Sunday, 23 September 2012

Currency Wars

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It is rather worrying how little coverage there is in the Western media about the increasingly nasty escalation of the China-Japan stand-off over a few small islands. The Arab Spring which was galvanized through the enormous power of social media may have parallels in China given the strangle hold the authorities have there over main stream media - social media is rather more difficult to keep the reins on…
In  the markets this week ,the big factor continuing to reverberate around the globe is the de-facto potentially unlimited US Quantitative Easing. This huge round of monetary easing is unparalleled in the US and the world to date including Japan.
Back when QE started in 2009 I forecast that it was a ‘Pringles’ event – once started you just can’t stop. And so Ben Bernanke is proving. Many Countries around the world are not unsurprisingly, no particularly enamoured by this new course of money printing. US dollar devaluation only makes it more difficult for developing economies to grow as their products become more expensive on global markets.
The US, by printing money, is trying to generate inflation to help it wipe outs its debt. This inflation though is also being felt in other countries. Their response is to also to try and reduce the value of the currencies through their own forms of QE.
With the dollar falling, there are some potential lucrative investment gains to be made. As the dollar falls, risk assets gain. Also as the dollar falls, the other side of the equation is that the “pair” currencies strengthen, particularly of havens like the Swiss Franc and the Norwegian Krone. Similarly, commodities also generally rise. It is quite hard to see how more money printing in the US and elsewhere does not underpin commodity prices – given the value destruction in the mining sector this year that itself provides a good long-term position for finding value - a stance that is opined in the current edition of spreadbet magazine -

Finally, in terms of opportunities presented through a falling dollar, this also pushes up food prices. There is of course quite rightly a stigma attached to betting on food prices but spreads and ETF’s are offered.

Below is the HSBC graph of the effects of QE on the dollar – it does work in lowering the dollar and this in turn sets off a competitive devaluation in other currencies around the world. It provides the only solution governments can think of to the current sovereign debt crisis and this is to devalue their debt instead of paying it off as the burden is too large.

The currency wars are here to stay and traders should look to this as a theme to underpin their trading strategies in 2012/13.


Demetrius said...

I don't like the look of this at all. Is it a back to 1929 scenario?

Sebastian Weetabix said...

No. 1931 was actually worse because "they" (Europeans in general, Germans in particular) cleaved to the gold standard and tightened monetary policy going into a slump. This pro-cyclical stupidity led directly to a debt-deflation spiral, 40%+ unemployment and the rise of Hitler.

Money printing will definitely prevent a debt deflation spiral, but it is being done the wrong way. We don't have much inflation to speak of because all the money has gone onto zombie bank balance sheets rather than circulating round the economy. If they really want to kick-start the economy the Bank of England should give every adult a cheque for £20K rather than piss £300 billion into dead banks.

Anonymous said...

give away free money, what nonsense.

People would just blow most of it on foreign manufactured consumables, not helping our own economy at all.

What the government should be doing #1, is stop fkin wasting money on foreign aid and so called renewable energy subsidies, cut all benefits to anyone not a full British citizen except for special cases.

Then reduce business taxes and regulations so we could produce more of what we need in this country.

All these bizarre financial tricks aren't going to change anything in the long run.

It is surely inevitable that we tighten monetary policy sooner or later as things start to run out of control.

I think it'll be worse than 1931 because we are currently spending/printing a fortune trying to reinflate the bubble, which even if it was successful can't be sustained? surely?

You mention the rise of Hitler, but the current crisis as lead to the 'Arab Spring' in the middle east, while China and Japan are in the verge of fighting over oil.

Electro-Kevin said...

Someone please correct me if I'm talking baloney.

At the outset of the Obama govt I posted on my blog that I hoped he'd turn out to be a bit of a pirate as regards US indebtedness to the Chinese. (My allusion to US battle fleets and her ability to resist economic normalities.)

Is this default by inflation ?

Is the US fleet in the Sth China Sea really about honouring treaties with Japan ? Or is it about preserving US primacy ?

hovis said...

Anon: I'm Quite happy for 20k - it is easily more sensible than propping up a TBTF banking system.

Sure some would go on consumables some wouldnt. It would be far more useful than QE which has totally undermined the value of money but kept us in stasis.

As for Foreign Aid, I used to hold view similar to yours but on consideration it is oil to the wheel of influence. The narrative that it actually is aid is PR.

The welfare bill is mainly British citizens, though not necesarily a bad start no doubt it would fall foul of cross border EU arrangements?

I'm with you for de-regulation and an actual bonfire of the Quangos. To get rid of large useless leeches on society/the body politc how about we get radical and scrap the bloated corporate monsterthat is the NHS?

CityUnslicker said...

SW - printing money and givign it away is more honest. it would lead to a big, helpful devaluation (helpful for the Government). But it would also hole rather badly the belief that money is something to be earned - fiat money has this existential problem of needing to be belived in.

The banks and bankers know this and play the game, so you can give them money and they won't tell as they indeed are part of the conspiracy of fiat....

hovis said...

Very good analysis CU. Fiat lovers will always tell us that PM's of course are not the answer .... now if only I had a large amount of such 'barbarous relics' ..

Blue Eyes said...

They don't want inflation for the sake of it, they want the people sitting on all the capital to invest it rather than sitting on it. They are effectively doing nominal GDP targeting. At the moment everyone is waiting for everyone else to get things moving. Supposedly unlimited QE gives people the signal that they need to get out of cash and into something more productive.

Anonymous said...

but who gets the 20k?
I very much doubt it goes to the same taxpayers who put money into the system over the years.
A large number of people who had 20k land on their lap would think they'd won the lottery as its more than they've ever seen before.
And as you mention else where, EU citizens have the same rights as UK, do they all get 20k as well?

If we wanted more money in peoples pockets, we should reduce taxes.

Exactly what useful influence does our aid buy?
Even if there is any, does it justify the £10 billion cost?

Yes the welfare bill is mainly for the British, as it should be.
(fk Europe)

Anonymous said...

BE, but what is something productive?

My dads generation just put money into property to preserve wealth.
I know it doesn't always work, but its ingrained in a lot of people to do that.
Others put money into gold..

There's no saying money is going to flow to where they think it should to go.

Sebastian Weetabix said...


Banks are getting "free" money at everyone else's expense. My tongue in cheek suggestion would 'cost' no more and actually achieve the BoE's object of boosting the economy!

FWIW I don't think we should be printing money. I also don't think we should prop up dead banks. They need to die. The present corporatism is killing our future.

Budgie said...

All money is fiat (or rather it is a model of the economy) whether conch shells, linen or gold. Yes, even for you gold bugs the intrinsic value of gold (for jewelry and industry) is far below the current price; which actually requires belief to sustain it.

QE was (is?) needed because money supply was contracting dangerously. The UK and USA are still teetering on the edge of turning a recession into a depression (= recession + deflation). The eurozone is in depression (50% youth unemployment, 20%+ general unemployment etc).

What is needed in the UK to counteract the recession is a transfer of wealth from government to citizens, mainly because we are more efficient at buying than government is. It has always worked in the past.

Anonymous said...

Contracting after previously ballooning.
What goes up must come down, if it can't be sustained