For Whom the Currency War Tolls

Hanami celebrations under the cherry blossoms in Ueno Park, Tokyo (Photo credit: Wikipedia)

According to the South China Morning Post (“Japan stimulus will start currency war, say Chinese economists”),

“The Bank of Japan will double its monetary base to 270 trillion yen (HK$22.1 trillion) by March 2015.”

 

Doubling their monetary base?!  In just 2 years?!  That’s an average of 50% increase per year!  Ohh, the beasts!  The damn Japs are inflating the yen and starting another currency war!!  Ohh-Em-Gee!!!

 

Gold Fundamentals

Reverse of the American Buffalo gold coins (Photo credit: Wikipedia)

After eleven years of up, up, up, gold has been down, sideways, or down since it peaked at $1,900 in August of A.D. 2011.  Last week, we saw several consecutive days of gold falling between $10 and $24 per day.  On Thursday, gold fell below $1,550 and left many wondering how low gold can go.  Confidence in gold was badly shaken.

Société Générale S.A. is a French multinational bank headquartered in Paris.  It’s France’s second largest bank and the no. 8 bank in the European zone.   So it didn’t help to restore confidence in gold when Kitco News posted an article entitled “Societe Generale Sees Gold Under $1,400 By Year-End”

$1,400 gold!  Two weeks ago, I would’ve dismissed such predictions as silly.  But, last week, I began to wonder if maybe $1,400 gold was possible.

According to that article,

 

Adam Smith: The Origin and Use of Money

Profile of Adam Smith (Photo credit: Wikipedia)

Adam Smith (1723 – 1790) was a Scottish moral philosopher and a pioneer of political economics who’s best known for writing An Inquiry into the Nature and Causes of the Wealth of Nations (A.D. 1776). This book (usually abbreviated as “The Wealth of Nations”) is considered the first modern work of economics. Smith is cited as the father of modern economics and is still among the most influential thinkers in the field of economics today.

Chapter IV of Book I of The Wealth of Nations is entitled “Of the Origin and Use of Money”.  In that chapter, Smith explains that,

 

“[I]t is but a very small part of a man’s wants which the produce of his own labour can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for.  Every man thus lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society.”

However, there’s a problem with this system of barter. Suppose one man has more of a certain commodity than he can use, and another man has less.  The former would be glad to dispose of his excess; the later would be glad to buy it.  But if the latter has nothing to trade that the former needs, no exchange can be made between them.

 

Egypt Is Dying

Egyptian V (Photo credit: yamaha_gangsta)

According to the story of Exodus, Egypt suffered ten “plagues” before Pharaoh finally agreed to release the Hebrews from bondage.  Those plagues included waters becoming blood, frogs, lice, flies, diseased livestock, boils, hail, locusts, darkness, and finally, the deaths of all firstborn Egyptian children.   

That list of plagues surprises in the sense that it did not expressly include famine. The Egyptians were harassed, annoyed, and troubled—but they weren’t generally starved unto death.

However, recent events suggest that Egypt may be about to suffer an “Eleventh Plague”—famine.

Over the past 20 years or more, the US has used the fiat dollar’s status as the “world reserve currency” to export American inflation to foreign countries.  As a result, the prices of food and other commodities have been rising globally to keep up with the depreciating dollar.  As the dollar inflates (grows less valuable), foreign food prices rise, and foreign people find themselves less able to purchase food.  They begin to starve.

 

“Currency Wars” Against Whom?

Inflation & Gold (Photo credit: Paolo Camera)

When you have a “war,” it is presumably waged against a particular “enemy”.  If the governments of the world are about to engage in “currency wars,” who, pray tell, are their enemies?

Premise:  By inflating its currency and thereby lowering its currency’s value, a nation fosters its “competitiveness” in foreign markets—but simultaneously robs its domestic creditors of their savings and robs  its own working people of their standard of living. 

•  Inflation makes the fiat dollar “cheaper” and thereby benefits two primary groups:

 

Is Now The Time to Buy a New Home?

houses for sale sign (Photo credit: Images_of_Money)

Bloomberg recently reported (“Treasury Scarcity to Grow as Fed Buys 90% of New Bonds”) that, “The average interest rate on 30-year mortgages is a record low 3.31 percent.”

