``If most of us remain ignorant of ourselves, it is because self-knowledge is painful and we prefer the pleasures of illusion.” Aldous Huxley
There are other issues that appear to have been eclipsed by the Dubai Debt Crisis.
Vietnam’s Inflation Control Measures
First, Vietnam announced a sharp hike in its interest rate to allegedly combat inflation. According to Finance Asia, ``The State Bank of Vietnam will increase its benchmark interest rate to 8% from 7% as of December 1”
In addition, Vietnam likewise devalued its currency the Dong by 5.2%. According anew to Finance Asia, [bold emphasis mine] ``The State Bank of Vietnam also reset the US dollar reference rate to 17,961 dong from its current level of 17,034 dong, in its third devaluation of the currency in two years. The central bank will also narrow the trading band of the dollar against the dong to 3% from 5%.
``This is an effort not only to bring confidence to the currency, but also to correct the difference versus where the dong is trading on the black market, which has been at about 19,700 per US dollar in recent weeks.”
Figure 6: Wall Street Journal: Vietnam’s Devaluation
In other words, currency controls have widened the spread between the black market rate of the Vietnam Dong relative to the US dollar and the official devaluation merely is an attempt to close the chasm. The Vietnamese economy has been suffering from a huge current account deficit to the tune of almost 8% of its GDP.
However, in spite of the fresh monetary actions (see figure 6) the black market rate for the Dong and the official rate remain far apart.
And because of the spike in interest rates, the Vietnam equity benchmark fell by 11.73% over the week.
However, a curious and notable observation is that Vietnam’s present policies seems like responding to a market symptom which can be characterized as our Mises Moment,
This from Thanhnien.com, ``Vietnamese lenders are facing a shortage of funds to meet rising demand for loans because gains in gold and the dollar are deterring people from putting money in the bank, according to a government statement. Commercial banks have had to raise deposit interest rates to as high as 9.99 percent over the past week and offered gifts and bonuses to depositors to lure them back, the statement on the government’s website said.” [bold emphasis original]
In other words, the Vietnamese people have been hoarding gold and foreign currency (US Dollar) and have shunned the banking system in response to Vietnam’s government repeated debasement of its currency. It’s seems like an early symptom of demonetization.
As we have previously quoted Professor Ludwig von Mises from his Stabilization of the Monetary Unit? From the Viewpoint of Theory,
``If people are buying unnecessary commodities, or at least commodities not needed at the moment, because they do not want to hold on to their paper notes, then the process which forces the notes out of use as a generally acceptable medium of exchange has already begun. This is the beginning of the “demonetization” of the notes. The panicky quality inherent in the operation must speed up the process. It may be possible to calm the excited masses once, twice, perhaps even three or four times. However, matters must finally come to an end. Then there is no going back. Once the depreciation makes such rapid strides that sellers are fearful of suffering heavy losses, even if they buy again with the greatest possible speed, there is no longer any chance of rescuing the currency. In every country in which inflation has proceeded at a rapid pace, it has been discovered that the depreciation of the money has eventually proceeded faster than the increase in its quantity.” [bold emphasis mine]
Will Vietnam follow the path of the most recently concluded Zimbabwean monetary disease?
I was thinking of Venezuela as next likely candidate but here we have a next door neighbor exhibiting the same symptoms that ails every government that attempts to control or manipulate the marketplace.
The Japanese Yen On A 14 Year High
The second issue overshadowed by the Dubai Debt Crisis is that the Japanese Yen soared to its highest level against the US dollar in 14 years.
According to a Bloomberg report, ``The dollar dropped to the lowest level versus the yen since July 1995 and fell against the euro as the Federal Reserve’s signal it will tolerate a weaker greenback encouraged investors to buy higher-yielding assets outside the U.S.”
The strength of the Japanese yen had been broad based against other major currencies but gains were marginal.
The news blamed the Yen’s rise on the carry trade ``delay debt repayments spurred investors to sell higher-yielding assets funded with the currencies.”
Such oversimplification is not convincing or backed by evidence.
As noted earlier, the US dollar fell to new lows on the Dubai incident before rallying back Friday but eventually giving back most of its gains.
Besides, not all markets had been severely hit. In Latin America, Brazil, Columbia, Chile, Mexico and Venezuela all registered weekly gains. Emerging markets are expected to take it to the chin when carry trades unravel. This hasn’t been the general case.
In Europe, Germany, Italy, Norway, Sweden, Switzerland and Italy survived the week on positive grounds. So even if the Dubai debt crisis exposed Europe more than the others, the selling pressure wasn’t the same. UK home to RBS suffered marginal losses (.11%).
Again none of these accounts for as any solid or concrete signs of an unwinding of carry trade.
Figure 7: stockcharts/google: Nikkei-Yen and Japan exports
While the rising Japanese Yen has so far coincided with a lethargic Nikkei since August (see figure 7 left window), it’s not clear that such correlation has causation linkages.
Although the Japanese government thinks it has.
Again from the same Bloomberg article, ``Finance Minister Hirohisa Fujii said he will contact U.S. and European officials about exchange rates if needed, signaling his growing concern that the yen’s ascent will hurt the economy. The Bank of Japan checked rates at commercial banks in Tokyo, seen as a type of verbal intervention, Kyodo News Service reported.
``Japan hasn’t sold its currency since March 16, 2004, when it traded around 109 per dollar. The Bank of Japan sold 14.8 trillion yen ($172 billion) in the first three months of 2004, after record sales of 20.4 trillion yen in 2003. Japan last bought the currency in 1998, purchasing 3.05 trillion yen as the rate fell as low as 147.66.”
Well it came to my surprise that after all the political gibberish about Japan’s so-called export economy or export dependency, we realized that Japan’s economy is hardly about global trade.
According to ADB data, Japan’s trade in 2006 only accounted for 28.2% of the nation’s GDP, where export (right window) is only 16% of the GDP pie (yes this stunned me as I had the impression all along that Japan’s trade was at the levels of Hong Kong and Singapore and I had to check on official or government data).
The Philippines has even a higher share of trade (84.7%) and exports (36.9%)!
In addition, Japan’s industry, as a share of GDP pie registered for only 26.3%, according to the CIA factbook in 2008.
So a policy for a weaker yen is likely to benefit a small but strong lobbying segment of the society at the expense of the consumers (via cheaper products) or the society.
All these are strong evidences on why the world is facing a greater degree of risks from a hyperinflation episode.
The fallacious Mercantilist-Keynesian paradigm wants a race to devalue currency values, based on a simplistic one product, single price sensitivity, one labor, homogenous capital model which presumes global trade is a zero sum game. They hardly think of money in terms of purchasing power but from political interests based on “aggregate demand”.
Finally, Finance Minister Hirohisa Fujii isn’t likely to succeed in convincing his peers to collaborate to prevent the yen from strengthening. That’s because all of them share the same line of thinking or ideology. And Fed Chairman Bernanke has been on a helicopter mission that will likely to persist until imbalances unravel to haunt the global markets anew.
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