Echoes of 1934 are thundering with increasing intensity.
In 1934, United States President Franklin Delano Roosevelt outlawed the private ownership of gold. People who refused to turn their gold over to the government went to jail. With the same presidential order Roosevelt shocked the world by devaluing the dollar. The cost for an ounce of gold, previously set at $20.67, henceforth cost $35.
President Roosevelt told the country that it was a radical effort to stimulate America’s economy. A cheaper dollar would make America’s exports less expensive and help American companies sell more products to the rest of the world, he said. More money would flow into America, and more jobs would be created.
It did those things. And it also marched the world another giant step closer to war.
From the world’s perspective, President’s Roosevelt’s actions felt like a full-on economic broadside designed to steal a bigger chunk of a stagnating global economy. To the world, it was another—albeit much bigger—salvo in an ongoing global currency and trade war! And it responded in kind.
Today, the economic guns of 1934 are thundering once more. The world’s economy is languishing. China, Europe and America face miry growth. Commodity prices have cratered. And demand for materials has been blown to smithereens. Meanwhile, global debt is skyrocketing. Desperate nations are doing everything they can—including destroying their currencies—to stimulate their economies and keep disruptive internal social forces at bay.
But could we really be headed toward world war again? The parallels, at least, are ominous.
It is in this current tense climate that, on August 11, China surprised the world by initiating the greatest single-day devaluation of the yuan in China’s history.
And that was just the warning shot.
Over the next days, the yuan fell at an unprecedented rate—blowing multi-decade records for depreciation. The move was especially significant because, for the past several decades, China has made sure the value of the yuan closely tracked the dollar.
The fall of the yuan quickly mobilized other nations into action. Kazakhstan and Vietnam announced they would devalue their currencies in response. India, the world’s second-largest nation by population did not even make an official announcement before it depreciated the rupee. Turkey let its lira slide for a record five days.
The international outrage was loud and clear—and it drew a response from China.
On August 16, Ma Jun, the chief economist at the People’s Bank of China, emphatically reassured the world that the Chinese government had “no intention or need to participate in a currency war.” He called commentary to the contrary “completely groundless and unfounded.”
Reuters quoted unnamed “powerful voices” within China’s government who suggested the yuan needed to fall by 10 percent. Morgan Stanley predicted a 15 percent fall earlier this year.
There will be retaliation.
China’s currency bombardment is not happening in a vacuum—just as President Roosevelt’s action to devalue and outlaw private gold ownership did not happen in a vacuum.
The 1920s and ’30s saw wave after wave of currency devaluations. Germany, Hungary and Italy virtually destroyed their currencies in an attempt to stimulate their economies. In 1930, America retaliated by passing the Smoot-Hawley act to protect American producers. It raised the tariffs on 20,000 imported goods to record levels. The impact ricocheted around the world. Twenty-three major trading partners sent letters of protest and threats of retaliation. They were ignored. In May 1930, America’s greatest trading partner, Canada, reacted by imposing tariffs on 16 products that accounted for almost a third of U.S. exports to Canada. France and Britain protested and switched to new trade partners. Germany developed a system of self-sufficiency, shunning U.S. products. By 1931, Austria unlinked the schilling from gold and devalued its currency; a move that precipitated the United Kingdom’s own exit from the gold standard that same year due to its starving economy. France, learning from the UK’s mistake, reinstituted its own gold standard at a much lower level to protect its own export industries. Roosevelt was actually late to enter the devaluation game.
Economic war raged. Trade war raged. World war loomed.
This is where we are today. And a case can be made that China is actually late to the game.
China is today’s financial kamikaze.
Full article: Dangerous Currency War Dragging World Toward World War III (The Trumpet)