Currency wars and game theory time.

Currency wars always, always end badly. Especially for the smaller nations.




Whether it is pre Euro or post Euro it always ends badly and the consumer is the one who usually picks up the tab because the things we need cost more and things we don't need cost less.
That being said our glorious leaders have put a shot across the bow of the Chinese. I don't think they are actually being serious about it. They are simply telling the Chinese "this is our game and don't forget it or we will take our ball and go home". They want the Chinese to shut up about getting our fiscal house in order. They want the Chinese to loosen credit domestically. They want the Chinese to keep buying our bonds. If not then we will allow every manufacturer in the USA to theoretically able  to lodge a complaint against any imported good on the basis of unfair trade because of "misaligned" currency.

In recent weeks we have seen the commodity index across the board decimated. The shocker was copper. Long being seen as the ultimate indicator of health for the world economy. The recent economic numbers have not been horrendous so why the beat down in Copper? According to Metal Augmenter the guys in China who have been stock piling Copper are being forced to liquidate their warehoused copper below market value because of cash flow problems. Credit is so tight in China that loan sharks are competing with banks on a larger and larger scale. Not good for China and not good for the World.

IMHO the commodity index is not the measure of world economic health right now. We should be looking at a blunter tool like the Baltic Dry Index which has been showing some signs of life recently.
It's a tough one to get a handle on though as there were a lot of ships in the build pipeline before the Credit Crunch Crash of 2008. Which is part of the explanation of why the Index has been so horrible since 2008 as we over built.  However, unless there have been a bunch of ships recycled for scrap or moth balled we can assume that things are looking up if only on a dead cat bounce. If that Bill mentioned above is passed short the hell out of the index.

So how will this end? In a word Diplomatically.
China is in no position to self fund it's expansion. They are creating an internal atmosphere of risk off and people are hunkering down when they should be getting their people to consume. They need to turn that ship and fast. Unlike us, they can turn the ship fast because there is no vote on the matter. The Party says jump and they jump. There is no vote, posturing for cameras, baby kissing or lobbyist permission required.
We need to keep abusing our position of reserve currency in order to keep going. So the bill gets shelved if the Chinese play ball and we go QE all over again. If there is a short term plan B or C I can't see it.

So my advice is patience. Just a little more patience because either we are all going down in flames or the mother of all buying opportunities is just around the corner.

Edit: I watched a little bit of the Bernanke stuff and the man looks like hell. Maybe is is getting over the rotten cold that has been going around or maybe he is just completely stressed out. He seemed nervous before every question was asked and then once asked he was comfortable. In other words no one was asking the questions he was most worried about. There was even one idiot (I) Sanders, I think it was, who asked him if the Fed could not lend directly to the small business community. To Bernanke's credit he didn't look at him as if he was retarded, burst out laughing, etc but patiently answered the stupid question.
In any case no one is begging him for QE3 yet and he claimed success for QE2 etc. in that it didn't raise inflation and fought off deflation.  Measured like that I guess it was a whopping success. He is a smart feller as he out politiced the politicians from what I saw.