While attempting to enjoy Pittsburgh (and hopefully a Cubs game), the markets buzzing about the U.S. Treasury’s report about the “Trade facilitation and trade Enforcement Act of 2015.” In a Bloomberg News article published late Friday afternoon, “U.S. Places China, Japan, Germany on New FX Monitoring List,” it seems that the Treasury and Jack Lew are raising the threat of retaliation against nations that meet the Congressional crafted criterion of currency manipulation. These include: 1. Significant bilateral trade surplus with U.S.; 2. Material current-account surplus; and 3. Engaged in persistent one-sided FX intervention. The issue of “one-sided intervention” is defined as only weakening a currency by conducting repetitive net purchases of FX amounting to more than 2% of its GDP.”
There were no violators of the three elements but of course China, Japan, South Korea and Germany were cited as violating all but the one-sided criteria though they were warned against any aggressive intervention or policies thought to be of similar effect. The Bloomberg article noted that the “U.S. says Germany has adequate policy space to provide additional support to demand.”
The advice to Germany is very problematic because the U.S. is directly intervening into German domestic politics by pushing on the Merkel government to initiate robust fiscal stimulus. This is a case of the U.S. acting as a global hegemon and trying to craft economic policy for the entire world. The German current account and trade balances are robust because the German export sector has been able to take advantage of a weak euro related to the economic problems of so many of its comrade states within the EU.
The German people receive an economic advantage in trade but are severely punished by ultra-low interest rates as a tool to relieve the stress of interest payments on Greece, Spain, Italy, Portugal and France. If Germany is to act on its own because of the incongruities built into the EU system why would President Obama be pushing the British people to join such a flawed financial and political system? The world would be better with a strong Deutsch mark but currently that is not an option. If German economic strength pushes the EURO HIGHER the economies of Spain, Italy and France will be negatively affected.
The U.S Treasury cannot single out Germany without citing the entire EU. More importantly, IN MY OPINION THE TREASURY RELEASE RAISES THE WARNING THAT THE U.S. HAS REALIZED THAT GLOBALIZATION WILL PLAY A HEIGHTENED ROLE IN THIS YEAR’S PRESIDENTIAL ELECTION. IT APPEARS THAT THERE IS AN EFFORT TO WEAKEN THE DOLLAR TO ASSUAGE THE VOICES OF PROTECTIONISM. If so, then the FED will not be raising rates, which is why President Obama invited Fed Chair Yellen to meet at the White House, to raise concern at the highest level about the “currency manipulation” of the U.S. trading partners.
If so, LOOK FOR YIELD CURVES TO STEEPEN AS THE FED DELAYS ANY RATE RISE REGARDLESS OF ECONOMIC DATA and of course this theory provides a boost to gold. Readers of Notes From Underground know that my argument for the last four months to own gold was because of the central banks losing control of monetary policy and thus gold being the best haven and store of value. These trades will be volatile and play out over time but it seems markets agree that central banks are not all that they portend to be. The world craves a global massive fiscal stimulus but politics seem to momentarily prevent it. The U.S. is not the hegemony it used to be so market volatility is sure to increase as other nations dare to cross the U.S. Treasury’s red lines. Be vigilant and patient as the macro-world unfolds in response to the U.S. authority.