E Currency War Combatant Capability Comparisons

College football teams are broadly ranked by their strength so that a contest between teams may be both interesting to watch and be seen as fair.  Accordingly, teams ranked being in Division One, only play other teams in the same division. In the Olympics, where fairness and sportsmanship are elevated, boxers, wrestlers, and weightlifters compete in their own specific weight class. It is immediately obvious that members of a lighter weight class have little chance of winning against someone in a heavier class. No such fairness or “sportsmanship” is extended in the contest over currencies.

Currency wars usually are clandestine, and information regarding their operations are usually difficult or impossible to confirm. As a result, anyone trying analyze or get information on such activities will quickly be stymied. However, one can infer from important market price information evidence related to currency wars. For example, if a country’s currency declines 20% or more over a short period of time, it is reasonable that some currency manipulation has occurred, and that it is the likely cause of the decline. A currency war is an act of war.

By contrast, sanctions against a specific country are usually widely broadcast, so they are not secret. An interesting feature of sanctions is that other countries and their corporations are expected to honor the dictates of the country or organization doing the sanctioning. In recent history of the world, the country most frequently declaring sanctions against other countries is the United States – dictating that other sovereign nations always support America’s foreign policies. In previous centuries naval blockades, embargoes, or otherwise forced isolation were considered acts of war. Sanctions is today’s modernized version of a blockade, and equally an act of war – but like a currency war requires no congressional approval.

Importance of low sovereign debt

In their book “This Time is Different” authors Carmen E. Reinhart and Kenneth S. Rogoff analyze the default history of sovereign country debt.  In their analysis the researchers conclude that countries with a ratio of debt to Gross National Product (GDP) approaching 60% are already at a heightened risk of default.  They note that “Ultimately, default often occurs at levels of debt well below the 60 percent of debt to GDP enshrined in Europe’s Maastricht Treaty, a clause intended to protect the euro-system from government defaults.”  We will show herein as to what extent countries have disrespected this EU treaty provision.

Countries, regardless of size, have learned from experience that borrowing U.S. dollars on seemingly favorable terms in a few years can turn into disgorging interest rates of effectively expanded loans via unfavorable dollar exchange rates.  As a result, countries which have a higher level of debt to GDP ratio are even more dangerously exposed to currency manipulation and loss of economic sovereignty.

Comparing country GDP’s

In economic and political discussions foreign countries are almost always cited and referenced without considerations of “size and weight”. In this way we lose sight of the vast difference in the size of countries, their populations, their GDP, or their “Division” of competitor class in currency wars. For the purpose of making such comparisons in analyzing currency wars we first compare the GDP, population, debt, and debt/GDP ratio of the U.S. and its English speaking allies, and its immediate southern neighboring country Mexico. 

The source of this information comes from “The Economist” magazine’s global debt clock which compares global debt by country.  It should be noted that “The Economist” statisticians compile data on a basis of their own design; for example they seem to exclude U.S. inter-governmental agency debt, as U.S. debt which is now at $22 trillion is shown as only $17 trillion.  There are likely other anomalies; however, for a consistent basis of so many country comparisons, this data base serves our purposes well.

                                                            TABLE 1

Country          Population         GDP         GDP to U.S.      Debt/GDP 

                             (mil.)               ($ bil.)

 

U.S.                      322                 17,441             100.0%           100.0%

England                 64                   2,841              16.6                108.0

Canada                  36                   2,140              12.5                84.4

Australia                 24                  1,460               8.5                 27.6

Mexico                 119                  1,750              10.2                 38.0

The preceding table demonstrates that the U.S. is in a size and class all its own. Not only are the populations of the English speaking countries relatively small to that of the U.S., their relative GDP’s are commensurately smaller as well. With apologies to the people and cultures of these countries, we can characterize them as economic monkeys compared to the big gorilla – meaning that in economic or financial warfare there is no possible contest here on account of the vast difference in economic heft between the United States and these other countries. Note that while Mexico’s population is as large as the population of England, Canada, and Australia combined, their GDP is 3.6 times larger than Mexico indicating its relative economic underdevelopment.  Note also, that according to “The Economist” global debt clock statistics, the U.S. debt just happens to be 100% in size relative to its GDP.

The second very important statistic to note is the ratio of public debt relative to the size of GDP. One cogent reason to show this ratio is that smaller countries which have a high debt to GDP ratio are particularly exposed to default because of the possible contribution of hostile currency manipulations.  Note that the U.S., England, and Canada show debt to GDP ratios far higher than the 60% ratio for heightened risk to default cited by authors Reinhart and Rogoff. Note also that despite Mexico’s relatively low debt to GDP ratio, it experienced default issues in the 1980’s, as a Latin American debt crisis rose from the FED’s interest rate hikes.

European Union Countries

Our next comparison looks at some European Union countries and compares them to that of the United States.

                                                TABLE 2

 

Country          Population         GDP         GDP to U.S.      Debt/GDP 

                             (mil.)               ($ bil.)

 

U.S.                            322           17,084         100.0%             100.0%

Germany                   82             3,216            18.8                  86.8

France                       65             2,434            14.3                106.0

Italy                            62             1,846            10.8                123.3

Spain                          47             1,207              7.1                  96.8

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and ...

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Dick Kaplan 3 months ago Member's comment

EXCELLENT article! A long but worthwhile read.

Gary Anderson 3 months ago Contributor's comment

Yes, this is an interesting article. World cooperation advances to offset the abuser, our very own nation!

Henry L. Morgan 3 months ago Member's comment

Sad but true.