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Currency Wars and QE2 continued

In a previous blog post, I discussed the global currency wars being waged across the globe in the aftermath of the global financial crisis. Last week’s G20 summit in Korea saw heated discussion and debate over the state of the global currency market. So what did the G20 summit achieve?

The G20 Nations including Australia’s Julia Gillard met in Seoul last week to expressly look at competitive currency devaluations but very little was achieved except a strengthening of the IMF to help the basket cases. China with its pegged currency and the US with its QE2, faced off but neither side would budge and both leaders blamed  each other for the world’s woes. China maintains that to revalue the yuan would  lead to hordes of unemployed. For its part the US needs its currency to fall to allow it to export more and compete domestically with Chinese  imports.

Unfortunately developments in Ireland are making investors worry about the euro. The immediate investor reaction is to sell euros and buy USD  pushing its value up (which is exactly what the US does not want happening).  At the same time QE2 has led investors to dump US treasury bonds in excess of the monthly amount of QE2 (USD100billion) leading to interest on bonds rising instead of falling (excess sales lead to lower prices but higher interest rates). QE2 could become counterproductive.

Meanwhile China does continue to tighten the restrictions of overseas investment into its already booming property market because its artificially low currency is attracting hot money into property. Chinese leadership fears a property bubble of the  type that first brought Japan undone and now has led to Ireland’s woes. I read today (17 November 2010)  in the Australian that Ireland allowed construction costs to be offset against tax and  the banks were encouraged to offer low interest mortgages with no deposits.  Since the GFC Irish taxpayers have been keeping their banks afloat at a cost of 14000 euros per man, woman and child.  I am so glad we have profitable banks.  If only the Greens would stick to their knitting and worry about the environment rather than stop the banks from raising their rates we would be all much better for it.

It is not inconceivable that Ireland might default  like Iceland did during the GFC (again because of bank failure) and Argentina did in 2001. Argentina seems to have recovered,  but could Ireland or the euro recover from a default?  If not then the USD will rise even faster and QE2 will be a waste of time. We will need a strong Australian banking system to survive that impending storm.

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