Currency Wars - Is anyone winning?

It was the strangest of times, it was the... Oh well, I’m not sure I can complete that using any statement that might have you believing that there is any “normalcy” left in the markets these days.

Keynes would be downright proud of the current central bankers’ attempts to inflate, devalue, quantitative ease, etc. each country’s or union’s economy into near oblivion. Keynes envisioned a world currency that he named the Bancor, which would be controlled by one world central bank. He felt that with such an instrument in place the world would be able to inflate and borrow as needed to “smooth out” the highs and lows of a world economy. Currently, the central bankers seem to be attempting to do this in unison with their various currencies. We see attempts to devalue the dollar, the euro, the yen, the yuan and other currencies in an attempt to do what exactly nobody seems quite certain. Those in power in the various countries and unions will say that they are attempting to make their currency weaker in order to boost exports. (The logic being that if your currency is weaker it takes less of the other’s currency to purchase your widgets.) But in reality does that make sense?

I will give Keynes credit for one thing though— Keynes always wanted a balance—with the governments and central banks going into debt during hard times and then catching back up during times of surplus and plenty. Modern so-called “Keynesians” operate under no such restrictions—they are happy to print and borrow in the good times as well as in the bad.

I recently sat on a plane from Montreal to Toronto next to a Mr. Brown. We struck up a conversation and I asked him what he did for a living. He explained that he sold Japanese equities. When I asked how business was, he said that with the new central bank policy “things are booming! We haven’t had this kind of interest in Japan for two decades.”

So, what can we draw from that brief exchange? Yes, the leaders of the countries and unions are correct when they say that by weakening their currency they hope to boost exports. But that is only half the truth. By weakening the yen the Japanese are attracting strong new investments. Because you can get so much more now for your dollar, euro or pound than you could before when the yen was stronger.

Each central banker knows and understands this. These funds flow into the equity markets—boosting virtually all indexes to all time highs. But are these real highs? No, it is money finding the path of least resistance. Like water, money will always flow to the deepest, lowest pool—given the right path. It is this path of devaluation that the central bankers are digging each time they quantitatively ease or lower the central bank lending rates.

Sadly it is mostly a paper game that is being played. While equity indexes hit all time highs on lower earnings and record low employment in many countries such as the US and many European Union members we are also seeing the commodity markets ravaged. Not only ravaged, but decouple from reality as gold trades for $400 to $500 per ounce higher than the spot prices in countries like India and China. How long can that continue?

Currency and war

Central bankers understand this all very clearly. Every major country and union is attempting to manipulate their currency and “out-manipulate” the others. New economic unions such as BRIC are coming of age and attempting trade without using the US dollar for settlement. China and Russia have reached agreements (both with each other and with other countries) to settle in their own currencies and not use the U.S. Dollar.

What will the end result of this all be? Honestly I am no prophet. But looking back in history we can see times when countries devalued their currencies and it never ended well for them. What we have never seen is a time when all major currenciesare attempting to devalue at the same time. I do not think that this bodes well for the 99 per centof us who are not the super wealthy regardless of where we might live. As currencies devalue and banks offer no interest to depositors, those on fixed incomes or living off savings will end up on the short end of the rope with little buying power.

I would not be surprised to see the world wake up one day and see a major equity market bubble burst in connection with a commodity scramble causing virtually all goods to rapidly increase in price. That or those in power might just be hoping to solve it all the old fashioned way — a real war.


BITB holds a degree in finance from Brigham Young University, an MBA from Pepperdine University and has 25-plus years of experience asa financial analyst, CFO and COO for domestic and international companies.