A year ago, a panicked Federal Reserve introduced its QE2 programme. One of its key aims was to kick-start US growth via driving down the value of the US$ and boosting exports.
Since then:
• The US$ has fallen, and US exports have increased
• But other major countries have become alarmed about the impact of this policy on their own exports and growth
• Japan and Switzerland now aim to drive down the value of the yen and the Swiss franc
The blog discussed this risk in its January White Paper ‘Budgeting for Uncertainty’. Its analysis still seems valid today, particularly in the light of Chrysler’s comments this week:
“Rising Western unemployment does not help the domestic population to repay the debts incurred during the final stage of the Boom after 2002.
And if it can’t repay its debts, then it won’t repay them. This will have consequences for the people who lent the money – particularly those Asian countries, such as China, who operated mercantilist policies under which they lent money to the West, in order to sell them the goods needed to keep their factories employed.
“In fact, as the chart above from Comstock Partners illustrates, we are now getting towards the really difficult part of the Cycle:
• It began with Asia boosting savings and investment in chemical and other plants as part of its export-led development model
• Whilst the West created overcapacity in financial services, as it recycled the vast Asian savings pool into Western debt instruments that would enable consumers to buy all the goods being produced.
• But in the end, of course, growing overcapacity then led to a loss of pricing power. In turn, this led to the Crisis of 2008.
“Now we have moved into a new stage, where countries try to maximise domestic employment by boosting exports via devaluation of their currencies. And as it is impossible for everyone to devalue against everyone else, we risk moving closer to the next stage of the Cycle, where countries begin to adopt protectionist measures to support employment.
“This would have a particularly bad impact on the chemical industry, which has been a major beneficiary of the globalisation trend and accompanying movement to free trade.”