Purchasing Power

After a few days of dollar weakness due to concerns that the Fed's rate hike intentions have been derailed following some undisputedly ugly economic data (perhaps the Fed should just make it clear there will never be rate hikes during the winter ever again) the USD has resumed its rise, and as a result risk assets, after surging early in the overnight session driven by the Nikkei225 and the Emini, the "strong dollar is bad for risk" trade has re-emerged, with the Nikkei dropping almost 500 points off its intraday highs, with US equity futures poised to open lower once more, sliding nearly 20 points in the overnight session, and surprising the BTFDers who have not seen five consecutive days of "risk-off" in a long time.

“If you’re unhappy with what you’ve had over the last 50 years, you have an unfortunate misappraisal of life...  should all be prepared for adjusting to a world that is harder..."

The global debt glut, plus the related money printing efforts by the world's central banks to try to stimulate further credit growth at all costs, leads us to conclude that a major currency crisis -- actually, multiple major currency crises -- are practically inevitable at this point. To understand better the anatomy of a currency collapse, Philip Haslam - author of the book When Money Destroys Nations, and an authority on monetary history, who more recently spent much time in Zimbabwe collecting dozens of accounts of the experiences real people had as the currency there failed - explains the six 'gorge' process to hyperinflation.

In the first part of this series we discussed Greece and its ongoing negotiations with the European Union – particularly with Germany – and how the complicated history between these two countries makes it exceedingly difficult for the Greek people to accept the terms on offer from the EU. This time we will turn our attention north, to a different kind of conflict.  This one has also wrought economic devastation to a European country, but of a much higher intensity.  It is the first civil war that the European continent has seen since the Balkan Wars of the 1990s, when the regional superpower of Yugoslavia was ultimately broken up amidst a series of separatist and independence movements.  Today’s conflict will almost certainly result in a similar outcome for its host country. I’m talking, of course, about Ukraine.  Let’s take a closer look.

In the previous installments of this series, we discussed the hidden and often unspoken crisis brewing within the employment market, as well as in personal debt. The primary consequence being a collapse in overall consumer demand, something which we are at this very moment witnessing in the macro-picture of the fiscal situation around the world. Lack of real production and lack of sustainable employment options result in a lack of savings, an over-dependency on debt and welfare, the destruction of grass-roots entrepreneurship, a conflated and disingenuous representation of gross domestic product, and ultimately an economic system devoid of structural integrity — a hollow shell of a system, vulnerable to even the slightest shocks.

"Because the Bank of Japan gobbles up dramatic amounts of debt, the cost of financing government spending stays low. It’s been said that a country that issues debt in its own currency cannot go broke. Theoretically that may be correct: the central bank can always monetize the debt, i.e. buy up any new debt being issued. But in practice, there has to be a valve."

In the aftermath of the ECB's QE announcement one topic has received far less attention than it should: the unexpected collapse of risk-sharing across the Eurosystem as a precursor to QE. This is what prompted "gold-expert" Willem Buiter of Citigroup to pen an analysis titled "The Euro Area: Monetary Union or System of Currency Boards", in which he answers two simple yet suddenly very critical for the Eurozone questions: which "currency boards", aka national central banks, are suddenly most at risk of going insolvent, and should the worst case scenario take place, and one or more NCBs go insolvent what happens then?

Debt, Distraction, Currency Wars, Itchy Fingers

These negative rates that we see in Europe are a first glimpse of fiat currency destruction due to imploding economies.  And again the negative rates are nominal rates meaning they are negative by way of something beyond inflation.  Specifically they are moving to their natural minimum state of valuelessness because the economy is no longer strong enough to provide alternative investments for the fiat currency.  Fiat currency is shown then not to be a storage of value whatsoever.  But only a representation of strength of its respective economy.  As the economy goes to zero so does the value of its currency.  This point is exceedingly imperative to understand in our current global environment.

What can strike a balance between the opposing forces operating on the euro-dollar exchange rate? No one can say for sure, but one thing is certain: Whereas the profits from playing transatlantic interest-rate differentials may run to 1% or 2% per year, investors can easily lose that amount in a single day – or even an hour – by buying the wrong currency when the trend turns. As we know from decades of Japanese and Swiss experience, selling a low-interest-rate currency simply to chase higher US yields is often a costly mistake.

Will Europe ever see its money back?

In the last few weeks, we have seen what looks like a transition from deflationary behavior to a more traditional behavior in which gold acts as the "anti-dollar". I don't think this represents a sea-change--I still think there is more deflation to come. But we might see a change in behavior for some time before deflation returns.

Not just one 25 basis point rate hike, taking a look at that chart, several rate hikes have already been priced into the US Dollar Index.

We need to look at the concept of a reserve currency differently, because it is important. We need to look at it as a privilege and a responsibility and not as a weapon we can use against the rest of the world. If we abolish, or even lessen, legal tender laws and allow the process of price discovery to reveal the best sound money, if we allow our US dollar to become the best money it can - a truly sound money - then the chances of our personal and collective prosperity are greatly enhanced. We all have the same interest. We all want to have the highest standard of living for ourselves and our families. A sound money reserve currency offers us the best chance of achieving our shared goal; therefore, we should rally around every effort to make it so.