Currency Wars Have Begun: Central Banks in Denial or Worse

by Mitch Feierstein about 6 years 5 months ago

Here’s a piece of recent news that you almost certainly missed: A large consumer products company, Johnson & Johnson, announced a one-off loss owing to a 32 percent currency devaluation in Venezuela. The reason I expect you missed that less-than-seismic piece of news is that, unless you happen to be particularly fascinated in Johnson & Johnson, or utterly enthralled by the development of currency policy in Venezuela, you probably didn’t care.

But here’s the thing. Do you care to guess how much J&J lost thanks to that currency movement? Answer: a cool hundred million dollars. Johnson is a pretty large company, but even so. To lose a hundred million bucks? In Venezuela? That sounds a little disturbing, no? A bit like the start of one of those killer-virus horror flick, where the pretty teenager who comes down with a benign little illness ends up dying horribly as some unknown disease takes hold.

Our Central Planners Bernanke, Draghi and Merkel Hard at Work

Central Planners Bernanke, Draghi & Merkel Hard at Work

Well, that is now the reality of the world economy. The loose money policies at the world’s leading central banks are beginning to broadcast that virus right across the globe. The vector of transmission isn’t just low interest rates. It’s money printing too. It’s the purchase of government bonds so that the long end of the yield curve is as manipulated as the low end.

Indeed, you simply can’t set a bound on how widespread and intensive the destruction of value has been, not merely in the U.S., but across the globe. Take, for example, the Fed’s willingness to purchase toxic real estate assets — using your money to acquire securities which are now shunned by the market. Or take the Bank of England’s efforts to shove easy money at banks making corporate loans. What happened to good old-fashioned faith in markets? The belief that transactions of commercial merit will be struck between a willing buyer and a willing seller … and that any other sort of transaction should be strongly discouraged?

The simple fact is that the world’s major central banks are indulging in a massive proprietary trading scheme placing your money at risk in support of poor quality assets. When I wrote Planet Ponzi, I argued that Wall Street and government between them had created the world’s biggest ever Ponzi scheme. Well, the central banks want to play at that table too — and right now they’re the ones with unlimited money and zero accountability.

In recent months, the Japanese yen has plummeted 30 percent against the euro and some 20 percentagainst the U.S. dollar. Those figures are astounding enough in themselves, but get this: The euro currency probably won’t even exist in a few years’ time. The outcome of the Italian election gave a more than quarter of the vote to a comedian, Beppe Grillo. (He is literally a comedian; I’m not just using the term as a synonym for “Italian politician.”) Grillo wants to exit the euro and default on Italian debt. Other parties shared nearly all the remainder of the vote. The only politician to stand four-square behind Angela Merkel’s austerity ad infinitum plan was Mario Monti, who secured just one tenth of the vote.

Grillo’s plan, as it happens, isn’t dumb. The euro has been killing Italy, and though Italian debts are high, they are, for the most part, funded domestically and the national budget is not far from being in balance. So Grillo’s plan keeps it simple: quit the euro, self-fund the debt, go back to doing what Italian governments have always done. If that sounds nuts, bear in mind that Italy’s economy has been a post-war miracle — growing way faster than the U.S. economy, albeit from a lower base. Italy only really started to fail when it joined the euro: Meaningful growth has been absent ever since. Italy’s competitiveness — never so secure — has been systematically wiped out by its adventure with the euro.

If Italy follows a path that’s anything like the one Grillo has mapped out for it — or if civic unrest grows — or if some European bank found itself obliged to admit to the true value of some whole new pile of nasties on its balance sheet — then the euro is dead; but this is the currency against which the yen is devaluing.

The precise path of these currency wars is impossible to predict, but it’s not hard to predict the final outcome. First, there will be huge losses. Japan has an economy that’s almost twenty times larger than Venezuela’s. If Johnson & Johnson can lose $100 million in Venezuela, just how much more will be lost in the Far East and Europe, not just by that one company but by every other multinational one too?

Spain's civil disorder - A coup d'état in the air? Euro departure?

Spain's civil disorder - A coup d'état in the air? Euro departure?

Secondly, civil unrest. We’ve seen bouts of unrest already surging across the world — from riots in Greece, to the Occupy movement, to the indignados in Spain — but these things are only going to get worse. Suppose, for example, that Italy does successfully quit the euro; what will that say to the Spaniards and Greeks and Portuguese and Irish who are currently suffering its death throes?

And thirdly: inflation. The trouble with currency wars is that they’re too easy to wage. You just have to print money. The mainstream media barely reports the ongoing activity and the Fed is either in denial or lying. It all sounds a little technical and dull. We assume that the people in charge of looking after our money supply are on our side, that they have our interests at heart.

