Nobody wins a currency war…but politicians love to try. The idea goes like this…. “If we can cheapen the value of our currency, then we’ll be able to export more goods and it will get our economy going. And then I’ll get re-elected and everyone will love me!” (see the beginning of this series here.)
Of course, if you understand economics, you know that every action in an economy causes ripple effects throughout the economy. If you’ve paid attention to the machinations of governments over the centuries, you might have noticed that every manipulative move by a government type has negative unintended consequences.
Watch what happens in this case…
The US government (or its central bank proxy) prints excess money in order to cheapen the value of the currency. Today, this is often done by lowering interest rates, issuing more debt, &/or having the Central Bank buy US Treasury Bonds on the open market. None of these actually involves a physical printing press whirling away, but all of them lead to a greater money supply in this digital age. And all of them are being used to extreme levels by the US government today!
So the market reacts to the excess money supply by lowering the amount of other currencies that they are willing to pay for it. This does lead to corporate exports being cheaper around the world which helps US companies sell more goods worldwide. It also makes foreign goods more expensive to buy in comparison and so the hope is that US made goods will get a leg up and sell more at home. The problem with this is that there’s a severe delay in this coming to pass, and other countries react more quickly than would be needed for this aspect to work.
But so far, so good. US companies are selling more goods which is great for all Americans, right?
Wrong, if you have any assets, the government/Fed has just decided for you that they are all worth less now than they were before. You can buy less commodities or foreign goods for the same amount of money. Also, any US made good that depends on commodities or foreign goods for their production have just seen their costs go up and thus their prices have to rise.
Because low interest rates are a part of this money creation, you are extremely limited in what you can earn on your savings. Thus the government has just rewarded borrowers and punished savers. Not the way to grow a healthy economy!
Then comes the Double Whammy…
Other countries don’t sit still and just accept that their currency is now stronger than it had been (they should, but they don’t in this Keynesian Utopian Paradise we’re living in). Instead, they take action to do the exact same thing. They lower the value of their own currency.
Thus each country’s government is doing all it can to manipulate their currency lower while their adoring citizens are becoming poorer all the time. The unintended consequences stay on long after the initial jolt to the economy has completely subsided.
We’ve been seeing this for years. The US, UK, Japan, & China excel at these maneuvers. Europe has been getting into the game in the last year and they will become the king of this game very soon, or let countries start defaulting. The currency war is just heating up and everyone loses such a war.
The first country to go to a hard, asset backed currency will win the game, but this is completely the opposite direction from the objective every country is pursuing. These are certainly interesting times!
Make sure you and your family are prepared for what is coming and really, is just about here.
PS – You might have noticed the significant slowdown in quantity of blog posts. We apologize for that. We’d like to keep a more frequent pace, but between additions to the family and a too busy schedule at the moment, this has not been possible. We’ll try to keep a once a week post up going forward until such a time as we can return to a greater frequency. Thanks for bearing with us!
This is the 26th post in a series. You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here. Here are the rest of the posts: 3) Ben Bernanke’s Dollar Devaluation Plan, 4) The Coming US Dollar Devaluation, 5) Stock Market Volatility, & 6) Stocks to Fall in 2012, 7) The European Crises, & European Options, 9) European Prediction, 10) Recession in Japan, 11) Japanese Yen Crash,12) War with Iran, 13) Jewish Perspective on Iran, 14) Commodities to End 2012 Lower, 15) Where Will Gold Go Next?, 16) Gold, Should you Wait?, 17) Will Silver Move Higher?, & 18) Why Buy Silver Now?, 19) Oil Prices to Explode Higher, 20) Bonds Will Fall, 21) US Dollar, 22) European Recession, 23) Sovereign Default in Europe, 24) China’s Slowing, & 25) US Recession.