Currency Crashes and Currency Clashes

As China fights a relentless battle to save the perishing yuan, it is also fighting a currency war with the dollar, though not one that it is in any way winning. In today’s news (below) we read that China has ordered major brokers to stop trading or greatly curb trading on foreign exchanges. Some of the firms, in response to the boss bank’s “request “have almost completely stopped trading yuan for other currencies.

Breaking China

In spite of all China has done to save the falling yuan, the yuan remains at a sixteen-year low against the dollar. Of course, the Fed, in fighting inflation, is pushing the dollar higher by raising interest on dollar-based bonds and by forcing the government to find other funders for its bonds than the Fed. By actually sucking dollars out of the global economy with its QT, as total money supply has been shrinking with the Fed’s balance sheet, the highly global dollar rises in value compared to other currencies, and the yuan sinks. That is in spite of the fact that the dollar faces price inflation (diminishing dollar value) at home, whereas the yuan ironically faces a bit of domestic deflation (strengthening at home).

All of this continues to make it hard for China to stimulate its flailing economy — where real-estate in the news today is still falling — by printing money. To stem the slide of the yuan against the dollar as China makes some attempts to stimulate its economy, China is targeting the dollar with some of its actions.

“The PBOC will have to keep liquidity loose and interest rates low to back the domestic economic recovery, rendering it hard to support onshore yuan via lifting funding cost” like in the offshore market, said Stephen Chiu, chief Asia FX and rates strategist at Bloomberg Intelligence. “It will have to rely on outright spot selling via state-owned banks or other methods like refraining dollar buying via window guidance.”

The central bank on Thursday said it will cut the reserve requirement ratio for most banks, as it steps up support for a stuttering economy. The currency has been weakening as China’s interest-rate differential widens against that of other major economies.

There were some signs of improvement in China’s retail sector this week, but real-estate remains a total train wreck — the cost of building entire ghost cities under central planning on the “if you build it, they will come” principle and then quarantining everyone inside of those cities (and other cities) in the peculiar belief that you can do that without destroying your vibrant entirely stimulus-driven economy.

China’s currency struggle is also resulting in an extremely high premium of $120/oz. on gold bought in China. This is happening because traders in China are seeking to flee the yuan by stocking up on gold. To this, China is taking defensive action:

Traders have sold the yuan this year as disappointing economic data and real estate turmoil spurred the central bank to cut interest rates. As monetary policy diverges with the rest of the world, sending the currency toward record lows offshore, the central bank has intervened to stem the slide. That includes limiting gold shipments into the local market by squeezing import quotas.

If your fiat currency is falling apart like an old knotted rag in a dog’s mouth, curtail the availability of the go-to for anyone fleeing a flailing currency. Bar gold bars from enterning the country (and all other forms of gold) … or, at least, from entering the hands of the “Republic’s” people.

“It looks as if there’s been no imports,” said Rhona O’Connell, an analyst at StoneX. “That also makes sense because of the efforts that they are putting in to defend the currency.”

That does not mean, of course, that the central bank is not buying any gold. It’s just making sure the little guy can’t get any as a pathway to protection from the staggering yuan. Speculations on gold import restrictions started in June, raising the premium on available gold … if you can find it. There is no driver of price premiums like greater scarcity.

China is the world’s biggest market for bullion, with rich and poor citizens alike buying gold as a savings tool. Demand for gold in the country has remained largely subdued this year, until recently when the weaker yuan and economy started to boost purchases.

Russia trying to rise from the ruble rubble

China’s partner in the dollar demolition derby is also struggling to shore up its own currency. The main front of this battle is the home front against inflation, which is now worse than in the US. Russia, today, just raised its target interest rate to 13%, more than double the level reached by the Fed and, based on what was seen today, with far less success.

Russia is, however, also fighting on the dollar front just like China to avoid losing ground like it is doing bit by bit in Ukraine:

The move is the second rate hike in two months following an emergency meeting in August held after the Russian ruble fell below 100 against the U.S. dollar.

The ruble has since dipped just below the crucial level — seen as a barometer of economic health by many Russians — but has failed to strengthen significantly.

It’s pretty bad when your currency falls against the dollar when it can barely even trade against the dollar because it has been banned on dollar markets.

This is driving inflation inside of Russia because a falling currency raises the cost of imports, and imported parts are in just about anything technical in Russia. Russia is also facing record labor shortages since the Covidcrisis, just like the US, which is driving up labor costs.

As a result, we see a peril that may also happen in the US:

The Bank also said that domestic demand was rising much faster than Russia’s economic capacity to produce new goods, which was causing stubborn inflationary pressure across the economy.

The Fed’s worst fear if it only knew what to fear

That is the high-risk scenario (worst-case scenario) I pointed out for the US in my predictions at the start of this year. Since the labor market is NOT (contrary to almost all opinions) tight because “the economy is strong” and, therefore, demanding labor, but is damaged and unable to supply labor to meet past production and service levels, it stands to reason logically that labor is also diminished in its ability to produce.

