Currency Wars and Gold

A currency war in the simplest form is basically when there is too much debt and not enough growth.
– James Rickards, Currency Wars: The Making of the Next Global Crisis

Currency wars are real wars. But they are waged with currencies, stocks, bonds, derivatives, commodities, rather than guns and other kinetic weapons.

In a currency war, countries try to manipulate their own currency to gain an unfair trade advantage. There is a currency war when one country tries to devalue its currency relative to others in order to promote exports and create jobs.

Let’s take an example. Some countries manufacture jet aircraft. The United States has Boeing, Europe has Airbus, Brazil has Embraer and there are a few others. Now imagine you are Thailand. You want to buy aircrafts for your airline industry, but you don’t make them yourself. You have to go shopping. But where are you going to go? The theory behind the practive of currency war is that if the US cheapen the Dollar, it will make the Boeing aircraft a little more attractive than an Airbus or an Embraer. Boeing would sell more planes and create more jobs.

But once you go down that road, you quickly invite RETALIATION. In return, other countries will devalue their own currency too. There are unintended consequences. It creates a spiral of retaliations that ends up with a contraction in world trade, a GLOBAL DEFLATION. And in this context, the temptation to steal growth from your trading partners by trashing your own currency becomes overwhelming.

Suppose you are a Chinese manufacturer. You sell goods to the United States. They pay you in dollars and you take those dollars back to China. When you exchange those dollars into Yuans (¥), that’s going to drive UP the value of the Yuan. But instead of that happening, the value of the Yuan stays the SAME… You do exchange those dollars for Yuans, but the Chinese central bank prints Yuans TO BUY those dollars, so as to keep their currency where it is. By doing this however, China is importing INFLATION from abroad.

The USA are also doing the same thing. They are cheapening the Dollar to increase exports, by making export prices less expensive. The problem here is that a country like China or the US does not just export, it also IMPORTS. The USA for instance import more than it exports. So if the Federal Reserve cheapens the Dollar, the price of those imports is going to go UP, which will bring inflation into the United States from abroad. The American people will be paying much more for iPads and iPhones and flat-screen TVs and French wine and vacations in Italy and clothes made in Korea. It brings inflation into a country, and that’s why a currency war is always a losing game.


And when you devaluate your currency that way, it generates retaliation from other countries. China reacted to the devaluation of the Dollar by trashing the Yuan in return. (Weaker countries who can not do that develop measures of capital control, such as freezing the assets of foreign investors for extended periods, which can trigger trade wars.)

Growth (gross domestic product) = consumption + investment + government spending + net exports

There is too much debt around the world now: sovereign debt, corporate debt, consumer debt, individual debt, student loans, car loans, etc. Too much debt that can’t be paid, and won’t EVER be paid.

Individuals can default, corporations can go bankrupt, but governments usually don’t. The US government is not going to default on its $16 trillion debt. It will just print the money, and pay the debt with severely devalued, virtually worthless “money.” Governments who print their own currency don’t have to default. They can just inflate their way out of their debt.


The US governement and the Federal Reserve want higher inflation in the USA because the dominant force in the global economy nowadays is deflation. Widespread debts lead to generalized deflation.

So to fight deflation and to boost exports, the USA began in 2009 to “print” a lot of money. A LOT. By “printing money,” we mean that the Federal Reserve buys Treasury bonds from the market in exchange of dollars. The Fed credits bank accounts electronically. We are talking about computerized entries into the Federal Reserve’s ledger. The Fed literally types in an addition of X billion or Y trillion dollars into its balance sheet, creating dollars out of thin air that exist as zeroes and ones on a computer server, and then use those new dollars to purchase US Treasury bonds. In this way, by INFLATING the supply of dollars, the Fed devaluates the Dollar. It has debased the US dollar by roughly one half the total GDP in less than four years.

But why are not the prices out of control in the USA yet, despite the Fed having increased the money supply by several trillion dollars?

First, a lot of inflation (US dollars) went to China.

Second, the VELOCITY of money is very low now. Velocity is the turnover of money, how quickly money turns over: do I take it and spend it, or do I stick it in the bank.

The Fed can increase or decrease the money supply, but it can not control how it is being spent or saved.

Well, if I take my friends out to dinner and you know, the restaurant owner uses the money to buy some new equipment or whatever, that money starts to have velocity, which means it’s getting used; but if I take it and stick it in the bank, or if I take it and buy gold, that money has a velocity of zero because it’s not being used.

The Fed can not control how money is being spent. It’s behavioral, it depends on how I feel and how you feel and how everybody feels. And frozen money does not affect prices.

The government has to affect behavior in order to control the velocity of money, which means they have to make the people worry about inflation, or scare you into spending your money. They think that by holding “interest rates” low, they can encourage inflation. And they bet on the people, spooked by inflation, will get out and buy cars or houses before the prices go up. The US government also tries to increase “lending” because it wants to get inflation ABOVE the interest rates. If borrowing rates are two percent and inflation is four percent, that’s a NEGATIVE interest rate. Which means that you can pay back the loan in cheaper money. So it’s actually not only a low interest rate, it’s FREE MONEY. The bank is PAYING you to borrow because you can pay them back in cheaper dollars, in dollars of lesser purchasing power.

And that is precicely what is happening. The US and many other countries want to do pay back their debt in a severely devalued currency. It’s called “monetizing” the debt.

They’re doing so by cutting interest rates to near zero, and by printing money. Printing money de facto creates negative interest rates because the value of the dollar is eroded by this inflation of the money supply.


In this world of negative interest rates, we need to FIGHT inflation, in order to preserve our wealth. If you put your money in a bank at zero or one percent interest rate, and you get 3, 4, 5 percent inflation, the value of your money is going to be cut in half in 15 years. Savers or investors are actually in a difficult position because the Fed is trying to drive the economy off of consumption, rather than investment.


With investment, you get growth when you make the investment. And then you get MORE growth down the road because you improve productivity as a result of that investment. Not so with consumption. Consumption is a one time thing. You buy something, you consume it. But investment pays off year after year, after year.

Higher interest rates encourage people to save. And that attracts investment from around the world. And that can drive growth. But in context of negative interet rates, many savers think they have no choice but to go into the stock market or the property market, which are very risky and volatile assets. They feel they are being forced to spend, to consume, to gamble, rather than to save.

But we the people can RESIST by buying gold or anything of physical value that can not be trashed by massive inflation, in order to store and preserve our wealth.

Because inflation is lethal for a lot of unprepared folks. You need to be prepared. There are winners and losers. The losers are the savers and retirees, people on a pension. They are going to see their wealth erode every year quickly.. The winners are banks, hedge funds, speculators, people who got into gold. Because of that, gold is nowhere near a bubble. People are underinvested in gold. Institutional allocations are anemic. They are investing a lot in stocks, in bonds, in hedge funds and so forth, and a skinny little one percent in gold. If institutions just doubled their allocation from say one-and-a-half percent to say three percent, there’s not enough gold in the world at these prices to absorb that kind of inflow.
Gold is volatile though. But it preserves your pruchasing power in a world of high inflation and negative interest rate.

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