We may be on the verge of some serious currency wars! I guess this is what happens when you have fiat monetary systems that are easily controlled and manipulated by central banks. Heaven forbid we allow markets to work out freely. That would take too long and wouldn’t look good for the politicians. Let’s walk through a recap of where things stand today:
The United States is world’s largest economy and the US Dollar is the world’s reserve currency. The US had led the way with monetary stimulus (the Fed’s Quantitative Easing programs) in an effort to devalue our currency against others to boost exports. If other countries don’t want their currencies to appreciate against the US Dollar, they’ll have to continue to fund our nation’s growing debt by buying Treasury Bonds.
Japan’s new Prime Minister, Shinzo Abe, has pledged stimulus to pull their economy out of two decades of deflation, targeting 2% inflation. Their currency, the Yen, immediately fell and has been falling ever since. This is great news for Japanese companies, like Honda and Nissan, because it makes their products cheaper to the rest of the world. However, US carmakers are now complaining, asking President Obama to enforce repercussions since this will hurt their sales. (side note: if Japan is able to achieve their inflation target and rates rise, even slightly, I think it will raise some very serious issues by not being able to afford its massive debt load.)
Japanese Yen (FXY etf) – 1 year
French President, Francois Hollande, is now pleading that the Eurozone take steps to depreciate their currency, the Euro, because the recent rise in value against the Yen and US Dollar (and therefore Chinese Yuan since it’s essentially pegged to the US Dollar) is crushing any hopes of an economic recovery and deepening their recession. He’s also calling for the government to use controls rather than letting it fluctuate in the open market (like that has ever been a good idea…). Switzerland saw the writing on the wall back in 2011 when they pegged the Swiss Franc to the Euro to put an end to what seemed to be a never-ending appreciation. They know the Eurozone is a disaster, which is why they didn’t join it in the first place, so why not artificially suppress their currency with the Euro? The southern Euro nations (Italy, France, Spain, etc.) are still deteriorating (quietly) and I’m guessing this story will rear its ugly head again at some point this year…
Euro (FXE etf) – 1 year
Russia, Korea, Brazil and the UK are not sitting back to allow this either. They’ve noticed the game the US has been playing for a while, but now that Japan has joined the party and Europe is complaining so loudly, they say they’re ready to act if these shenanigans don’t end.
These policies are known as Beggar-Thy-Neighbor tactics, which means each country is trying to better its position by weakening its neighbors – or in this case, strengthening their neighbors currency against their own. But this raises the question: how can everyone have a lower currency at the same time? It’s a never-ending spiral!
We’re heading down a slippery slope and it will be interesting, to say the least, to see how this all plays out. The simple assumption would be some pretty bad inflation down the road. Just another reason why I’m still very bullish on commodities.
-Nick