as home.