The Spiral Begins – Competitive Devaluation, AKA Currency Wars

by Mike

Updated and bumped: Less than 24 hours after we brought you this warning, we read that The world’s biggest banks are begging the leaders of the G20 nations to avoid a currency war. From The Blaze:

Currency Spiral Ahead?

Currency Spiral Ahead?
(Graphic – Pravda)

The world’s biggest banks on Monday begged the Group of 20 economic powers to work together to avoid a clash of currencies, further evidence that fear of an impending “currency war” (i.e. competitive devaluation) is not merely something dreamed up by “wingnut” circles.

Representing more than 470 financial firms, the Institute of International Finance warned that global addiction to “quantitative easing” (money-printing) could lead to “possible discord on exchange rates” and put a strain on international relationships.

In a supreme irony, the letter was sent to the Russian finance minister, who will chair the G20 meeting, only a few weeks after the head of Russia’s central bank had issued a warning on this exact topic. (Corroboration from CNNmoney.)

A few weeks ago, we warned that alarm signals were flashing for the Dollar, and for World currency markets.

In that article, I talked about how US monetary easing is causing problems for our trading partners, because they have the choice of allowing their goods to become more expensive here, or to inflate their own currencies to match. We accuse China of being a currency manipulator because they buy our bonds and as last resort print Yuan/Renminbi in order to manage the rise of their currency, but they aren’t the ones with the worst problem.

US Dollars per Yen

US Dollars per Yen

Remember Japan’s TWO lost decades of monetary easing and low to no growth? Well, four years ago, a dollar could buy about 110 Yen, but by the end of 2012, that was less than 80 Yen for one dollar, because, for all their problems, Japan was considered a safe haven for investment. That rise in the Yen of about 40% continued until Shinzo Abe became Prime Minister late last year – he made it clear that his goal was to push inflation to 2%, and threatened to revoke the independence of Japan’s central bank if they did not print enough Yen to reach his goal – note how the graph suddenly plummets.

Russia recently warned the USA and the world about the dangers of a ‘beggar thy neighbor’ currency war, where every country tries to import inflation to get a temporary boost in economic activity at the expense of the others, who then chase each other in an accelerating devaluation race to the bottom.

If that sounds bad enough, you can count on Hugo Chavez to take it to the next level by bringing a nuke to a financial knife fight – ZeroHedge has the story:

While the rest of the developed world is scrambling here and there, politely prodding its central bankers to destroy their relative currencies, all the while naming said devaluation assorted names, “quantitative easing” being the most popular, here comes Venezuela and shows the banana republics of the developed world what lobbing a nuclear bomb into a currency war knife fight looks like:

VENEZUELA DEVALUES FROM 4.30 TO 6.30 BOLIVARS (per Dollar)

Somehow, you are reading this and thinking “a competitive spiral can’t end well”, and you’d be in good company. Remember earlier, I introduced you to James Rickards, who studied potential currency war scenarios? Well he thinks the spiral will end in the collapse of the Global Monetary System (MoneyNews):

Buy the book, and experience currency war gaming

Buy the book, and experience currency war gaming

The world already has entered a currency war that began in 2010 on the heels of the Federal Reserve’s massive easing program, he tells Wall Street Journal Digital Network. Since then, plenty of nations have joined in, including Brazil, Switzerland and Japan, says Rickards, author of “Currency Wars: The Making of the Next Global Crisis.”

“All major central banks are easing,” he says. “Eventually so much money will be printed that this will lead to inflation. The endgame is collapse of the international monetary system — sometime sooner than later.”

Alarm signals flashing? Perish the thought!

Alarm signals flashing?
Perish the thought!

Couple that with defensive moves by Russia, China, and Germany to build up their gold reserves, and all the ingredients are in place for a big shift in global currency markets, or even the replacement of the Dollar as the global reserve currency.

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