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Currency battles cheapen dollar, deepen fiscal hole

Treasury Secretary Timothy Geithner listens questions press conference during G20 Finance Ministers Central Bank Governors meeting Saturday Gyeongju South Korea.

Treasury Secretary Timothy Geithner listens to questions at a press conference during the G20 Finance Ministers and Central Bank Governors meeting Saturday in Gyeongju, South Korea.

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Updated: May 3, 2013 12:14PM

Global finance ministers, including Treasury

Secretary Tim Geithner, met in South Korea over the weekend to discuss

exchange rates. And they promised they wouldn't create a currency war

that could lead to a global trade war. That promise won't be easy to


It's estimated that the recent decline in the U.S. dollar will add

half a percent to our annual growth rate, as the weak dollar makes our

exports more attractive to foreign buyers. That's the one plus of

creating "too many" dollars, and weakening our currency.

But there is a downside. No country ever made itself more powerful by

having a weak currency. Especially when its currency is the basis of

world trade.

How many dollars do you have in your wallet? Probably not enough.

Well, that's a problem you don't share with the central bank of the

world. They have too many dollars -- and they're worried that the

Federal Reserve is seriously thinking about creating more.

And if you think this isn't your problem, or even that too many

dollars is a nice problem to have, think again. What happens when there

is too much of anything? Its real value falls.

That's true of tickets to a football game or rock concert, and it's

also true about currencies. If there are too many around, no one really

wants them. But if they are scarce, then their value goes up.

Since you make your household budget in dollars, and plan your

retirement in dollars, it would be important to believe those dollars

have buying power -- now, and in the future.

Monopoly money

But, just as in a Monopoly game, when the banker starts handing out

more money, the value or buying power of your savings declines. And

unlike the Monopoly board where the price of Boardwalk is fixed forever,

in real life when there is more money around, prices go up.

We call that inflation.

It isn't a problem now, because so many dollars have been lost down

the black hole of bank losses. And the banks are sitting on a huge pile

of dollars created by the Fed, hoping they won't lose them down the

drain of even more real estate foreclosures, credit-card write-offs and

loans to failing businesses.

Currency wars

The central banks of the world have been accumulating the dollars

that we've sent to China and Japan and other countries to buy their

products. And those countries holding the most dollars don't want to see

that the U.S. central bank is talking about "quantitative easing" --

ie., printing more money.

Those foreign countries want to keep selling stuff to the United

States. But they don't want to be paid in dollars that will be worth


The United States takes an opposite view, it seems. While we talk

about preserving the value of the dollar, we keep creating more. The

idea is that if our dollar falls in value, it will encourage other

countries to buy more from us.

The problem is that the rest of the world understands this trick.

They, too, want to keep their currencies "cheap" to make their products

more attractive to U.S. consumers. It's called a "beggar thy neighbor"

strategy and every country is playing it.

This is a global currency war, with money as the ammunition. They

keep "score" in this war by counting trade deficits, not battlefield


And that was the big debate going on at the G-20 meeting this

weekend, where the finance ministers of the world's leading economic

powers met in South Korea to discuss this issue.

Out of ammunition

For decades, the U.S. consumer was the world's biggest buyer. We

benefitted from a strong and respected currency. It let us buy more

stuff made overseas. But now, with American consumers pulling back, we'd

like to get our economy moving again.

Thus, our government calls on China to let its currency "rise" in

value against the dollar, instead of being closely linked to the dollar.

If the Chinese currency rises, they could more easily buy things from

American workers. And help our economy grow.

It would be a lot easier for the United States to put some pressure

on China -- if they didn't have all those dollars already. And if China

weren't using their dollars to buy our government debt -- Treasury

bills, notes, and bonds.

Their willingness to keep buying our debt keeps our government going

in spite of our rising deficits, and has kept our interest rates low,

helping the housing market here.

It's in the best interests of the Chinese to maintain the value of

the dollar, since they already hold so many of them. And it's in their

best interest to keep their currency low in value, so American consumers

can buy more "made in China" stuff.

Because we're so greatly in debt, the balance of power has shifted.

We're hardly in a position anymore to tell China how to set its currency

policy. The United States is belatedly learning that "beggars can't be

choosers" And that's The Savage Truth.

Terry Savage is a registered investment adviser.

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