Cooperation Breakdown: Part I Editor: It was widely expected that G20 finance ministers meeting in Moscow at the weekend would have been openly critical of Japan’s recent currency devaluation. However, the lack of criticism has been seen by some analysts as an endorsement of Japan’s aggressive monetary stance and it opens the door for other countries to take similar steps. This type of “beggar thy neighbor” monetary policy is ultimately very destructive. As Max Keiser, host of the Keiser Report, puts it, “a currency war is basically a firing squad lined up in a circle”. I.e. there are no real winners.

The evidence of a major breakdown in global economic and monetary cooperation continues to mount. Just yesterday, the G7 released a statement regarding foreign exchange policies, only to be followed by a corrective statement that the market reaction was undesirable. This indicates escalating tensions within the G7. But if the G7 cannot cooperate, how on earth will the G20 do so? Or other countries? We are witnessing in real time a descent into economic nationalism that increasingly resembles the 1920s and 1930s. Then, as now, such nationalism resulted in major economic damage, with every single currency devaluing sharply versus gold, and with every single stock market underperforming gold. History is rhyming, loud and clear.


On several occasions I have predicted a breakdown in international economic and monetary cooperation, most extensively in my book, The Golden Revolution (link here), but also in the pages of this report and in several TV interviews, including an appearance on the Keiser Report just last week (watch here). But I must admit even I was taken by surprise by the astonishing behaviour of G7 officials yesterday.

To much anticipation, the G7 countries (US, Canada, UK, Germany, France, Italy and Japan) released an official communique early in the morning European time regarding their foreign exchange policies. Among other things the statement said that the G7 “will not target exchange rates.”1

So far, so clear. The entire statement was also entirely consistent with the previous G7 communique from September 2011, which read in part that “We reaffirmed…our support for market-determined exchange rates.”

Given this degree of consistency between the two statements and lack of any specific mention of the yen, the foreign exchange markets determined that the G7 was giving tacit approval for Japan to continue to weaken the yen, which has declined by 10-15% versus all major global currencies in the past few months. The yen declined by another 1% versus the dollar and euro in the hours following the release of the statement.

Apparently, however, this was not the reaction all G7 members in fact desired. As the yen continued its decline, an unidentified G7 official came out with a highly unusual (and possibly unprecedented) qualifying statement, saying that:

The G7 statement signaled concern about excess moves in the yen. The G7 is concerned about unilateral guidance on the yen. Japan will be in the spotlight at the G20 in Moscow this weekend.2

Whoa! Well G7 members are either concerned specifically about the yen or they are not. So it would seem that certain members of the G7 desired to include a specific comment on the yen but that certain other members vetoed this. Now who might that have been? Japan itself comes to mind and, given that Japan has been the biggest single purchaser of US Treasury securities over the past year, it seems reasonable to assume that the US supported Japan with the veto. The UK and Canada have now both said they made no such comment.

Taking the other side would logically have been the euro-area countries. While Germany is widely known to compete with Japan in a broad range of global export markets, there is also a degree of such competition with France and Italy. Indeed, on a per-capita basis, northern Italy is as large a world exporter as Germany, producing a huge range of manufactured goods, including precision machinery vital to many global industries. There are also such pockets in France, including around Paris, Lyon, Lille and Strasbourg. (I am excluding agricultural products here, although both Italy and France are wine and cheese export powerhouses.)

Yesterday’s unusual G7 drama thus appears to confirm what I claimed in my last report, COUNTDOWN TO THE COLLAPSE (link here), that Japan broke a temporary ‘cease-fire’ in the ‘currency wars’ with the sharp weakening of the yen in Q4 last year. In that report I also indicated that the UK was likely the next country to join hostilities.

Sure enough, in a press conference earlier today, Bank of England Governor Mervyn King said that “it’s very important to allow exchange rates to move,” and that “when countries take measures to use monetary stimulus to support growth in their economy, then there will be exchange rate consequences, and they should be allowed to flow through.”3 These bold comments could be interpreted as embracing rather than eschewing the escalating currency wars. They also indicate that the UK desires a weaker sterling.

If even the relatively closely-knit G7 can’t cooperate in foreign exchange matters, why should we be confident that the G20 can? Well, we shouldn’t be. Quite the opposite.


The G20 is arguably the most important forum when it comes to maintaining international economic cooperation, or potentially revealing the lack thereof. I also mentioned in my last report that a key event to watch will be the upcoming BRIC summit held on March 26-27 in Durban, South Africa. Now as with all such international diplomatic gatherings, discussions and negotiations around key topics and issues begin many weeks or even months in advance. By the time the G20 meet in Moscow this weekend, you can be confident that the official BRIC position on foreign exchange matters is already under discussion.

It is therefore possible that, in one or more statements by BRIC member countries at the G20, we receive a hint or two as to the evolving BRIC position. But what is it likely to be? How do the BRICs feel about the weaker yen, for example? About the fact that the South Korean won and Taiwan dollar have recently weakened and, just this week, have been joined by the Malaysian ringitt? China, for one, finds itself suddenly surrounded by sharply weaker currencies. China is also embroiled in some escalating territorial disputes with Japan and other neighbours regarding sovereignty over the South China Sea. (Note the name!) In this context, should we be surprised that China appears to have ceased allowing the yuan to rise versus the dollar of late?

1 For more details please see this Bloomberg News story here.

2 This was reported by Bloomberg News here.

3 These statements were reported here.

Part II of Cooperation Breakdown will be posted tomorrow.

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