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Race to the Bottom

News articles abound about the latest war of words between Japan and South Korea over the race to the bottom in the currency wars. The Wall Street Journal has a decent article of the financial ramifications of this mess.

Wall St Journal graphicThe short synopsis of the story is that the US Dollar has fallen more against the Japanese yen than the Korean won, which makes it easier for US consumers to buy Korean rather than Japanese products. Japan accused the central Bank of Korea of intervening in the currency markets. Korean leaders, meanwhile, shot back that Japan was making inappropriate remarks. Heavens to Betsy!

While this is ominious for anyone watching the continued slide of the American Dollar in the realm of world financing, it’s not entirely new. The Marmot’s Hole, one of Korea’s more popular English blogs, has blown it out of proportion with their article entitled “Japan’s Comments Drag Korea Into Currency War“.  Japan hasn’t dragged anyone into anything – Korea is already there and has been in the middle of a currency war. The stark reality that nearly all countries are either worried about the weakening dollar, or like Japan, Korea, China and a boat-load of other countries have been doing something about it for a long while. I’ve even written in the past here on the BOK’s tactics with regard to the dollar/won exchange rate they’ll do what they need to do to protect the Jaebols of Hyundai, Samsung and others that drive the bulk of the Korean economy,

And therein lies the problem. So, too, will Japan do what it needs to do to protect Sony, Sharp and Toyota. And so will China to protect its Wal-mart factories. And so will Brazil, and so on and so forth.  Everyone is racing to the bottom or the currency war. Everyone wants to be their currency to be weaker in order to sell more exports. That’s a Ponzi scheme in reverse and is bound to fail – there aren’t enough consumers to buy the products if everyone is vying to be a net-exporter.

Although Japan raised Korea’s visibility in the war this week, rest assured that no one was dragged into a war. They’re already in it and the opening shots were fired sometime back. Don’t be surprised if one day they stop throwing rates and start tossing metals – such as lead.