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The worldwide
currency debasement war has now entered a new and more deadly phase. Central
banks have escalated the combat plan to bring about the world's weakest
currency for their individual countries. On the heels of the Federal Reserve
and European Central Bank's promises of unlimited counterfeiting forever, the
Bank of Japan announced last week that it would expand its purchase of
Japanese Government Bonds (and other assets including equities) by 10
trillion Yen. This brings the latest round of BOJ intervention to a total of
80 trillion Yen!
The sad fact
is that the developed world's central banks are in a desperate battle of
one-upmanship. The ill-founded goal is to wreck their currency's value in
relationship to other fiat currencies in order to boost manufacturing and
stimulate economic growth. But once again these central bankers have their
economics backwards.
A weak
currency that is caused by printing money cannot create a more competitive
market for a country's exports because it increases the cost of goods sold in
terms of the domestic currency. Central banks reduce the value of their
currency by lowering interest rates and boosting the money supply. This
causes aggregate prices to rise, especially on manufactured goods that are a
key component of exports. While it is true that foreign currencies will have
a more favorable exchange rate, the price of domestic goods and services will
have increased in commensurate fashion--thus, offsetting the change in
currency valuations. Therefore, there is no improvement in the balance of
trade and no improvement in economic growth from competitive currency
devaluation.
For example,
the U.S. dollar peaked at 160 on the Dollar Index back in 1985--the USD Index
is comprised from a basket of our 6 largest trading partners. This index has
lost 50% of its value since that time and stands at just 79 today. According
to the economics of today's central bankers, this should have engendered a
U.S. manufacturing renaissance, a huge trade surplus and a vibrant economy.
However, the U.S. economy has been mired in anemic growth for years. The
trade deficit has been a chronic problem for decades and was $559 billion
last year alone. And manufacturing as a percentage of the economy has dropped
from 18% in 1985, to just 12% today.
You just
cannot ignore the fact that governments and central banks are engaged in a
global currency war. But we already know who the losers are in this battle;
they will be the middle classes and the economies of the developed world.
There will be no sustained economic growth until they make peace with their
currencies and put aside the notion that prosperity can come from inflation.
The
foundation for strong economic growth comes from having competitive tax
rates, limited regulations, attractive labor costs, stable interest rates, a
low debt to GDP ratio, price stability and a sound currency. By actively
destroying a currencies purchasing power, money printers work against all
those principles. Until those in charge of fiat currencies reach that
epiphany, the only winners will be those that can afford to place a
significant portion of their investments in hard assets.
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