|Are Currencies Unstable?|
A Bloomberg article by October 8th delves into how the dollar fell from almost a four-year high after Federal Reserve minutes were released last week. They showed officials are concerned that the global slowdown and a stronger currency also pose risks to the U.S. economic outlook. Afterwards, the greenback weakened as futures traders lowered bets the Fed will lift interest rates. “It kind of looks like the Fed will take any excuse not to normalize rates in the near term,” Lennon Sweeting, a San Francisco-based dealer at the broker and payment provider USForex Inc., said in a phone interview. “What we’re seeing is consolidation and probably a brief period of stability. Overall, the bull rally on the dollar is still intact.
I contend that the central banks have made an effort to reinforce feelings of economic stability by keeping currencies trading in a "quiet" range. This has allowed people to think the global economy was on sound footing as central banks across the world continued to print and pump out money chasing the "ever elusive growth" that always appears to be just around the corner. Because of weak demand for goods little reason has existed to pump this money into investments in buildings and equipment thus much of it has flowed into intangible investments. This is the reason inflation has not been a major problem and explains the surge of stock prices to all time highs. Yes, this is a bubble manipulated higher by those with money chasing returns and taking on risk in a low interest rate environment. Have no doubt the seeds for inflation in the future have been planted everywhere.
When investors become unwilling to buy the bonds of heavily indebted nations causing the bond bubble to burst the values of currencies in those countries will tumble. John Maynard Keynes said
By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.As the central banks print like crazy to control interest rates on bonds they devalue the currency. While there are not many Bond Vigilantes there are a slew of Currency Vigilantes and they are ready to make their presence known. Recent weakness in the value of the Yen, Pound, and Euro must not go unnoticed. The Currency Vigilantes are acutely aware of when a currency is overvalued or ready to be re-pegged and pounce on the weak currency to tear it apart.
Today we live in an age when billions of dollars can be traded in just the blink of an eye, imagine how fast things could go to hell. Even the batch of recently created money will be used against the Central Banks that created it. The country most vulnerable to a currency collapse is Japan which faces a wall of debt that can only be addressed by printing more money and debasing their currency. Often because of its size people forget that little Japan is the worlds third largest economy making it a huge economic power with a big shadow. The recent multi-year lows in the yen are very important. When Japan crumbles it will be felt across the world. I believe the cross-border flow of money leaving Japan is one reason many of the worlds stock markets have remained so resilient.
With the death of the Yen the myth that advanced Democratic countries are immune to hyperinflation will be destroyed. Soon after that people will realize that the Euro, Pound, and even the Dollar are not safe from hyperinflation. Japan will be the first domino to fall, but not the last. This will bring much clarity to the debate of whether the next crisis will be of a deflationary or inflationary nature. The dollar is not immune, but I predict it will be the last to go. More and more often we seen Central Bankers forced to pull rabbits out of their hats knowing if people lose faith in the major currencies the system will come crashing down around our ears. As we stand on the abyss central bankers will be forced to print so much worthless paper the money it will act as a cushion to our fall but not change the reality currencies are about to be debased.
Footnote; As always your comments are encouraged. World Central Banks have been on this murky path for a long time, please see the following posts. One deals with how this has detached from reality and other looks at how if a meltdown occurs many people will use it as a reason to adopt a new "world currency"
Footnote #2; My apologies for again returning to the subject of "currencies" so soon but, I found the Federal Reserve minutes a compelling reason to do this article.