Nobody ever really wins at Thumb Wars, which makes the whole thing rather pointless; and, as it turns out, the same can be said about the subject of Grant Williams discussion in this week's 'Things That Make You Go Hmmm...', - Currency Wars - which seem to be erupting across the globe; and, as they gain in intensity, these monetary conflicts are threatening to throw a major spanner in the works of a world that, until recently, seemed to have been operating under the assumption that it was possible for multiple countries to all devalue their currencies simultaneously in order to inflate their massive debts away.
Poor, misguided fools.
There are many parts of the current financial equation that puzzle me, from investors who are happy to accept guaranteed losses in their government-bond portfolios to governments that genuinely seem to think that increasing their spending by a tiny bit less than they had intended counts as a 'spending cut'; from yield-starved souls who feel that the appropriate return for dipping one’s toe into the junk bond market is sub-6% to business owners who, in a world sloshing in trillions of freshly printed funny money, are forced to pay double-digit interest rates for access to some of the magical bounty.
But beneath it all, at the wellspring of all the disconnects and false price signals that are making investing in today’s supposedly free markets an impossible task, lies the source of my greatest consternation: central banks.
I have one simple question for those august institutions, and it is this:
Do they really think it is possible for them all to devalue their currencies against each other simultaneously and achieve anything but rampant and universal inflation at some future point in time?
As we head into 2013, we find ourselves in a situation unlike any that has ever occurred in the history of global finance. The ability to simplify the complexity of that situation is something only the very brightest amongst us are able to do, and one such man is Raoul Pal of the Global Macro Investor put together a very simple list which, at the time he compiled it in late December, beautifully highlighted the utter absurdity of today's central banking folly.
The list was split into sections that grouped the 38 countries that had negative or zero real rates (yes: THIRTY. EIGHT.), as well as the countries that either had explicit QE programs in place or were actively intervening in or verbally manipulating their currencies:
Now, does it seem remotely possible that all these countries can have weak currencies at the same time? Of course it isn't possible. Not without rampant inflation, it isn't. But that doesn't appear to be a problem for the central bankers of the modern world, who are confident that inflation is 'contained'. Yes, 'contained'. Is anyone paying attention, I wonder?
The competitive devaluation merry-go-round will continue, because these buffoons have left themselves no other options.
Much more inside...