Currency Markets Reflect Diminished confidence!

Currency markets are beginning to reflect diminished confidence in the system central banks have created. As the currency games continue to ratchet ever higher it is becoming more apparent that we are standing on shifting sand. This was emphasized when the Swiss National Bank surprised markets and eliminated its exchange-rate cap a key source of support for the euro. The euro quickly plunged 3.5 percent against a basket of currencies, the most since its 1999 debut and hit an 11-year low against the dollar, and has fallen ever since. The schemes bankers have used for years to hide and transfer debt are coming under attack, if they crumble under the assault it will culminate in a reset of the economic system across the globe. It must be noted that this will not please many people who will feel deeply abused and totally betrayed by how it is accomplished.

A Very Important Chart In Understanding The Dollar

The chart to the left is very important. Today four major currencies dominate the world stage, they are the pound, the euro, the yen, and of course the dollar. The yen and the euro are in trouble, with the pound being very vulnerable to contagion. The remaining currencies remain small bit players in the over all scheme of things. The status gained by the dollar being deemed the "reserve currency" by which all others are weighed and in someway pegged does not make the dollar infallible or guarantee it will remain strong, but the liquidity of such a large market does add a resilience to the American dollar.

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. Weakness in the value of the Yen, Pound, and Euro must not go unnoticed as they are a precursor to the wealth fleeing the countries that use them in everyday life. What is occurring in the currency markets has been a long time coming, the cross-border flow of money leaving Japan and Europe is one reason some stock markets have remained so resilient.

As the Euro-zone self destructs the falling Euro has overshadowed the death of the Yen that makes up only 3.2% of worldwide reserve holdings. The Yen is more of a  harbinger of what is to come and as the value of the Yen spirals downward 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 the effects of a currency that is falling in relevant value. This means that people will want to get out of bonds in these countries as well.  This will result in a huge monetization in these countries and then hyperinflation. These four currencies make up about 95% of the Central Bank reserves backing other currencies. Faith in paper money in general will be shattered, Japan will be the first domino to fall, but not the last. The dollar is not immune, but protected by its position as the worlds reserve currency and massive size should be the last too crumble.

The way the global economy is structured the dollar is the linchpin of global fiance thus, it has guaranteed itself a place at the table until dethroned. This means that countries like Japan and China which hold a lot of American bonds or dollars will be able to offset some of the pain of a weakening national currency. Unfortunately, many countries are not in such a position, and to make matters worse countries that are mired in debt often have tied or pegged that debt to the dollar. This means a lot of economic pain if the dollar grows stronger their debt is magnified and these countries will find themselves under a great deal of pressure just to survive. Recent currency moves should again bring into focus the fact that debt does matter and raise questions as to the validity of Modern Monetary Theory that often attempts to sidestep this core economic principle.

Unstable currency markets can be a precursor to massive shifts in value and a sudden drop in confidence. It is logical to think that in such a situation insiders would be the big winners. The main reason the world has chosen a "reserve currency" is to have some benchmark to peg currency values to and lessen the impulse of countries that have accumulated massive debts to attempt to address their problems by just printing more money, This results in devaluing their currencies but often fails to address the root cause of their problem. Just printing more money is not sustainable and little comfort should be garnered from assets or pensions being pegged to future inflation because history shows promises are easily broken and rules often rewritten for what is called the greater good.

The collapse of any currency causes wealth to flee that currency and often the country of the failing currency in search of any safe haven within reach. The bottom-line is that while many people go about their daily lives giving little thought to currency valuations they leave themselves open to the whims of those that control, manipulate and play in this important area of the global economy. Ten percentage points higher or lower against a foreign currency can have a great deal of impact on how your net worth stacks up against someone across the world. This rapidly becomes apparent to anyone doing a great deal of travel or buying foreign goods. It also highlights why all of us should be very concerned where we stand when the smoke clears from the currency wars before us. While most people remain totally oblivious to these dangers do not underestimate the forces in play or the great risk of economic damage through contagion.

Because we  are all interconnected for better or worse it has become difficult to contain defaults in one country from affecting another. This is why some people have been calling for a "world currency" for years. In this respect the saying "one should never let a good crisis go to waste" means a meltdown with high levels of fear would present a perfect opportunity and catalyst to advance this agenda down the field. Remember, many people with agendas have a lot to gain when a major shift in the currency markets takes place. Even with some countries not participating in such a currency dislodging the American dollar as the world reserve currency represents such a shift.  If the world stumbles into an economic hell the noise could become deafening because people and their leaders tend to look for easy answers.



Footnote; Your comments are encouraged. Other recent articles concerning what is happening in the currency markets are listed below, also in the archives you will find several articles dealing with why inflation will win out over deflationary forces.
http://brucewilds.blogspot.com/2014/10/fed-concerned-that-stong-dollar.html
http://brucewilds.blogspot.com/2014/10/currencies-are-ious.html  
http://brucewilds.blogspot.com/2014/02/contagion-may-lead-to-new-world-currency.html