Therefore, if the Fed crushes jobs down even more, it may stem the rising labor costs that it wants to crush (because the Fed never truly wanted to see labor wages do anywhere near as well as executive pay and shareholder profits). That was just Yellen yappin’. However, it may also crush production down even more, which could backfire and actually cause inflation to rise due to shortages!

That outcome depends on whether the additional crushing of labor production in order to suppress wages is a more powerful force against inflation than the additional shortages are as a force pushing up prices. If the Fed gets itself caught in that Catch-22 scenario where it makes shortages significantly worse with its tightening, I don’t know what it will do because pushing down on the economy more at that point will actually make inflation worse still, and it’s unlikely the Fed is smart enough to even understand that dynamic based on anything I’ve seen whenever the Fed paints itself into corners that force it to destroy its own “recoveries.”

That was one of the major warnings of my Patron Posts (called “The Deeper Dive” now that I’m not publishing them via Patreon) at the start of the year when I was writing The Great Recession Blog. Think about it: it’s important, and no one is talking about it. I did not say the Fed WILL make shortages worse to a greater extend than it suppresses wage increase, but is a serious risk that the Fed will not likely understand any better than it understands the current tightness in the labor market, and is a situation that easily could happen.

You see, the Fed may have to do a lot of economic compressing before it gets labor demand down to match available labor to such an extent it curbs the wage gains we are now seeing in major union strikes. We have barely emerged from shortages, and still have some shortages, and crushing down on the economy in order to raise unemployment and diminish consumer spending will backfire very dangerously if it creates shortages because NOTHING drives inflation like scarcity! Labor now feels its empowerment created by the reduction in labor competition that came out of the Covid lockdowns, and it is clear ready for a fight with the CEOs who have long made themselves vastly wealthier than their workers at levels that have become obscene. (See today’s potent labor stories below.) So wages may not go down much at all, while shortages due to loss of jobs and production (and, right now, strikes) may become the more significant result of Fed tightening.

These are the kinds of scenarios I explore in my “Deeper Dives,” and this weekend’s “Deeper Dive” is going to dig into the real truth behind the inflation numbers that dominated the news this week to explore where inflation is really going because, as I predicted two years ago, inflation would become (now has become) the driving force for the death of the stock market and the crippling of the US economy and entire global economy.

This is a true global crisis just like a pandemic because global pandemic lockdowns helped create it

We now see inflation raising its head in Japan where inflation was thought to be as extinct as Smallpox, and as far away as Russia.

[Russia’s central bank] said Friday that the falling ruble had contributed to prices rising by 9.9% on a seasonally adjusted basis,

We see it scorching the West like summer’s heat storms, and burning the faces off people in Argentina like a nuclear blast, though Argentina seems to love to court extraordinary inflation once in every generation. It’s practically a passage of life there.

Even in faraway Russia, the battle against inflation is “higher for longer”:

“Considering the current conditions, we need to maintain tight monetary policy for a longer period to bring inflation back to the target,”

Inflation is a true global crisis brought on by the the insane Covid lockdowns that created shortages all over the world and that mysteriously decimated labor forces around the world and, to a smaller extent but still significant, by the sanctions of war and the cut-off of supply lines that wars create even without sanctions, all in the face of enormous money printing in many economies to try to offset the financial slaughter created by the absolutely foolhardy lockdowns, but especially by “overprinting” the vast global dollar.

The human cost of the lockdowns all around the world is high, and we are still paying it! Worse yet, we still don’t know where the bottom is for those damages our national policies created or even what all the damages will be as economies that were nothing but bubbles in the first place collapse because central banks are forced to rewind their fake recoveries by sucking enormous amounts of money out of the system that they pumped in during the Covidcrisis and by raising the cost of creating more money (interest rates) so less money gets created through loans.

I call these “fake recoveries” because, if they always remain dependent (and they always DO) on the massive money printing and artificially lowered interest that created them, they are no more of a recovery than a patient who looks alive and well can be said to have “recovered” if he is still utterly depending on a ventilator and feeding tube in order to maintain that appearance.

We are now living the day when central banks around the world are trying to take away the ventilators and strip out the feeding tubes and even draw some blood to weaken the supposedly resilient patient.

We are going to see a lot of economic death as the artificial life support is pulled from this horde of dependent patients. What we’ve recently seen was just phase one of the war. Most of the world’s brilliant economists and stock analysts actually believe the war is wrapping up as final victory. However, if I am right about inflation raising it’s head again, then phase two has to begin to beat down sticky inflation from rising wages and rising petroleum prices, and that’s where the already weak patients (businesses) all over the world, who are already strained by the withdrawal of artificial life support, really begin to die in high numbers.

Markets will not be forgiving of news that inflation is coming back, forcing the Fed deeper into the inflation fight. One more interest hike we mostly all expect, but another string of hikes, that’s a whole different story!

And this weekend’s “Deeper Dive” about inflation will dig into the details that show why phase two of the Fed’s fight is likely coming and is even at our door right now.

(Sorry about the lateness of this present editorial and its headlines, but some days are just like that when you have to run a regular job to support the job you spend the most time at, so I am working late into the night to get this out before the day ends. I try to deliver all the news you need … before it happens.)