October 28, 2010

Clash of the Titans

The currency wars, now well underway, may have started by being a predominantly US vs. China spat, but it has now sucked in far too much of both the developing and the developed world into the battlefield to be written off as just that. Outcomes are impossible to predict at this stage, although experts are going to town with their pet theories as usual. Regardless, I only know this: The importance of the US dollar will decline sooner than we think. And that shipping will be at particular risk, given the inevitable instability that the currency markets are likely to see for some time, not to speak of the direct economic fallout of this squabble. We are an international industry dependent on trade; the dollar is the currency we deal in. We carry commodities that are traded in the US dollar on ships that are paid and hired with the dollar- a currency whose stability has been taken for granted so far, even if concerns were periodically raised about the quantum of the staggering US debt. That, we assumed, was a long-term problem. Well, long term may be here and the US dollar domination of global trade may be slowly- we hope slowly- ending.

All these years, the hubris of the US financial markets extended to its satellite thinkers across the world. Their flawed reasoning was this: China has a huge trade surplus with the US. Therefore, what will happen is that China will be awash with dollars, which it will naturally spend, thereby making its own currency stronger. When it does this, what it sells will automatically become more expensive; therefore, Americans will buy fewer Chinese goods and so the trade imbalance will correct. Voila. Economics 101 through a narrow prism.

What people forgot was this: The driving imperative of China is to be a dominant global superpower, not just a rich one. Therefore, with calculation, it simply did not spend the billions of dollars it accumulated, thus short-circuiting that logical chain. When it did spend, it did not spend enough. Totalitarian China kept its own currency artificially cheap and bought US debt like there was no tomorrow. China did not want its exports to dwindle because of two main reasons: One, as said, it wanted to replace the US as King of the Economic Hill, which I would argue is a mission now accomplished. Two, it faced huge labour unrest at home, if its manufacturing driven exports screeched to a halt. And so we are where we are today.

Today, two years after the economic collapse, the US, along with many other nations, is still printing money like there is no tomorrow. This money is sloshing around world bond and stock markets, driving up stock prices in India and Brazil and elsewhere- and, inevitably, creating bubbles in markets across the world. The high inflation figures in India today, and the obvious unwillingness of banks to raise interest rates, are direct fallout of this crisis.

Countries are worried: Brazil has doubled taxes on foreign purchases of its bonds, South Korea, Japan, Peru and Thailand are taking similar measures or threatening to- in fact, Japan and S Korea seem to having a mini sideshow spat of their own. Britain and the US are keeping their interest rates abnormally low in a desperate attempt to boost jobs and exports- thus, effectively, devaluing their currencies. (The UK will also lay off half a million people and cutback heavily on defence). The US is screaming, long after the horse has bolted, that China is growing at their expense. Meanwhile, China is sitting on US$ 2450 billion in reserves, 30 percent of the world’s total. That a currency war is on is now well accepted; I hope sense prevails and a full-blown trade war does not follow. Unfortunately, the US- and Europe, what with its own crisis (witness the French strikes and unrest) and with the future of the Euro looking wobbly- are running out of options at this stage.

Shipping will have to, at the very minimum, learn to manage currency volatility; chances of the dollar- and other Western currencies- getting devalued further seem to be more than slim. And, although our industry may be global, its players are often not: they live in Greece or Japan or India or Taiwan, paying taxes and making profits in one currency or the other. The figures in balance sheets may well become skewed because of this. The Indian Rupee, for example, has appreciated nicely against the US dollar in recent months. If I were an Indian ship-owner (or exporter) getting paid hire in dollars, I might find that my profit, in rupee terms, has been impacted significantly just because of the changed exchange rate. A worse scenario is that a trade war erupts: the industry will obviously be hit much harder; it is hardly out of the woods as it is.

It is quite likely that we will see, in the coming years, a gradual shift away from the US dollar that is now the reserve currency of the world, and the currency against which almost everything in shipping is often benchmarked: commodity prices, freight, hire, bunkers, insurance, acquisition and crew costs included. Also, trade may likely increase in some cases without any dollar exchange or pegging: India and China may see a marked increase in the Rupee-Yuan trade, for example. We did go the Rupeer-Rouble route for a long time.

Even without this possibility, the maritime industries may well see a basket of currencies, or an SDR like mechanism, slowly replacing the dollar internationally. I am sure many ship-owners and traders are already seriously increasing their currency hedges, or starting new long term ones. Also hoping, along with the rest of the world, that the devaluation of the US dollar is gradual, that the Yuan is finally allowed to appreciate, and some normalcy is restored in the global financial system. Uncertainty usually hits markets harder than bad news.

The overriding prayer, however, will not be that one. The first hope will be that the two behemoths that triggered this war come to their senses and stop battling. Because it is in neither the US’ nor the Chinese interest to deepen or prolong the skirmish. Also because, as they say in Africa, it is the grass that is trampled when two elephants fight.

(Postscript: In the time between the publication and writing of this article, the G20 - 19 industrial and emerging nations and the EU- said they would "move towards market-determined exchange rates and refrain from competitive currency devaluation". A statement of hopeful intent meant to calm everybody down more than a certainty, methinks. In the absence of monetary targets, the whens and the hows of how this is to be done is unclear. )

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