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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  • Chris P. Bacon

    Mike, this sounds horrible. Almost makes me feel guilty about what a great day i had today. Almost.

    cpb- Living in a state of Gratitude.

    • http://granitegrok.com/author/mike Mike Rogers

      This is a case of we hope the central banks wake up before all trust in the monetary system is gone. If you read the longer article, or follow he reference
      Inks, we are on the edge of the abyss, and if is a gravity-defying miracle that the world still wants dollars.
      Most people can’t comprehend Weimar Germany, or modern day Zimbabwe, but a few more people have traveled regularly to Latin America. I did so a great deal n the 80s and 90s, and inflation was rampant, with hyperinflation unusually going on in one or two countries at any given time. Brazil reset it’s currency by a factor of 1000 at least twice during this time, in order to try to get a handle on the problem.

      Like the stock markets, fiat currency operates largely on psychology – if the world doesn’t believe it’s sound, it can collapse without warning

      Venezuela is the poster boy for the ill effects of socialist mismanagement: falling
      production, shortages of staples, big trade deficits, and a collapsing currency. Until this weekend, the Boliar was pegged at 4.3 to the dollar, and as a result nobody could get dollars to pay for imports, including food. The government’s devaluation to 6.3 was a belated bow to reality, but the black market tells the story, where it takes 18-20 Bolivars to buy one dollar!

      My hope is that more citizens will demand real responsibility from our elected representatives, before the dollar loses the sacred trust which supports it.

      • C. dog e. doG

        So Mike –
        Given placing faith and hope in politicians is a fool’s gold errand, what looks like the best hedge at this point? And yes, I wish I listened to that crazy old coot Glen Beck a few years back and converted to a weighty portable property then. But thems’ da breaks. So, rocks, papers, or scissors?
        – C. dog reduced to child games to stake his future to the ephemeral flights of man’s fantasies

        • granitegrok

          “weighty portable property” – if only to have it rest a bit with some other like minded folks here in New Hamsterdam…..

          • C. dog e. doG

            Try this on for size:
            1. A free port of call along the eastern seaboard – à la Hong Kong – right here in New Hamsterdam’s very own Portsmouth.
            2. A highly armed and regulated militia to protect same.
            3. Draw bridges to VertMonte
            4. Revolving doors to MA-MA Land to sell tax free hootch, cigs, etc.
            5. Free transportation (one-way) to adjoining LibLands for all moon bats – Liberatti must pay for their own lib-limo service (sorry Magpie and Generalissimo Kuster, you’ll have to dip into your own purse this time)
            6. Duty free import, storage, and use of “weighty portable property”
            7. Option for human chattel occupying adjoining geography to join the party, e.g. those along the northern bank of MA-MA Land along the mighty mighty Merrimack, Southwestern section of Maine along some semblance of a sensible border.

            Hey, if it can work in China for over a hundred years, why not in the Land of the Free and the Depraved?
            – C. dog barking out loud

          • http://granitegrok.com/author/mike Mike Rogers

            You know, I often wondered about some small area, like the whole state of Rhode Island, declaring itself a genuine free trade zone, but I like the idea of doing it here much more. Let us draw up plans and put it to a referendum – see how many capitalists NH really has. Perhaps raw capitalism might even encourage the Baconator to become a Free-Stater?

        • http://granitegrok.com/author/mike Mike Rogers

          (This comment previously eaten by Disqus email processor, so manually posted)

          Yeah, I also wish I’d switched to gold when Glen Beck first said trouble was coming.

          The problem with fiscal crises such as we face is not pointing out the fundamental flaws with the system, but accurately predicting when a convergence of conditions will make the flaws obvious to all – until then, the great and powerful Oz lumbers on.

          Being a perma-bear is easy; being a true prophet is hard – that is why people tend to ignore perma-bears, even if they are fundamentally correct.

