Currency Warts and All

LFT“Every war has its main fronts and its romantic and often bloody sideshows,” Jim Rickards writes, kicking off Episode Three of Currency Wars Week.

“World War II was the greatest and most expansive military conflict in history. The U.S. perspective on World War II is neatly divided into Europe and the Pacific, while a Japanese perspective would encompass an imperial empire stretching from Burma to an overextended attack at Pearl Harbor. The English, it seems, fought everywhere at once.

“So it is with currency wars. The main battle lines being drawn are a dollar-yuan theater across the Pacific, a dollar-euro theater across the Atlantic and a euro-yuan theater in the Eurasian landmass.

“These battles are real but the geographical designations are metaphorical. The fact is, currency wars are fought globally in all major financial centers at once, twenty-four hours per day, by bankers, traders, politicians and automated systems — and the fate of economies and their affected citizens hang in the balance.”

LFTThere are three players we’ll focus on today. That they’re the main focus of this particular currency conflict won’t surprise you…

Jim explains: “Three supercurrencies — the dollar, the euro and the yuan — issued by the three largest economies in the world — the United States, the European Union and the People’s Republic of China — are the superpowers in a new currency war, Currency War III, which began in 2010 as a consequence of the 2007 depression and whose dimensions and consequences are just now coming into focus.”

This is, as mentioned yesterday, the world’s third currency war in less than a century. But this one smells different than those that came and went in the past. Jim goes on:

“Today the risk is not just of devaluation of one currency against another or a rise in the price of gold. Today the risk is the collapse of the monetary system itself — a loss of confidence in paper currencies and a massive flight to hard assets. Given these risks of catastrophic failure, Currency War III may be the last currency war — or, to paraphrase Woodrow Wilson, the war to end all currency wars.”

In today’s episode, you’ll learn all about the latest skirmishes in Currency War III. You’ll understand why nations find devaluation irresistible. And you’ll see how you can protect your retirement savings from the fallout. All that and much more to come as Currency Wars Week progresses.

LFTThe last major financial cannonball was shot by Japan.

“The bank’s existing measures, a ‘different dimension’ of easing from past efforts, were already daringly bold,” said The Economist last October. “Now it will swell Japan’s monetary base at an even faster pace, by around ¥80 trillion ($712 billion) each year, up from ¥60 trillion-70 trillion currently.”

If Yellen is over here flying Delta, the Japanese central bank just flung itself into space to catch up with the Voyager 1.

foreign bank chart

And since Japan’s move, at least 25 central banks — including the ECB — have cut interest rates and used other tactics in an effort to weaken their currencies. It’s now a race to the basement.

Here’s a timeline of what the bigger players have been up to…

US Dollar Index Chart
Click to enlarge
Courtesy of Star Graphics

And courtesy of Phoenix Capital Research, here are the desperate times calling:

ONE: “In Japan, the Bank of Japan’s policies are demolishing the Middle Class. The number of Japanese living on welfare just hit a record and real earnings and household spending have been in a free fall since the middle of 2014.”

TWO: “In Europe, the ECB’s President Mario Draghi has admitted in parliament that he was concerned about a “deflationary death spiral” and admitted that QE was the last tool left. Half of the ECB’s Board is against his direction.”

THREE: “In the US, the Fed is now being targeted by Congress. Legislation has been introduced to audit the Fed AND force it to abide by the Taylor Rule.”

That’ll be the day.

As Japan and the Eurozone throw in their bets, China is counting its chips with one eyeball and the other is glued to the table. Everyone else is keeping a close watch on the Fed and Yellen. Will the Fed raise interest rates? What happens if it does? (We’ll get into that discussion in tomorrow’s episode.)

OK. Let’s bring it down to Earth. Yesterday, you learned how the individual is affected by the currency wars.

LFTNow, let’s go bigger: How do currency wars affect an entire nation? And why is killing your own currency so attractive to nations in distress?

“An example makes the point,” says Jim: “Assume a German car is priced in euros at €30,000. Further assume that €1 = $1.40. This means that the dollar price of the German car is $42,000 (i.e., €30,000 × $1.40/€1 = $42,000).

“Next assume the euro declines to $1.10. Now the same €30,000 car when priced in dollars will cost only $33,000 (i.e., €30,000 × $1.10/€1 = $33,000). This drop in the dollar price from $42,000 to $33,000 means that the car will be much more attractive to U.S. buyers and will sell correspondingly more units. The revenue to the German manufacturer of €30,000 per car is the same in both cases. Through the devaluation of the euro, the German auto company can sell more cars in the United States with no drop in the euro price per car. This will increase the German GDP and create jobs in Germany to keep up with the demand for new cars in the United States.”