Record-low interest rates on mortgages certainly provide an incentive to buy new homes.  But we not only enjoy record-low interest rates, the prices of the homes have fallen by 30% or more since A.D. 2008.  Thus, today’s homebuyers enjoy both low home prices and low interest rates.  Compared to A.D. 2008, today’s home mortgages are a steal.  Hard to resist that sort of temptation.

But then, that’s the point, isn’t it?  Today’s record-low interest rates are intended to tempt us to borrow currency from the banks.

Why the temptation?  Because the economy is slow and tending to recession or worse.  Therefore, much of the public is anxious about retaining their jobs and their ability to repay whatever they borrow.  Lacking confidence in the economy and their capacity to repay loans, many people are reluctant to borrow.  Therefore, the interest rates are at record lows to tempt people to risk going into long-term debt to purchase a new home.

 

Golden Years?

 

If Pensions Fail, Retirees will be “Off Their Rockers”  (Photo credit: robinrkc)

The National Seniors Council (NSC) republished the following article (“Obama Begins Push for New National Retirement System”) after President Obama’s recent reelection:

 

 

“A recent hearing sponsored by the Treasury and Labor Departments marked the beginning of the Obama Administration’s effort to nationalize the nation’s pension system and to eliminate private retirement accounts including IRA’s and 401k plans.

“The hearing, held in the Labor Department’s main auditorium, was monitored by NSC staff and featured . . . one representative of the AFL-CIO who advocated for more government regulation over private retirement accounts and even the establishment of government-sponsored annuities to take the place of 401k plans.”

 

 

Is the Era of “Cheap Food” Over?

Combining demonstration in Little Casterton, Rutland, Great Britain. An american Case combine pulled by a Caterpillar tractor, these were used just after WW2. (Photo credit: Wikipedia)

The Sovereign Man recently posted and article entitled, “The Era Of Cheap Food Is Over” which declared in part,

“There are only a few people who get it: the era of cheap food is over.

“Global net population growth creates over 200,000 new mouths to feed ever single day. Yet supply of available farmland is diminishing each year due to development, loss of topsoil, peak production yields, and reduction in freshwater supply.

“Then there’s bonehead government policy decisions to contend with… like converting valuable grains into inefficient biofuel for automobiles. Paying farmers to NOT plant. Banning exports. Etc.

“Of course, the most destructive is monetary policy. The unmitigated expansion of the money supply has led to substantial inflation of agriculture commodities prices.

“These fundamentals overwhelmingly point to a simple trend: food prices will continue rising. And that’s the best case. The worst case is severe shortages.”

 

 

Big Government: Inflate or Die

John Maynard Keynes (Photo credit: Wikipedia)

John Maynard Keynes may be the most influential economists of the 20^th century.  In A.D. 1919, in his book The Economic Consequences of Peace, Keynes wrote:

 

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency.”

By “debauch,” Keynes referred to the process of inflation whereby a currency subtly loses purchasing power and becomes less valuable.

Keynes continued:

 

“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. – As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

By “confiscate,” Keynes meant “rob”.

 

Comin’ Home to Gold

1854 Gold Dollar, Liberty Head, Obverse (Photo credit: Wikipedia)

The Daily Reckoning Australia reports that,

 

“SOMETHING is brewing.  We don’t know what it is, but it feels ominous. . . .  we know the financial system is broken and that the market should collapse. We know you can’t solve a debt problem by increasing debt.

“Jim Rickards reckons the most likely outcome of all this is chaos. . . .  When a system of international finance comes to an end, it normally goes through a chaotic period before another system emerges.

“What will that new system be?  Rickards puts a number of options forward.  All involve something taking over from the US Dollar as the world’s reserve currency.

“The problem with the US Dollar is that it fulfills the dual role of domestic currency and international reserve asset. This gives rise to the ‘Triffin Dilemma’, named after the economist Robert Triffin. The dilemma is that the objectives of managing a domestic currency run contrary to the objectives of an international reserve asset.”

I.e., a currency can serve only one “master”.  The US dollar can serve only the people of the USA or only the people of the world.  If the dollar serves one, it must slight the other.