The Great Money Caper

Several weeks ago we alerted you to the burgeoning currency wars and the new age of desperation.  If you recall, nations, in unison, are attempting to export their way to prosperity by killing their currencies.  Unfortunately, if everyone’s doing it, the competitive advantage of cheap exports quickly disappears.

Still, it appears the world is heading down this path of insanity.  In fact, last week brought forth new evidence that nations are preparing for the ultimate race to the bottom…

“Shinzo Abe, Japan’s prime minister, has used the phrase “regime change” to describe his hopes for a new mindset at the Bank of Japan (BoJ),” explains The Economist.  “His wish may be granted sooner than expected.  On February 5th Masaaki Shirakawa, the bank’s governor, announced his decision to step down almost three weeks early, on March 19th.”

Abe wants aggressive monetary easing (i.e. money printing) and a weak yen.  He believes his economic policies, which are being called “Abenomics”, will boost exports and pull Japan’s economy out of a two decade slump.  Will it work?

Who knows.  But what we do know is these types of financial shenanigans never quite play out as intended.  They bring about distortions, malinvestments, and destructive financial bubbles in unexpected and unwanted places.  Nonetheless, it looks like we’ll get to see the great Abenomics experiment in action…

Tomato Currencies

“It is virtually a given that whoever takes over in coming weeks as head of the Bank of Japan will pursue monetary easing with more vigor than outgoing governor Masaaki Shirakawa,” says Reuters.  “Having cut interest rates almost to zero, the BOJ has adopted policies that inject cash into the economy.

“At stake is how far the new BOJ chief will be prepared to push the central bank into untested policy waters in answer [to] Abe’s call for an all-out assault to break Japan out of years of grinding deflation and its fourth recession since 2000.”

Here at the Economic Prism we’d jump at the opportunity to buy a brand new Lexus for $15,000.  Heck, at that price we’d even buy two.  However, we doubt this opportunity will never come to be.

What Abe doesn’t care to appreciate is that the world is not a static place.  It’s dynamic.  The reason a Lexus will never sell for $15,000 is because as the Bank of Japan devalues the yen the Federal Reserve will devalue the dollar.  Obviously the devaluation won’t be entirely in concert.  There will be periods where one currency gets ahead of another…over the past three months the yen’s fallen 15 percent against the dollar.

But, over time, competitive currency devaluations will balance out.  Of consequence, however, the savings of each country’s citizens will quickly lose value when priced against commodities and assets that cannot be printed into existence.  The rapid value loss of currencies will be like the rapid value loss that occurs when a tomato goes from ripe to rot.  One day a tomato has value…the next day you can’t get rid of it fast enough.

The Great Money Caper

To further confound things, are the numerous participants in these antics.  Remember, it’s not just the Federal Reserve and the Bank of Japan that are engaged in monetary war games.  The European Central Bank, the Bank of England, and the People’s Bank of China – among others – are all arming up.

Just last week, European Central Bank President Mario Draghi, opened his mouth and talked down the value of the euro.  But that’s nothing…

Over in the United Kingdom, the Bank of England’s contracted the help of a Canadian to do its dirty work.  No kidding.  Later this year, Mark Carney, the Governor of the Bank of Canada, will become “the first foreigner to run the Bank of England in its 318-year history.”  He advocates, “moving opportunistically to a higher inflation target.”

Then there’s the People’s Bank of China.  They’re master interveners in global currency markets.  They’ve even coopted Chinese corporations to run interference of them.  Just last Friday, for instance, Chinese businesses bought the dollar forcing the Chinese yuan down in value.  From what we gather, the People’s Bank of China was behind the purchases.

Here in the United States, the Federal Reserve’s an ardent offender.  After adding $3 trillion to the nation’s monetary base over the last four years, the Fed’s on track to add another $1 trillion to its balance sheet just this year.  What’s more, they won’t stop cheapening the dollar until the unemployment rate falls to 6.5 percent.

As you can see, across the planet, money – including your money – is under attack.  Central banks are going all in…  The great money caper is upon us.

Sincerely,

MN Gordon
for Economic Prism

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