More Wars Without Shooting

–The latest money and credit growth figures from China are due out later today. Then, later this week, Australian employment figures will be published. The two are related. As long as China keeps chugging along at near-double digit growth rates, Australian joblessness won’t be a problem, at least not yet.

–In the wider world, Brazil’s finance minister Guido Mantega is making waves again. He was quoted in the Financial Times saying, “This is a currency war that is turning into a trade war.” Brazil’s currency the real has gone up almost 40% against the U.S. dollar in the last two years.

–Normally, strength and soundness in your currency might seem like a good thing. But for an exporter like Brazil, when the real is appreciating against the dollar, and the Chinese Yuan is pegged to the dollar, a stronger currency means less competitive exports. And them is fightin’ words.

–Well, not real fighting. Not yet. But it does raise an interesting question: can China and America continue to force the rest of the world to bear the consequences for the test of wills between the world’s two largest economies?

–It’s like a staring contest, except with currency manipulation. The Bernanke Fed pump and pumps and eases quantitatively, exporting inflation to China. Is Bernanke actually trying to force China to revalue by gunning the dollar as low as he can take it? And if that’ what’s happening, why are gold and silver correcting?

–The year begins with a lot more questions than answers. One thing we know for sure about the dollar is that it’s not the Euro. Europe returns from its leisurely Christmas break to deal with a sovereign debt problem that won’t go away. Bond yields are rising and the cost of borrowing for governments is going up.

The Wall Street Journal reports that it’s also a bank problem. “An area of concern is European banks. Share prices are sliding and in some cases the cost of borrowing money is rising. Because European banks hold hefty quantities of European Union government debt, they have long been seen as vulnerable to contagion from the sovereign-debt crisis.”

–Chicken, meet egg. Egg, chicken.

–The banks are already weak because they own so much of each other. And all of them are exposed, to one degree or another, to the various bad property loans emanation from Ireland Span. But what makes it worse is that the banks are also capitalised by government debt, and even that isn’t so flash.

–By the way, this is why the Basel III agreement that banks should own high quality government debt in order to meet liquidity and quality requirements is a bit dubious. Government debt isn’t the rock solid asset it used to be, especially in Europe.

–The Euro debt problem is going to have the slightly disorienting effect of leading to a U.S. dollar rally. This despite the U.S. rapidly coming up on the statutory debt limit of $14.3 trillion. You’d think this would be dollar bearish. But euro weakness is disguising the coming dollar crisis. More on that tomorrow, along with free speech, guns, the Internet, and politics.

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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‘Then, later this week, Australian employment figures will be published’

But before that, we get Roy Morgan’s:

Withdrawal of the stimulus and deceleration in private debt starting to take effect?

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