Make Love, Not War… echos from the hippie generation. Yet, today the world is still at war, over various things… with varied agendas being played out.
Human history shows that we don’t change that much.
The extent of damage can be huge… today we see a humanitarian crisis, something of biblical proportions similar to the Exodus, where millions of men, women and children are being uprooted from their homes and forced to take dangerous trips across borders to save themselves and live a life of peace and stability…
You’ll probably read this and sympathize with those people. Clicks and shares won’t help… sorry – but a few minutes from now, you’ll be back to your own life, as always… that’s just how we are.
I only hope you have time today to say a little prayer at least for those who are less fortunate – that their suffering will be reduced, if not ended.
Ever heard of a bloodless war?
Unlikely… but that is exactly what is going on in the world today. I was first introduced to this concept in 2010… and having read in detail the book – Currency Wars by James Rickard, all I can say is that it’s the most interesting war that is playing out in front of us today in the global financial markets.
A currency war takes place when countries start devaluing (cheapening) their currency in order to compete in the global markets. This affects not just their exports, but also their imports, particularly when it is essential as oil. And these kind of wars are slow… lasting 5 – 10 years. They arise when there is too much debt and not enough growth.
And here’s the interesting part… the U.S. was preparing for such wars way back in 1960s… yep, the sixties!
Here’s an example of what’s going on…
- Swiss ends its peg to the Euro in January 2015, causing currency traders to lose as much as 30%. Not surprising, they’re very dependent on external trade (meaning not just watches and chocolates, but also tourism).
- Chinese devalue the Yuan by 2% in an unannounced move in August 2015, markets get jittery – especially the U.S. and the world goes into a cliff hanger mode… hang on, we’re still here!
What really takes place when a currency war goes on?
When you have a strong currency, and when disaster strikes, all the world’s currencies convert to that stronger currency as a safe bet (which is usually the world reserve currency, and in today’s world – that’s the U.S. Dollar) and making it stronger. Unfortunately, this impacts that countries exports as they become more expensive.
And that’s only the start of the issue. You see the Federal Reserve (let me remind you, is a private institution) wants inflation of around 2%, but currency wars cause deflation.
If the Fed increases interest rates (which is its tool of choice) – the theory is that it will cause the economy to tank (and with that the markets) initially – because it will attract more dollars (when interest rates are near zero on dollar denominated accounts) and thus cause the dollar to strengthen further (as more and more people convert to dollar).
If the Fed doesn’t increase the interest rates, it will lose credibility as its been saying for a while that it will when certain targets are met…
So you see, the Fed is stuck – damned if they do, damned if they don’t.
But according to Deutsche Bank, the Fed could be preparing for a controlled demolition of the market, meaning that you could see a 20% – 40% drop in the markets, if the rate hike is announced this September, the first since June 2006. And in the words‘ of the World Bank’s chief economist Kaushik Basu:
… a Fed decision to raise its policy rate next week, for the first time since 2006, would have negative consequences.
So what would happen, the emerging markets would have capital outflows because all that institutional money is borrowed and it’s time to repay back, and where would all this money go?
Well, what’s the first thing you do at a foreign currency exchange, you convert your currency into your home (‘safer in your eyes’) currency – in this case the U.S. Dollar, strengthening it even further as more and more institutions convert back, ultimately making the U.S. even less competitive on a global scale because of a stronger currency. Perhaps, this is what the Fed wants!? What if the markets could be pushed higher before this announcement – it justifies a rate increase right?
And if you’ve heard about my G.O.D Theory – you’ll understand that the other player in this market is China who has to balance its own books. You see, one one side China loves the deflation (a strengthening U.S. Dollar) – because it can acquire assets and more specifically gold (which is relatively cheaper) with the massive foreign exchange reserves it has (about $4 trillion in dollar terms). If U.S. Dollar started to weaken or you see inflation, China would be ok because it has just enough Gold to counteract the weakening dollar. In my books, that’s a perfect hedge – not one they’re talking about publicly. What James (Jim) Rickards is saying is that you could see gold suddenly shoot up to $5,000 or $10,000 an ounce – I on the other hand, would be glad to see it at $3,000 as fair value.
Back home in the Middle East, particularly the GCC…
The Gulf Cooperation Council (GCC) is pegged to the U.S. dollar (in hopes of a stable system) – the most notable amongst these are Saudi, Bahrain, UAE and Qatar. Kuwait however, took a different turn – in June 2007, it went against the tide and depegged and created a basket of currencies to balance against.
When a country pegs its currency to another country (and in this case the U.S. Dollar) – it gives its monetary policy to the other country to manage, and also when things go against the U.S. Dollar – the pegged country also suffers. Today, the GCC countries are primarily oil & gas exporting (it forms over 50% of these countries GDP) – so with oil prices taking a beating – you need not ask what’s happening!
What does this mean for you and what can you do?
In war, there are winners and losers. What can you do to diversify your currency portfolio… do you keep everything in dollars (or the pegged currency) or convert them to your home currency?
Which currency will win, and which will lose is a guess. Whilst Jim Rickards is suggesting Euro, Martin Armstrong is saying that the Euro will ultimately collapse. So where do you park your money?
For now, let me leave you with this video interview with Jim Rickards… its 30 minutes, but worth watching… to help you start the process of deciding.
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