What this does is steals purchasing power from the end user so the big fish can sell BMWs to Japanese twenty-somethings.

“Imagine this dynamic applied not just to Germany but also to France, Italy, Belgium and other countries using the euro. Imagine the impact not just on automobiles but also French wine, Italian fashion and Belgian chocolates.”

Not just that, think about the effects on intangible products. Or travel even: “A decline in the dollar value of a euro from $1.40 to $1.10 can lower the price of a €100 dinner in Paris from $140 to $110 and make it more affordable for U.S. visitors.”

Now think about all the tangible and intangible goods and services all across Europe.

“Take the impact of a decline in the dollar value of the euro of this magnitude and apply it to all tangible and intangible traded goods and services as well as tourism spread over the entire continent of Europe, and one begins to see the extent to which devaluation can be a powerful engine of growth, job creation and profitability. The lure of currency devaluation in a difficult economic environment can seem irresistible.”

But the currency warrior doesn’t engage in such behavior without risk…

LFT“A prospective currency warrior,” Jim goes on, “always faces the law of unintended consequences.

“Assume that a currency devaluation, such as one in Europe, succeeds in its intended purpose and European goods are cheaper to the world and exports become a significant contributor to growth as a result.

“That may be fine for Europe, but over time manufacturing in other countries may begin to suffer from lost markets leading to plant closures, layoffs, bankruptcy and recession. The wider recession may lead to declining sales by Europeans as well, not because of the exchange rate, but because foreign workers can no longer afford to buy Europe’s exports even at the cheaper prices. This kind of global depressing effect of currency wars may take longer to evolve, but may be the most pernicious effect of all. So currency devaluation as a path to increased exports is not a simple matter.

“It may lead to higher input costs, competitive devaluations, tariffs, embargoes and global recession sooner rather than later. Given these adverse outcomes and unintended consequences, one wonders why currency wars begin at all. They are mutually destructive while they last and impossible to win in the end.”


OK. Now you want to know: how can you protect yourself?

The first threat to your savings is the indirect value of the U.S. dollar…

Let’s take an example. Let’s say you want to buy a new car. You’ve been saving up for months. And since Japan has flipped on the monetary machine, you’ve noticed that Toyota you like is far cheaper than usual.

This is great. You’re happy. You’re getting a deal. That is, until you go to trade your car in. Since the market value of Japanese tangible goods have decreased, it’s also decreased the value of your tangible goods in the U.S. The price benefits of your assets are reduced as a result of another nation’s — in this case Japan’s — economic policy.

You are forced to discount your assets due to Japan’s monetary policy.

Yes, it’s unfair. But fortunately, there are things you can do.

So how do you protect yourself? With both defensive and offensive strategies.

First, you can turn toward tangible assets. Oil, gold and other hard assets will keep your wealth protected if Currency War III ends in disaster. Also, tangible assets aren’t, in the end, dependent upon the currency value. They are intrinsically valuable. Seems obvious, but many people don’t understand this simple distinction. So if the U.S. dollar flies off the radar, the value will remain. That’s your defensive strategy.

And on the offense, you can claim your copy of The Currency War Trader’s Handbook.

LFT“Only one in 100 (or about 1%) readers,” Peter Coyne writes, “will able to get their free copy of The Currency War Trader’s Handbook at this time.”

Unfortunately, Jim and Peter have put a cap on how many readers can gain access to the Currency War Trader’s Handbook and Jim’s unique insights each month.

Currency War Trader Handbook
Click the book for a sneak peek

Going forward, central banks will continue to engage with one another. They’ll continue to fight over your purchasing power. This means more surprises and more volatility. Hold onto your seat. It could get nasty.

That’s why you’re going to want Jim Rickards by your side. His Currency Wars Trader’s Handbook won’t just show you how to protect yourself from currency manipulators…

It’ll also show you how to profit from gains 100 times (or more) higher than you’ll get from passively or actively trading on the stock market.

Click here to claim your Currency War Trader’s Handbook now.

I’ll talk to you tomorrow,

Chris Campbell

Chris Campbell

Written By Chris Campbell

Chris Campbell is the Managing editor of Laissez Faire Today. Before joining Agora Financial, he was a researcher and contributor to