As many of you who have read my work in the past know, I expect this whole Keynesian monetary experiment that has been going on since World War II to finally terminate in a global currency crisis. I’m starting to wonder if we aren’t seeing the first domino start to topple.
I’m talking about the Japanese Yen…
I think everyone assumes that the Yen is dropping in response to Prime Minister Abe’s intent to imitate U.S. policy and print its way out of its troubles.
The problem with this strategy is eventually Japan will break its currency. Japan is in a particularly tenuous situation in that their debt to GDP dwarfs most of the rest of the world. The only hope they have of servicing this debt is for interest rates to stay basically at zero.
Any move by interest rates above this artificially low level and Japan’s debt becomes unserviceable, without resorting to a greater and greater debasement of the currency. Unfortunately, that will also result in…
I thought it appropriate to start this piece with a quote from Ludwig Von Mises regarding the global system of “flexible” currencies:
A general acceptance of the principles of the flexible [currency] standard must therefore result in a mutual overbidding between the nations. At the end of this race is the complete destruction of all nations’ monetary systems. LINK
That was written in 1949 and essentially prophesied the eventual global currency war that Von Mises visualized unfolding, as countries used currency devaluation strategies in a desperate attempt to prop up their own crumbling economic systems and “protect” their relative export power.
I am not alone in thinking that we entering a very real and very dangerous global currency war. The highly regarded Comstock Partners issued their view on this four days ago: “If we are correct, the U.S. and global economies will contract and there will be a race to the bottom with “competitive devaluations” rampant. All the countries that need exports for economic growth will be very aggressive in the race to the bottom…” LINK.
I remember when I first started looking at the precious metals back in 2001. I read one of James Dines newsletters at the time in which he was promoting gold and mining stocks as the ultimate defense against a global race to devalue currencies to zero. At the time I was unaware that his vision was based on the work by Von Mises fifty years earlier.
Essentially, in a system of flexible, floating national currencies, the currency of each nation achieves relative value in relation to the other currencies based on either relative economic strength or relative supply of the currency. With the weak global economy, nations have resorted to devaluing their own currency in an attempt to keep their respective systems from falling apart from the burdens of too much debt and as a means of making their exports relatively cheaper. The latter strategy is also an attempt to stimulate domestic manufacturing by stimulating foreign demand.
The preferred method of currency devaluation has been through prolific use of the printing press, aka “QE.” As you can see from the two charts below, this process of devaluation has actually been occurring since the start of the new millennium:
Beijing, Jan 26 (IANS) China’s securities regulator has published provisional rules for the operation of gold exchange-traded funds (ETF), paving the way for introducing such business into the country’s financial market.
There is no specific timetable yet for the listing of gold ETFs, or mutual funds traded on stock exchanges that track the price of goldand have most of their assets invested in gold, according to an official from the China Securities Regulatory Commission (CSRC).
This will be Huge and the last nail in the coffin for the dollar if true!
“The report discusses the likelihood/probability that, one day soon, the world will be offered an additional “reserve currency”, the Chinese renminbi.”(RMB or CNY) means “People’s Currency” in Chinese language
Van Steenis continues (emphasis added):
One of the most debated topics in the corridors of Davos was the dramatic changes in Japan, with the new government keen to jumpstart the economy with a new 2% inflation target which has led to a material depreciation in the Yen.
And yet several central bankers argued there is more they can do. In one public debate, Angel Gurria of the OECD argued that the world had probably reached the limits of monetary policy. But Mark Carney contradicted Mr. Gurria saying “There continues to be monetary policy options in all major economies and they have to be framed in the context of the [monetary policy] mandate.” This flexibility should be used until their economies reach “escape velocity”.
While Mr. Carney was speaking at a generic level for all central banks, I came away from this debate and other meetings with central bankers that that this quantitative experiment is far from over. Not only in Japan are we seeing a bold new experiment but that the new Bank of England governor is likely to give it an extra nudge with a de facto or de jure change in mandate. My colleague Charles Goodhart wrote about options on this early in January. What does it mean for UK banks – in the longer term a stronger economic recovery is a clear positive; however, the market may underestimate that the normalisation in rates and margins may take longer to come through.
KWN: Today James Turk spoke with King World News about a historic event which has just taken place in the United States. Turk states that this situation is not being accurately reported in the mainstream media. He also believes that because of this unfolding drama, “It is all but certain now that the dollar is headed for hyperinflation.” Here is what Turk had to say: “The huge bases in gold and silver are getting bigger, which is very positive, Eric. The only thing the drop in price over the last few days has done is set up a retest of this significant and growing support.”
James Turk continues:
“We are seeing just another example of how the central planners intervene in the precious metal markets by selling paper to drive the price down during month-end option expiry. This maneuver maximizes the profit for their agents – those bullion banks facilitating the gold price suppression scheme – so that the calls they’ve sold to investors and financial institutions expire out of the money. It also ensures that as many call buyers as possible lose money, which helps the central planners foster a negative sentiment for the precious metals.
Bloomberg’s Guy Johnson recaps comments from newsmakers at the World Economic Forum in Davos on concerns for a currency war.