          I cannot be sure that trouble is coming, but a combination of Hubris, Fatal conceit, and Evil intent clings to Washnington and especially the White House like a sickly miasma, a choking Kultursmog, and thus the acceleration of danger signals is becoming evident – will confidence crack? That is the $64,000,000,000,000,000,000,000,000,000……. question.

          Easily fungible commodities and good preparation are your best bets. Don’t go nuts, but stock up on things you can consume or barter, and are not perishable. A good toolbox and barterable skills don’t hurt, either.

          As for Rocks/Paper/Scissors? I think Paper=>Silver, Scissors=>Guns, Rocks=>bullets.

          Time to become a cross between a dog and a squirrel, and have a well stocked and fortified kennel ;)

          Bonjour, M’sieu c. écureuil!

          • C. dog e. doG

            Almost got the magic decoder ring award:
            • Rocks = valuable minerals
            • Paper = stocks, bonds, and other paper insecurities
            • Scissors = various personnel protection devices; guns, bows, …
            – C. dog learnin’ to grow and ferment his own

        • Chris P. Bacon

          would you actually have recieved such property?, or a certificate saying some has it for yee?

          • http://granitegrok.com/author/mike Mike Rogers

            in troubled times, a certificate is of questionable worth, but weighty property is a tempting target – depends what kind of breakdown you are preparing for.

          • Chris P. Bacon

            i just want one where we can shoot people……with the swords Jesus said we should buy from selling our garments.

            cpb- luvs him some Patriot Preacher

          • C. dog e. doG

            When the Shi-ites hit the fan, certificates of minerals and other deposits will be worth their value in toilet paper. So, on the brite side of life, we got that goin’ fer us.
            – C. dog

        • http://granitegrok.com/author/mike Mike Rogers

          Yeah, I also wish I’d switched to gold when Glen Beck first said trouble was coming.

          The problem with fiscal crises such as we face is not pointing out
          the fundamental flaws with the system, but accurately predicting when a convergence of conditions will make the flaws obvious to all -
          until then, the great and powerful Oz lumbers on.
          Being a perma-bear is easy; being a true prophet is hard – that is
          why people tend to ignore perma-bears, even if they are fundamentally correct. I cannot be sure that trouble is coming, but a combination of Hubris, Fatal conceit, and Evil intent clings to Washnington and especially the White House like a sickly miasma, a choking Kultursmog, and thus the acceleration of danger signals is becoming evident – will confidence crack? That is the $64,000,000,000,000,000,000,000,000,000……. question.

          Easily fungible commodities and good preparation are your best bets. Don’t go nuts, but stock up on things you can consume or barter, and are not perishable. A good toolbox and barterable skills don’t hurt, either. As for Rocks/Paper/Scissors? I think Paper=>Silver, Scissors=>Guns, Rocks=>bullets.

          Time to become a cross between a dog and a squirrel, and have a well stocked and fortified kennel ;)

          Bonjour, M’sieu c. écureuil!

    • http://granitegrok.com/author/mike Mike Rogers

      By the way, I hope you have many more great days, just as I hope, by doing my bit to put pressure on the political class, that America continues to have many great days ahead.

      As I noted, very few remember Weimar Germany, and few have bothered to learn about the tragedy of Zimbabwe, but Brazil is not quite so far from home. From WW2 until 1994, when they adopted fiscal responsibility as a policy (shock), Brazil suffered rampant inflation, hyper at times, and I personally witnessed at least twice the renaming of the currency and the removal of three zeros from the notes, but even I was shocked at the total decline:

      “At its introduction [in 1994, the new] real was worth exactly one U.S. dollar. Combined with all previous currency changes in the country’s history, this reform made the new real equal to 2.75 x 10^18 (2.75 quintillions) of Brazil’s original “réis”.

      2.75 Quintillion times devaluation in 50 years – kind of makes the 25x devaluation by our Fed in 100 years look kind of tame, doesn’t it, but this is what can happen when a currency comes unglued from reality!

