International financial junkies rejoice! Today was a red letter day! The Greeks and the EU have reached an agreement in principle on a new 86 billion Euro bail-out package. All the usual stuff including fiscal deficit targets which are unattainable, asset sales--not on--governmental restructurings --when there may not be a government and on and on. It short, it is a nonsense but it will be agreed and the ECB will get paid as will everybody else this month and when it is realized that the thing isn't working we will revisit the entire situation around March. Which is exactly what should have happened, allowing the Euro to stay around, the EU to remain intact and Greece to remain as a member of the same until a better time comes to either face up to the inevitable (D*** F*********) or the unthinkable G*****. See you in March.
The really big news was the decision by the Chinese to devalue their currency, the Renbinbi (let's call it the Yuan, it's easier). Down went everything except for the U.S. Dollar and the Euro with shock and surprise on the faces of all the talking heads.
The Chinese dropped their previous support for the Yuan and announced that at the new level, their would be a new trading band of 2.00% Remarkably, the general view was: how clever. The Chinese had accomplished two things at once. They had made their exports (which had been down over 8.00% for the year) much more competitive and they had "listened" to the IMF and its promise of creating Special Drawing Rights in the Yuan by making their currency more "market sensitive." Allow me to comment if I may: pure and utter crap. The Chinese have in fact admitted failure in their attempt to transform their economy into a consumer oriented one and have fallen back on the export, export, export model making sure everybody has a job. They are in a spot of bother. Things ain't working as well and may be worse than we realize for as far as the eye can see their are bubbles of one sort or another. One good thing is that there is a hell of a lot less saber rattling since things started to go south. The People's Liberation Army ("PLA") which has a finger and sometimes a fist in everything that makes money in China may have realized that to gain the world and lose all your Yuan isn't the greatest of strategies and may now be paying a bit more attention to what's going on at home rather than in the South China Sea. And then there is the newly "market sensitive" Yuan.
Boys and girls, this is what is known as "Lowering the Peg." If the Chinese wanted to make their currency market responsive, they would have gotten rid of the peg. To impose a 2.00% trading band on an artificially created price is a nonsense. It can be 2.00% or .002% at any point in time depending on the whim of the Chinese leadership. That is not to say it, from a Chinese standpoint is not a useful step, but for pity sake let us recognize it for what it is, pure, naked currency manipulation. The IMF will praise it of course because nobody but the Chinese wants them around anymore but to look at it in any other way is a joke. The currency market opens at about 2130 EDT in Asia. Let's wait until then to see just how "freely traded" is the Yuan tomorrow morning.
As for the rest of the world...well, there are a few questions. And for Central Banks, including the Bank of China which for quite a while now had achieved mystical stature, one might well ask, "Is this the best you can do?" Throw scads of money at economies and when that doesn't work, bugger thy neighbor? Even the Smartest Guy in the Room admitted over the weekend that nobody is really quite sure as to how to deal with the problems of today. Far be it from me to offer advice to Dr. Fisher but might it be wise to stop doing what hasn't worked and try something different? Or better yet, stop doing anything at all, especially bailing out the gutless politicians of the world of which every country has a surplus? Just a though, Stan, just a thought.
More tomorrow.
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