The subject of currency wars has finally hit the big time. It made it to the front page of the Drudge Report.
Drudge featured a story last week entitled “Currency Wars Return, 1930s Style.” It linked to a CNBC piece that asks who will lose out in international currency wars, and offered the opinion that Japan is inching the world closer to a monetary showdown.
“The Bank of Japan doubled its inflation target to 2 percent in January and made an open-ended commitment to continue buying assets (until) next year. This follows a leadership change, with new Prime Minister Shinzo Abe openly calling for aggressive monetary stimulus from the country’s central bank,” according to the account.
Anxious to power its crucial export manufacturers – automobiles and electronics – Japan’ s government is set to print enough yen to cheapen the currency. A cheaper yen, goes the justification, will make the price of Japanese goods more affordable. If, for example, the yen slips two percent, a Japanese automobile that today costs $40,000 U.S. dollars, suddenly becomes $800 dollars cheaper.
It’s like an manufacturer’s rebate for the foreign buyer, except that this price cut doesn’t come at the expense of the carmaker’s profit. It still sells its cars for the same number of yen.
But if the buyer is getting an $800 deal, it has to be an someone’s expense. After all, as Milton Freidman liked to say, “there ain’t no such thing as a free lunch.”
Who loses the $800 per automobile that puts a smile on the face of the buyers?
The Japanese people. To achieve its aim, their government has to surreptitiously take 2 percent of the value of every existing yen in existence. From savers, old and young, from people with bank accounts, insurance policies, annuities, and pensions. It takes the money from people with sales contracts and time deposits, from Japanese children with piggy banks, and from people with cash in their wallets.
Along the way it raises the price the people of Japan must pay to buy goods that are imported, from groceries to gasoline.
This is a form of socialism. Since it is monetary policy is service of influential corporations, favored government cronies, it is corporate socialism. The automobile makers find their profit margins squeezed, so the government steps in to make them whole by “socializing” their losses.
But don’t suppose for a minute that Japan’s carmakers send everybody in Japan a dividend check in boom times. Not at all. The profits are not socialized. Only the losses are socialized. The profits remain private. The gains belong to the shareholders.
None of this is materially different than what goes on in the United States. In boom times the crony investment banks keep their profits for themselves. When they take a loss, the government and the Federal Reserve step in to make them whole at the expense of the people.
Eventually American carmakers will respond to the sale prices of Japanese vehicles made possible by Japan’s currency depreciation, by demanding import quotas on Japanese cars. And they will demand the further depreciation of the dollar to make American cars similarly affordable to foreign buyers.
History shows that when these import restrictions and trade wars accelerate, they can bring hot wars with them.
One of the great ironies is that the two percent inflation rate the prime minister of Japan is targeting that is reported “to bring the world a step closer to a currency war,” is actually less than that intended by the Federal Reserve. Ben Bernanke intends to keep printing money until inflation hits 2½ percent.
A global race to destroy the purchasing power of the world’s major currencies is just getting started. It won’t create more prosperity; it will only redistribute a diminishing prosperity to the crony classes.
It will, however, succeed… in destroying paper money.