Currency Devaluation: While Europe Gets Sinned, Australia Sins

Hans-Werner Sinn is a German economist. He’s famous for legally challenging the European politicians’ efforts to save the euro. And he recently gave one of the funniest interviews we’ve ever seen.

Here’s the highlight reel straight from Der Spiegel newspaper:

Spiegel: Mr. Sinn, Chancellor Angela Merkel feels as though economists have left her in the lurch. She once said that the advice that she receives from economists is “about as diverse as it gets.” Can you see where she is coming from?

Sinn: No.

Spiegel: Excuse me?

We’ve always wanted to see what a one word answer would do to an interviewer. But Der Spiegel had the last laugh. This is how Sinn is depicted in the article:

Spot the German Economist

Spot the German Economist
Source: Der Spiegel

Now onto some more meaningful banter between the newspaper and Sinn:

Spiegel: Now you are appealing to the financial markets to be reasonable. Yet they often overreact and behave irrationally.

Sinn: Where have you seen that?

Spiegel: Minor events are often enough to spark sharp increases in sovereign bond interest rates for countries in Southern Europe.

Sinn: But the markets are reacting rationally when they get cold feet and pull out of bad investments in Southern Europe. Last winter, interest rates rose in some cases to over 6.5 percent. Before the introduction of the euro, these countries had to pay interest rates of between 10 and 15 percent. The interest rate reflects the risk that investors will never see their money again. What’s irrational about that?

Indeed, what is irrational about the way the world is reacting to Europe? Investors are doubting the solvency of nations. That’s nothing new, unusual, surprising or devastating. Greece has spent much of its history in default.

What’s surprising is that the Euro system can’t withstand something as common as a sovereign debt crisis in peripheral nations. These countries often default. Who builds a currency union that can’t handle something which is so common?

Sinn’s last name means ‘sense’ and not ‘sin’, by the way. And he’s full of common sense, for the most part. His point is that everything is following a well trodden path in Europe. The only difference this time around is that everyone is using the same measuring stick these days – the euro.

In times gone past, the Greeks would just change how many millimetres make up a centimetre to make their economy look bigger and better. That’s a metaphor for this: they would print money and devalue their currency against the other currencies of Europe. That allowed them to repay debts, and it encouraged the local economy.

This makes you wonder why countries like Greece wanted to join the euro in the first place. Who would want to compete with a German on even grounds?

The South Melbourne Aussie Rules football team did just that yesterday. Your editor’s German athleticism is foreign to Aussie Rules and was promptly put in its place. What about our other European half, the English one? How are the Poms faring when it comes to Europe’s crisis?

One Foot In It

The Brits played smart when it came to Europe. They only put one foot in the European boat and kept the other in their own dingy. They accepted Europe’s policies, but kept the pound sterling and thereby kept control over their own monetary policy. But now that Europe is in trouble, the Brits have got to decide whether they’re Europeans or British.

The proper solution is of course to become Australian. But that’s another story. The truth is that Britain is itself in as bad a pickle as southern Europe anyway. But they can still change how many millimetres are in a British centimetre – they can devalue the pound to spur on the UK economy.

It’s cheating and it doesn’t work in our opinion, but what actually works isn’t relevant in politics. What matters is that countries think that devaluing their currency will be good for their economy. And so countries that can devalue, which is to say those not in the euro, will do so by printing money.

Australia’s Very Own Stealth Currency Devaluation Program

What might surprise you is that Australia is on this war path too. This from the Australian Financial Review:


‘The Reserve Bank of Australia could already be printing Australian dollars and selling them directly to foreign central banks in an effort to reduce buying pressure on the currency, according to investment bank UBS.’

Would you believe it, the AFR beat us to the punch line: The RBA is printing money!

What’s going on here is that the RBA is creating dollars to provide them to foreign central banks. The question is whether the RBA is, somewhere else, doing the opposite to balance out the transaction.

If they aren’t, they’re creating brand spanking new money. And it looks like that’s just what’s going on. We won’t go into ‘Other Outright Transactions’, but you can get the nitty gritty here if you want to.

But here’s the kicker. In a central banker’s world, and in the world of a two year old, it doesn’t matter what you actually do, it’s all about what you were trying to do. ‘I didn’t mean to hurt you’ is a fat lot of good if you’ve been hurt. But it’s an excuse that works for central bankers.

The explanation given for why the RBA isn’t actually printing money is that it’s not trying to do that. It’s just handing out Aussie dollars to foreign central banks without offsetting that transaction by buying Aussie dollars elsewhere.

Even though the effects are to increase the amount of Aussie dollars in the world, it’s not creating money, because it’s not trying to do that. What a load of baloney.

By the way, Greg Canavan, editor of Sound Money. Sound Investments, pointed out that the RBA is reacting to foreign central banks here. It is trying to counteract the rise of the Aussie dollar which has happened because other countries are printing money and thereby devaluing their currency. Two wrongs might not make a right, but at least Australian manufacturing doesn’t have to suffer a high Aussie dollar.

Anyway, this tells you that the RBA is already active in the world of currency manipulation. That has big implications for anyone expecting a deflationary shock. The RBA is already messing about in the currency in a way that creates inflation.

They are getting ready to offset any deflation we get as our economy worsens. But, for now, our position is that the RBA will be overwhelmed. Their inflationary efforts will fall short as Aussie house prices fall.

More on why soon.


Nick Hubble
for Markets and Money

From the Archives…

Why Australia’s Economy is No Economic Wonder
16-11-2012 – Greg Canavan

The Ills of Fractional Reserve Banking
15-11-2012 – Nick Hubble

Avoid the Slaughter: Watch This Key Stock Market Pointer
14-10-2012 – Murray Dawes

Molto Moderato
13-10-2012 – Dan Denning

Vote for an Honest Election: Democracy on eBay
12-10-2012 – Bill Bonner

Nick Hubble
Nick Hubble is a feature editor of Markets and Money and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about Markets and Money, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails.

Leave a Reply

Be the First to Comment!

Notify of
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to