chinese-yuan-devaluation

“Black Monday,” the recently coined term for the August 24th drop in both Chinese and global stock prices, is only the most recent turn in events since China devalued its currency a couple of weeks ago. Since the August 11 devaluation, the worldwide stock market has lost $5 trillion in value.

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Global Economic Losses

Because China is one of the world’s largest economies, this devaluation has sent shock waves through the global financial world. Some notable calamities are the loss of 530 points from the Dow Jones and a loss of 400 billion Euros from Europe’s 300 biggest companies. Since interest rates are already near their historic bottoms, there seems to be little hope that reducing them more could possibly help stimulate the economy.

Fed Rethinking Rate Hike

Also, reducing rates had not been planned in the United States. The Fed had actually planned to increase U.S. interest rates in September, but this latest downturn might give them second thoughts. Lawrence H. Summers, the former Obama economic advisor, has been one expert who believes the central U.S. bank should reconsider increasing interest rates in light of these new developments.

New Financial Crisis?

There are some striking parallels between recent events and similar triggers that sparked the 1994 financial crisis in Asia. At that time, Asia’s biggest economy was Japan and not China, but that largest Asian economy was slowing. Rounds of Asian currency devaluation triggered corporate and bank failures all across Asia in the 1990s. Could something similar be happening now in China?

Asian Economies Slowing

There is little doubt that these are risky times. Since China’s move, currencies have already been devalued in such countries as Vietnam as Kazakhstan and even South Africa and Turkey. However, the Bloomberg article explains that Asia’s financial system has already been cleansed by financial crisis in the 1990s and should be more resilient this time. Rather than predicting a severe crisis, the economists are predicting more of a painful, downward adjustment cycle.

Gold Responding with Strength

Meanwhile, many investors have returned to the safety of gold, as currency values remain uncertain. Gold news recently reveals a resiliency in the precious metals market. Gold prices have exhibited strength over the last few weeks, while silver, platinum, and palladium futures have also displayed gains.