With Japan, China and the U.S. all pursuing weak-currency policies, other major economies are retaliating. The WSJ’s Deborah Kan speaks to James Rickards of Tangent Capital Partners about whether the drive to devalue will set off a trade crisis.
As developed countries like Japan and the U.S. try to kick-start their sluggish economies with ultralow interest rates and binges of money-printing, they are putting downward pressure on their currencies. The loose monetary policies are primarily aimed at stimulating domestic demand. But their effects spill over into the currency world.
Since the end of November, when it became clear that Shinzo Abe and his agenda of growth-at-all-costs would win Japan’s elections, the yen has lost more than 10% against the dollar and some 15% against the euro. The greenback last week plumbed its lowest level against the euro in nearly 15 months.
James Rickards, a veteran financier and author of “Currency Wars: The Making of the Next Global Crisis,” predicts the former.
“People ask me who’s winning. I say nobody,” he told me. “I expect the international monetary system to destabilize and collapse. There will be so much money-printing by so many central banks that people’s confidence in paper money will wane, and inflation will rise sharply.”
Peter Schiff: ‘Let’s call it the “Bernanke Shock.’
Perhaps the entire international community is thinking back to the ’60s, because Germany isn’t the only country maneuvering away from the dollar today. The Netherlands and Azerbaijan are also discussing repatriating their foreign gold holdings. And every month, we hear about central banks increasing gold reserves. The latest are Russia and Kazakhstan, but in the last year, countries from Brazil to Turkey have been adding to their gold holdings in order to diversify away from fiat currency reserves.
And don’t forget China. Once the biggest purchaser of US bonds, it is now a net seller of Treasuries, while simultaneously gobbling up gold. Some sources even claim that China has unofficially surpassed Germany as the second largest holder of gold in the world.
Unlike the ’60s, today there is no official gold window to close. There will be no reported “shock” indicator of a dollar flight. This demand by Germany may be the closest indicator we’re going to get. Placing blame where it’s due, let’s call it the “Bernanke Shock.”
It Takes One to Know One
In last month’s Gold Letter, I wrote about the three pillars supporting the US Treasury’s persistently low interest rates: the Fed, domestic investors, and foreign central banks – led by Japan. I examined how Japan’s plans to radically devalue the yen may undermine that country’s ability to continue buying Treasuries, which could cause the other pillars to become unstable as well.