      • Chris P. Bacon

        This is what i figuere Mike. In a post apocolytic world that is surely coming (so people have said since the begining of said world) i think the people that survive will be the ones that have a skill that is useful to everyone else. I remember when Survivor came out. i had TV back then and watched it (the only Survivor i watched) I knew the fat flag was gonna win because he caught fish and provided for others plus he walked around naked, making everyone else feel less bad about themselves.

        For me, i am learning about CPR and EMS techniques and have recently gotten involved in a medical device that helps so many conditions. Also my knowledge of farming and aquaponics will make me useful. Tons of guns is good so you can form roving gangs to rob from those that have something like all the Mormon Preppers out here in AZ, but of course they are armed to the teeth.

        I am a commercial GC in Scottsdale and will soon be building “Catastrophe Shelters” underground for all the chicken littles. I figuere if everyone else is making bucco bucks of all this fear i might as well cash in too.

        cpb- another good day.

        • http://granitegrok.com/author/mike Mike Rogers

          Guns could be used for roving bands, and that is one fear which drives good neighbors to vow to stick together and support each other.

          Better to be prepared than unprepared, and better yet to be able to defend what you have prepared. Shooting of looters is a necessary evil to prevent partial breakdown becoming total breakdown.

        • C. dog e. doG

          You craven capitalist! Repent your ways, sinner. Send all profits to:
          Save the C. dog
          c/o White Mtn Kennel Club
          Freecandid, New Hamster

    • C. dog e. doG

      I thought you hate snow. Did your magic vapo-rizer show up so you went chasing horses into the crAZy dessert again? You need to get seriously miserable like us flinty New Hampsters, mister.
      – C. dog seeking gratitude in a foot of untracked powdah

      • Chris P. Bacon

        Gettin another 6 inches right now!! we are only sposed to get 6 inches a year!! This year we gots well over a foot so far.

        Luckily it will be in the high 50′s and low 60′s in another week!!

        • C. dog e. doG

          Luckily, luckily you say? You should be descending down Apache Mtn, pronto, tonto!
          – C. dog

          • Chris P. Bacon

            Speaking of Vapor, i have to tell you, that thing is awesome. No headache, no polyester mouth, no burning throat or lungs, and it is just enough effect to take the edge off, maybe like a pint of hard cider. Love it!! My 70 something parnets in laws want one and are taking it back to the fuddy dud farm where many of the old timers are getting their “green” cards and actually growing their own in their RVs. ( a fuddy dud farm is 100 acres or so of Canadians and other cold weather “snow birds” who come down here for the miserable 6 months back where their from).

          • C. dog e. doG

            How often do you guys water the fuddy duddies? I still prefer my hard cider – keeps the Federalés and Statey’s away, though I am darkly attracted to the prospects for Hamster moonshine.
            – C. dog

          • Chris P. Bacon

            only in Hollyweird would they name the Lone Rangers side kick “Tonto”, which means stupid in Spanish. Course now with all the PC the show wouldn’t even make it to the network cuz of that.

            Almost as good as GM releasing a Nova in Spanish speaking countires, as “no va” in Spanish means won’t go. Appropriate for a GM product i must say.

          • C. dog e. doG

            I blow gas in your general direction, you silly silly English man – which is what “tonto hombre” means according to my google tower-of-babble discombobulator.
            – C. dog se souviens

  • http://www.facebook.com/george.zeiter George Zeiter

    Skeets Owebama is doing this deliberately.

    • http://granitegrok.com/author/mike Mike Rogers

      If Helicopter Ben stopped printing and buying the government’s debt, Washington would come to a screeching halt, and BarryO would have to face reality.
      The trouble is that Bernanke is complicit in the problem.

      • Chris P. Bacon

        Their just doing what there told. Blaming O and B for things is like blaming…actually i can’t think of anything right now.

  • Sam Adams

    next they will say we need a one world currency, world bank will run it, and un will rule the world. un small arms treaty to stop all wars, no private land, and free food for all. One Big Happy world?

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