Tuesday, October 26, 2010

Pen Meets Paper Oct.25'10

Opinion by Helge Nome
The term “currency wars” has appeared in the mainstream media lately. What does this term mean and in what way is it relevant to people that carry out their day’s work and get paid for it?
Following what has now been termed the “General Financial Crisis” or GFC in 2008, huge amounts of debt has been transferred from the balance sheets of large banking institutions to the balance sheets of national governments. This was done to save the banks from the folly of their own actions in entering into high risk credit agreements, hoping for quick return on investments. The levels of private debt also escalated hugely during the lead up to 2008, because of inflated asset prices in the real estate sector in particular. We are now in the “morning after” hangover phase with debts having to be repaid, one way or another, in order for the financial system to hang together in one piece. (Notice that there is a lot of “hanging” here). The US economy, in particular, has taken a real beating because of North Americans’ reliance upon cheap credit to buy consumer goods and anything else of perceived value. Also North Americans like high paying jobs and tend to shy away from “menial” tasks, unless they are paid $50 an hour, or better, for doing them. So, a lot of manufacturing activity has been shifted over to low wage countries like China, yielding low priced consumer goods as a result.
And now the panic is on: North America is faced with growing unemployment which is becoming a potential threat to social cohesion and something drastic has to be done.
The US Government has chosen the path of printing more of its dollars in order to create inflation, and so lower the value of the US dollar in order to try and make what industries do operate in the US more competitive in export markets. That would improve the employment picture at home.
Predictably, other national governments aren’t just going to sit back and see their currencies go up in value against the US dollar, loosing exports and see cheap US goods coming into their own markets, putting their own industries under stress.
Several responses are open to these governments, including printing their own money in abundance, just like the US is going to do. The net result is more money floating round everywhere, meaning that each unit of money will loose in value.
The big losers in this kind of war, a currency war, are those on fixed incomes which includes pensioners and, in practice, wage earners. In effect the people that are printing the new money are stealing from those that receive fixed incomes because they are diluting the value of their earnings, just like an undetected counterfeiter of currency would do.
So, the paycheck you receive every two weeks, or month, will look the same, but at the end of the day an ever increasing portion of that paycheck will be needed to fill up your fridge, or your gas tank.

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