Thursday, March 16, 2017

Currencies Are Trading In A False Paradigm

 brucewilds.blogspot.hk / By: Bruce Wilds

In science and philosophy, a paradigm is a distinct set of concepts or thought patterns, including theories, research methods, postulates, and standards for what constitutes legitimate contributions to a field. Currencies are trading in a false paradigm in that they have been sheltered from the storm of volatility by existing in a rather closed system. Wealth is contained within this system of fiat money by laws and rules that discourage freedom of movement. It is the coordinated collusion of the major central banks that has allowed this charade to exist. The fact it has not been recognized or acknowledged does not alter nor does it guarantee the system will continue. The failure of any of the world's four major reserve currencies will destroy the myth that major currencies are immune to the same fate that has haunted so many currencies throughout history when the nations granting them have proven unable to control their budgets and been crushed under the weight of debt.

Central Bank Balance Sheets Have Exploded
One thing the global economy doesn't need with all the uncertainty that is currently floating around is unstable currency markets. When you consider just how destabilizing currency swings can be it is easy to see how a strong dollar could obliterate the global economy. It should not be a surprise in our current situation that behind the curtain central bankers could be busy manipulating currencies so they trade in a narrow range that will not rock the boat. Over the years countries have become very adept at coordinating policy and currency swaps are only one of the tools they use which now extends to even investing in stocks. When the dollar began to soar back in late 2014 the fear index began to rise and concerns were heard about the stress it was causing in countries that owed a great deal of debt that would have to be paid back in dollars rather than their own currency.

As far as the idea China will tank the dollar because they are reducing their holdings of U.S. Treasuries in order to support the yuan a different story is emerging. We must remember the world currency market is a complicated place full of paths that fall away or come back on themselves and many of the tools used are like a double-edged sword that cut both ways. In the case of China, capital is sneaking and flowing out of the country faster than the government can create new ways to bolster the currency and sadly for them it is flowing into America strengthening the dollar even more. Adding to China's woes is that as their currency falls they will hear more calls from Trump supporters to place duties and tariffs on their exports to America in an effort to level the playing field and reduce the trade deficit.

Currency Trade Creates Illusion Of Stability
Consider the possibility that currencies are trading in a false paradigm and investors should get ready for a rude awakening caused by major changes in currency values. A dam has been built to protect market stability but pressure is building and when it breaks it will wreak major damage. Part of this is constructed upon the fallacy we have been given and accepted that a major currency cannot fail or collapse. This will only become more apparent as concern over the future of both the yen and the euro become more of an issue. Both the yen and the euro have major problems going forward and while people point to the fact that behind the dollar America stands with a rapidly growing national debt it is nothing compared to the issues Japan and the Euro-zone face.

The different growth paths are a symptom of a general problem that has haunted currency unions for centuries. Competitiveness and productivity develop at a different pace in different countries. Over time, this leads to large differences in growth and the shifting of wealth among the members of a currency union. When the dollar union of the U.S. threatened to fall apart during the Great Depression because of the different economic conditions and unequal potential apparent between states, the federal government found it necessary to enact federal income transfers from prosperous states to aid ailing ones. The federal budget rapidly increased and this practice of income transfers from one state to another to bind the states together as a union became permanently embedded in our system.

While in the United States a no bailout policy of crisis-hit states that had been enacted decades ago remains a somewhat "masked equalizer" accomplished through inter-system wealth transfers has contributed that special something that the Euro-zone completely lacks. Inequality has a way of growing and must be addressed early, After a certain point, it becomes too late to implement such a system that transfers wealth from the most prosperous to the most needy because some people will without a doubt feel cheated and others resentful. The bigger a debt problem and inequality is allowed to grow the more people and institutions suffer when they become the victims of a default. Greece has fallen and continues to suffer the consequences of this while much bigger countries like Italy and Spain are teetering on the brink.

During the last several years the question of how to exit the Euro-zone monetary union and the euro has become an important economic issue. Uncertainty and fear relating to its costs tend to discourage political leaders from taking the risk and decisive steps towards an exit but if one or more sizeable countries bolt from the shelter of the euro or the Euro-zone the currency could quickly unravel. A major cause of the Euro-zone problem is growing inequality among its members exacerbated by the lack of system-wide bank protection which causes money and wealth to flee the weaker countries and their failing banks. Japan faces an entirely different problem while national debt is an issue for the central banks that issue both currencies. Japan's debt is much larger and the country faces a demographic crisis that leaves it forced to support a population comprised of citizens far too old to work.

These problems give credence to the possibility that both of these currencies will fail at some point and if they do it is very likely that in our modern era, where wealth leaps across borders at the push of a button, their death will be fast, and swift. Like many Americans, I have railed against our growing debt and questioned whether it would destroy the dollar, however, when looking at the miserable alternative currencies before us the dollar is without a doubt king. We must not underestimate the advantage the dollar has being the world's reserve currency or the size of debt floating across the globe comprised in dollar based agreements. If the dollar proves victorious in the currency wars and is indeed the last major currency standing the people of America will reap the benefits of a game well played or just plain luck.


3 comments:

  1. Dude its the yen! (Why risk borrowed money in Japan if yen goes up?) Everybody can't be wrong at the same old same old time?

    ReplyDelete
  2. The fed is not buying anything!
    Its borrowing money out of the system?
    We have a fed balance sheet that screams deflation and a European dollar market that marches to its own drummer?

    Nobody wants to buy our freedom but would think nothing of borrowing our military?

    ReplyDelete
  3. To my opinion, dollar and euro are the most stable currencies in the world. Maybe I am wrong, but I just do not believe in other ones as much as I’m confident in US dollar. Also English pound is strong and stable enough but now its stability can be damaged because of economic situation. It’s especially necessary to pay attention to the currency when you use lending options for fast cash. I experienced an unpleasant situation with that, so it’s important to be careful.

    ReplyDelete