The US dollar, as the world’s reserve currency, has a very important role in the exchange of value between nations. It is currently estimated that 70% of all global trade is transacted in US Dollars. It is the volatility in the value of the US dollar compared to its trading partners, which is driving fears of a global trade war.
The FX rates between nations are bouncing up and down based on global macro market dynamics. The price of most commodities is skyrocketing, with the grains regularly limiting up currently. The US is continuing to see an increase in food exports, as US Farmers book nominal historic prices.
The exporting of inflation to third world nations is now causing catastrophic results in nations historically ran by autocrats with strong ties to the United States foreign policy. The events in Tunisia and Egypt have unleashed a rising tide of anti-Americanism in the region.
If the current administration is intentionally destabilizing dictators & autocrats, the region should expect the policies of the Federal Reserve to continue. The current course of action by the Federal Reserve is directly feeding the populous revolutions with public anger at rising food costs.
The invisible hand of the market is directly pulling the strings of the people rioting. This will continue until the Federal Reserve decides that it has inflicted enough inflation on the globe. This is economic war, even if professors of Government are unaware of the implications of their actions.
However, if the current administration is in fact surprised and worried by these events, it should address the cause of the problem. The decline in the purchasing power of the US dollar is the driving force behind the demonstrations.
The cost of food is increasing while the economy itself is not keeping pace. This has poor disadvantaged families feeling the real impact of inflation, in the cost of calories. This is what drives unrest in nations without the safety nets that westernized nations have.
In the past, when the US dollar was too strong, or too weak, a group of nations would meet and design a response to the situation at hand. In 1985, the Plaza Accord was signed by France, West Germany, Japan, England and the United States.
It was designed to lower the value of the US dollar by depreciating it against the Yen and Deutsche Mark by intervening in the currency markets. The exchange rate on the US dollar fell by 51% between 1985 and 1987, when it was felt that the Dollar had fallen too far.
In 1987, a new accord was called together in Paris. The Louvre Accord of February 1987 was agreed to by the G-6 nations to stop the US dollar depreciation. The dollar had fallen too far, too fast.
While the Plaza Accord was a trade agreement, reached by adjusting the exchange rates between nations, the Louvre Accord was different. It was an attempt to bring together monetary policy and Global Macro based fiscal results for all nations.
The international export markets today are in need of a new Louvre accord, to stabilize the drop in the US Dollar and the currency rates of its major trading partners. The Louvre accord attempted to address these issues in 1987, as emerging markets felt the pain of rising commodity prices, inflation and instability.
The world needs a new Louvre accord, to stop the intentional devaluation of the global reserve currency by the Federal Reserve. This type of action would stabilize the effects of inflation in emerging markets, at the expense of slowing down US exports.
The only way this could happen is if China agreed to let the Yuan rise against the US dollar, while the worlds central bankers stabilized the exchange rates between nations. Until Central Banks decide to play together using a single script for the world to listen too, we will have continued examples of popular uprisings. Food inflation is no joke, and strong man governments around the worlds are fearing its affects.