The Sounding Line recently ran an article about how Stanley Druckenmiller, who made his name on highly successful currency trades including ‘breaking’ the Bank of England, says that he expects the U.S. Dollar to lose reserve currency status within 15 years due to a “totally inappropriate” combination of radical monetary and fiscal stimulus. Many people agree with him, the big question is how soon a major adjustment will take place. Clearly, 15 years is not tomorrow and it is difficult to look out that far.
I contend that currencies have been trading in a hyper-manipulated state for several years. Fiat money tends to create a shelter from volatility. This is because once wealth is placed into this rather closed system, it tends to remain there. After all, laws and rules discourage it from breaking free. It is the coordinated collusion of the major central banks that have allowed this charade to exist. The fact it has not been recognized or acknowledged does not alter or guarantee the system will continue. The failure or major repricing of any of the world's four major reserve currencies will destroy the myth that major currencies are immune to the fate that has haunted fiat money throughout history.
Over the years countries have become
very adept at coordinating economic policy, currency swaps are only one of the
tools they use, another has been to invest in stocks.
This means over the last few years central
bankers have developed more tools to manipulate currencies and keep them trading in a narrow
range that will not rock the boat.
When the dollar began to soar back in late 2014, fear began to rise and
concerns grew 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. This allowed Fed Chairman
Powell to pursue a course that weakened the dollar and in doing so the Fed propped up markets across the world.
|Central Bank Balances Have Exploded|
History shows huge currency fluctuations tend to destabilize markets. The one thing the global economy doesn't need right now with all the uncertainty that is currently floating around is an unstable currency market. We must remember that in our modern financial system, capital can sneak and flow out of the country faster than its government can create new ways to bolster the currency.
As far as the idea that China and its cohorts will succeed in destroying the dollar by reducing
their holdings of U.S. Treasuries in order to support the yuan, their ability to carry out such a scheme is questionable. 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 by markets are like a double-edged sword that
cut both ways. China will find that if the dollar falls much they will hear more calls to
place duties and tariffs on their exports to America in an effort to reduce the trade deficit.
|Currency Swaps Creates Illusion Of Stability|
Refrain from calling me Captain Obvious when declaring that currencies are trading in a false paradigm and
investors should get ready for a rude awakening when currency values shift. 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 many investors have been given, and
accepted, the notion that a major currency cannot fail or collapse. This fallacy will only
become more apparent as concern over the future of both the yen and the
euro becomes more of an issue. Both these currencies have major
problems going forward. 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 fact countries and areas face different growth paths is a problem that has haunted currency unions for centuries. Competitiveness and productivity developing at different paces lead to a shifting of wealth and large imbalances in growth 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 varying 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 the American system.
While in the United States a no-bailout policy of crisis-hit states that had been enacted decades ago remains, our "inter-system wealth transfers" has contributed that "special something" the Euro-zone lacks. Inequality has a way of growing and must be addressed early. After a certain point, it becomes too late to implement a system that transfers wealth from the most prosperous to the most needy regions of the economy because some people 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.
As stated earlier in this article, the other major fiat currencies stand as miserable alternatives to the dollar. A major cause of the
Euro-zone problem is growing inequality among its members. This is exacerbated by
the lack of system-wide bank protection which causes money and wealth
to flee the weaker countries and their failing banks. These problems give credence to the possibility that the euro is on its way to the dustbin. It could be argued that the reason the euro has fared so well recently is
that investors have sold dollars and bought euros to buy assets in
the EU because prices are so high in the US. Buying "cheap assets" in the EU does
not translate into the idea America is rapidly falling apart or that the EU has suddenly resolved any of its many problems, it merely says American assets are way overvalued.
Japan faces an
entirely different problem while its national debt is an issue for the
central banks that issue both currencies. Japan's debt is massive and the country faces a demographic crisis that leaves it forced to
support a population comprised of citizens far too old to work. This is a reason to think the yen 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, its death will be fast, and swift. For decades Japan has benefited greatly from China's growth but that may come to an end.
We must not
underestimate the advantage the dollar has as the world's reserve
currency or the size of debt floating across the globe comprised of
dollar based-agreements. This means when all is said and done, people and companies must buy dollars to settle these debts. 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.
Footnote; If you have read the above article in its entirety I urge you to not nitpick or respond with a knee-jerk reaction. To say this is a complex issue is an understatement and I would be interested in your thoughts. I recognize those interested in pursuing a New World Order will gladly throw any country under the bus if it promotes their agenda. Still, regardless of the games being played in the background, shifting currency values remain are a big deal.
(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)