Saturday, September 20, 2014

Caution Alert, Currencies May Get Wild!

Volatility Is About To Rise
Every now and then a very notable and important event occurs, sometimes it slips by without even being noticed. For months the major world currencies have traded in a narrow range as if held in limbo by some great force. I contend that the central banks were behind much of this in an effort to reinforce feelings of economic stability. This has allowed people to think we were 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.

Until now because of weak demand for goods and most of this freshly printed money flowing into intangible investments inflation has not been a major problem, but the seeds for its future growth have been planted everywhere. 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.

I think most people tend to understand money more than government bonds. In an article way back in early 2013 I raised concern the games central bankers had been playing in manipulating various currencies had reached a dangerous level. This has not only continued but gotten worse. 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. In fact history shows no mercy is given when this occurs. 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. This means paying off their debt with worthless yen where possible and in many cases defaulting on promises made. Japan's public debt, which stands at around 230% of its gross domestic product (GDP), is the highest in the industrialized world. When Japan crumbles it will be felt across the world. 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.

This has been a long time coming and I contend the cross-border flow of money leaving Japan is one reason some 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. This means that they 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 I predict it will be the last to go.

Back to the idea that we may now have entered "the danger zone". In a silly movie promoted as a political and financial thriller  named "Rollover"  the stars played by Kris Kristofferson and Jane Fonda watch the world collapse and crash. Things have progressed since the film was made back in 1981. In the past currencies were part of a self regulating self adjusting system that was suppose to punish those guilty of economic mis-steps. Today it is questionable how well that mechanism functions, an argument could be made that it is becoming less effective due to manipulation from both central bankers and politicians alike. A word of caution, actions have consequences, and countries can still be punished through their currency.    

More and more often we seen Central Bankers forced to pull rabbits out of their hats. A couple of years ago when Mario Draghi, president of the European Central Bank gave a speech many people say that "he saved Europe."  Intervention and manipulation seems to be the flavor of the day,  making real value an outdated concept. A falling currency is a double edged sword, while it increases exports by making them less expensive it makes everything imported into a country more expensive. Like shown in the dramatic final scene of the silly film Rollover made decades ago, if people lose faith in the major currencies the system will come crashing down around our ears.

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 added 1/16/15;  More recent article concerning what is happening in the currency markets are listed below,


  1. A great post as usual. I remember the previous posts, and I get the feeling that the global "currency" is just around the corner. It seems to me that money itself is the battleground between communal enterprise (it is the common denominator for countries, nations, and groups of nations) and private enterprise ( it is also the measure for private enrichment and "wealth"). Depending on the use, it can be a source of communication or a weapon of power. In the future, I envision a dozen super-nations, each with their own exclusive currency, who trade freely with each other without translating the goods and services into monetary values. Kind of like the latest "trade" deals between Russia and Iran - oil for power stations. This would put and end to the colonization of weaker countries and give us a chance to clean up the corruption of the existing financial structure.

    Everyone is going to have accountable for their contribution to society that justifies the "reward" that they accumulate. It is absolutely criminal that one person can amass huge amounts of money for distributing drugs to addicts while another barely scrapes by working at an essential job. Political leaders who enrich themselves by inside knowledge or bribes are the lowest of the low, and their actions demean the common currency - like unruly children peeing in a swimming pool. Their punishment should be a severe example for everyone. Unfortunately, the status quot is to point the finger at other leaders in other countries and ignore the elephant right in front of us.
    Blair Hamilton

    1. Blair, it is good to hear from you. Thanks for the complement and I hope all is well.

  2. I have read that the rise in our stock market is due to all the foreign money flowing in because the U.S. is the only country worthy of investing in
    It is as if we can exist without other countries doing as well as us
    Funny I did not realize our country was so profitable
    Then again maybe we have the profits but we do not have them distributed appropriately
    Don Levit

  3. The links and resources posted by you in the blog are very useful for me but search professionals attribute a large portion of the engines' algorithms & their updates to link-based factors.
    Equity Trading Tips

  4. Interesting, but I think that there is a lot of pressure to keep the USD strong especially with Japan and Europe wanting to devalue their currencies and global turmoil increasing. I expect deflation and stock market declines while gold finds a bottom. Ultimately, I expect you will be right, but not before a major deflationary event including stock market collapse.

    1. This is what everybody is waiting for, especially for investing in stocks , but , this may never happen and we could end in hyperinflation directly

    2. Thanks for the comments. I have pondered the possibility that what we have been going through is the "major deflationary period." More and more often we seen Central Bankers forced to pull rabbits out of their hats. When 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 and how individuals fare will depend on how they are invested.

  5. Useful stuff for currency market traders. i am also doing in the same and getting best advice and calls from TheEquicom.
    forex trading tips provider in India

  6. The Equity Trading Tips that are analyzed by the market experts will be seminal for Our business. By this tips we can earn the maximum profit. Certainly a fantastic piece of work.Your blog is so captivating.Thanks for sharing.

  7. Firstly your blog Caution Alert, Currencies May Get Wild! is so good & effective, your blog has very useful information for the trader that need to update market... Forex tips

  8. A great blog about Online Forex trading . I really inspire the way you choose a suitable title Caution alert currencies may get wild.