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Currency Wars Fiat Currencies Uncategorized

New war in town – currency war

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Currency wars was something unheard of as a term in the mass media just 5 years ago. Now if you search through news paper , you will find that the most usages of the word war is related to currency.

Things are getting really serious recently as all parties are trying to outsmart the others and s most things in finance this is a zero sum game and somebody has to lose for you to win. When playing parties are countries and law makers it gets serious to make others lose for you to win.

This game is really simple – you (as a country) don’t want your currency to be very strong as costs for domestic businesses will be high compared to other countries and that brings a whole lot of problems – no foreign investors (they will go to China right?) , weak domestic companies, low exports, high unemployment etc. That brings in a lot of discontent and you don’t get elected at the next poll – simple as that. So strong currency is bad, looked at country level. Here comes the printing press – countries print money to debase currency and thus give a hand to business (make domestic costs lower). But who suffers here? The savers. If you hold money in the bank – that’s bad news. Current monetary policy favors borrowing and not saving. That’s why Germans are against running the printing press and Italians and Spaniards are in favor.

I don’t know if a little monetary policy is good here and there but one thing i know for sure that is very bad – when monetary policy substitutes reforms.

Our policy makers have run out of ideas (or don’t want to push them as our world as we know it needs very painful restart of the financial system and that’s bad for ratings) so bad since the start of the crisis that they have substituted all sound (but painful) policies with one thing and that is known under many names: monetary policy, QE or simply money printing. However, that always ends bad. 100%, no exceptions here in human history. If you are a net borrower, you don’t need to worry to much – you can only benefit. If you are net saver, start looking at the time as your worst enemy as money in the bank will eventually end up bad.

That is valid for all major currencies – dollar, yen. euro, etc. US printed three times the money supply for 5 years, Japan has never stopped to print large amounts of money, ECB just announced very ambitious plans for printing. On the other hand, all these parties are stuck in their financial reforms and that can be seen easily – GDP growth is hardly hitting 2%, unemployment stays high (especially youth figures), bureaucracy is high, taxes are high etc. So even though they try to solve all heir problems with the printing press results are not there because printing can help but can’t substitute sound policies.

As a conclusion, remember that history repeats itself. Every non gold backed currency (fiat currency) has failed in human history.No exceptions. Time span is usually 40 years. All world currencies are fiat since Nixon made them such in 1971. It may not be in the next year or two but if it happens in your life span and you are not prepared, 10-20-30 years of your labor may just disappear in a matter of days.