The currency ‘Trip to Jerusalem’

By John Mangun / Outside the Box

THIS is the way it worked before and should be working now. Greece has massive debt and a bad economy. They devalue their currency. Inflation in Greece goes up but prices for foreigners become cheap. The Germans come to Greece in mass quantities to vacation, a good form of “bailout.” Greece brings in huge amounts of foreign currency and makes a lot of money. Greek exports are now cheap and everyone buys those products. Eventually, their economy grows enough to pay their debt and gets healthy.

But they cannot do that because they do not have their own currency.

The US understands that is the way it is supposed to work. That is why the dollar is being devalued through Quantitative Easing. Americans would then see inflation because of high oil and commodities prices and goods from China would be more expensive.

Europe, in trying to save its loser countries is trying to devalue the euro. Japan understands it too and is trying to devalue the yen to help its economy. China has had a “devalued” currency for a decade, which helped allow its economy to grow.

But the problem in 2012 is that when areas, the US and Europe, which are responsible for almost half of the global economy are in trouble, who is the “rich” country that can help the “poor” country’s economy grow?

The 21st century problem is that the “rich” nations have not been rich for a long time. Where did all the money come from that fueled Western growth? The economic growth of the West in the last two decades has been through the creation of artificial money, which allowed massive borrowing. We commonly talk about the US borrowing money from China but where did China get that money to loan? China did not loan the US any money.

China sent its exports to the West. The West gave China government debt. That debt was created by merely adding a few zeros to the balance sheets of the central banks. As I said last week, the price of gold was $300 in 1998 and is now $1750. The price of gold reflects the artificially created money. And notice also that the period from 1998 to now is the period of China’s “economic miracle.”

The US has no choice but to monetize its debt and the debt of Europe. That means creating an amount of new money virtually equal to the amount of the debt. The term being used is Quantitative Easing to Infinity. We will continue to see that happen as the price of gold, the one constant financial instrument, goes to $3,000 and beyond.

While there are a large group of comparatively rich countries including the Philippines, even together they are not a substantial enough portion of the global economy to bailout the West. With the West going down and nations like the Philippines and Indonesia going up, the flow of money, as in the Greece/German example above, should be coming from the Philippines to the US. But that will not happen.

Part of the money printing scheme is near-zero interest rates. Westerners, being able to borrow money for almost no cost, will transfer those funds to profitable locations like the Philippines. That is why in spite of massive money printing in the last two years, there has been little economic growth in the West and increasing growth in places like PHL and Indonesia.

This trend will continue and accelerate. The problem is that countries like PHL are holding their newly found wealth in dollars and euros and yen. While PHL has collected billions of dollars in the last years as shown by the Bangko Sentral foreign reserve numbers, that money is not being invested in the Philippines.

The BSP is clearly signaling that it understands the problem and is trying to figure out a way to put those funds to work at home without a strong appreciation of the peso. But it will happen.

In the meantime, the financial colonial mentality will continue with the PSE rising and falling on every move in the West. Overseas remittances and outsourcing will grow as these industries are critical to Western businesses. Foreign money will look for a home here despite the government trying to keep foreign investment out of the country.

Currencies are the key to understanding the global economy and where things are going. There are only a number of chairs on the “Trip to Jerusalem.” Greece does not have one. The Philippines does and will in the future if the government does not kick it over.

E-mail to mangun@gmail.com, web site is www.mangunonmarkets.com, and Twitter@mangunonmarkets. PSE stock market information and technical analysis tools provided by COL Financial Group Inc.