But do they? Again and again, we see that central banks make the error of equating happy financial markets with strong economies — precisely the mistake that was made by central banks ever since the dot-com crash (and, indeed, before.) Here’s the simple truth. Financial markets prefer excessive valuations and excessive liquidity. Sure, they love it if the Fed prints a ton of new money. Obese kids would probably like it if McDonald’s gave away their stuff for free on street corners.

But the interests of Wall Street are not your interests. Global stock markets are making new record highs — on what? What’s so great about the world economy? The truth is that stock markets are up because of Fed-based ‘hopium’: the torrents of cash artificially manipulating prices. Yet whatever goes up must come down and no one at the Fed even pretends to have an exit strategy. The simple fact is that the Fed has created the mother of all asset bubbles, and the popping will be on a scale previously unknown.

Indeed, you only have to look at the personnel in key positions across the globe to understand how deeply Wall Street has penetrated institutions that were meant to be there for us.

Jon Corzine - What happened to MF Global's missing Billions?

Jon Corzine - What happened to MF Global's missing Billions? Who said there is no revolving door between Wall Street and Washington?

Mario Draghi, head of the European Central Bank is an ex-Goldman guy. So is William Dudley President of the New York Fed — who controls the FOMC. So is Mark Carney, soon to be Governor of the Bank of England, currently the Governor of the Bank of Canada as well as the Head of the Financial Stability Board in Switzerland. When you start to add in key politicians with affiliations to the same institution (Mario Monti, Hank Paulson, Robert Rubin, Gary Gensler, Jon Corzine), you start to realize that our entire political system has become heavily conflicted and corrupted. The interests of Wall Street have come to dominate the interests of ordinary citizens.

All Ponzi schemes must come to an end. They always bring disaster when they do — but that’s no reason to close them down, because the collapse only gets bigger the longer you leave them. We are in the end stages of a huge, global Ponzi scheme right now. The losses are rising, the risks are getting greater. And the worst disasters lie ahead.

24 Responses to: Currency Wars Have Begun: Central Banks in Denial or Worse

  1. Harry Alffa says:

    Tie the financial sector to the real economy, like a sheep-savaging dog to a ram.

    From a UK context: tweets by @HarryAlffa

    SMEs “crucial” to recovery says @D_Blanchflower and A Posen. http://www.bailoutswindle.com makes SMEs in best interests of banks.

  2. Bill Armstrong says:

    Mitch, I have just read your ‘Planet Ponzi’ book after learning about it on the Keiser Report. You have done a great service to my & I guess many other peoples understanding of what is going on right now. It has crystallized and quantified my general misgivings about the economic mess much of the West (& beyond) is in. Debt is the albatross around all our necks. We are collectively living beyond our means and the fat lady is about to sing. Its hard to believe that governments, who are addicted to living beyond their means, will point us in the right direction. The general media is no more aware of the coming apocalypse than it was in the run up to the sub-prime meltdown. Journalists on the whole are as lazy & inept as the politicians & economists they should be challenging.
    I do believe you are right to say that out of the impending financial crisis good will eventually come. However I fear that you underestimate the short-term probable political fallout. If democratic institutions lose all credibility (as they should given their massive failure) and we face a further decade or more of falling living standards, mass unemployment etc then I fear that democracy will not survive, at least in its current form, in many countries.
    I would hope that your book & amp; ongoing analysis provide a basis for a like minded group to produce a ‘Manifesto for New Democracy’ which looks to truly enfranchise the interests of the majority – over the interests of the greedy minority who have prevailed over the last 20/30 years with the connivance of the politicians they have directly or indirectly bought. The Western democratic model has failed its peoples in a spectacular way. I cannot see the existing political class ever acknowledging that fact. They long ago gave up on the idea of looking out for the interests of the majority of the people, they supposedly represent, or taking responsibility for their short-term & short-sighted policies.
    Please keep shining your flashlight onto the mess we are in . Lets hope it will help stimulate some of the disenchanted to formulate plans for a new way forward when the tsunami hits and chaos ensues.

  3. bobcat says:

    I’ve been thinking the great colapse would have happened by now. I am completely out of all stocks and bonds only keeping money in phisical silver,gold and platinum. Is this the right move ? Any other suggestion on where I sould park my capital?? I have read your book great read!!

    • Deon Opperman says:

      Check out Bitcoin. All caveats taken into consideration – “another Tulip or South Sea Buble” etc. – I believe there is something worth looking at here. And yes, proceed with caution. I have allocated around 10% of my portfolio to Bitcoin. The attraction here is that while gold and silver are hedges against fiat currency, Bitcoin is a hedge against any store of value that can be manipulated by central banks or Wall Street. Also: Bitcoin is supra-national, its value determined by pure supply and demand and belief. because it is still novel, it will be subject to volatility, but I see that as an opportunity. So you’re going to need strong command of your fear and greed if you deal in Bitcoin. But there is definitely something here.

      • Mitch Feierstein says:

        Thanks Deon,
        I have not done enough research on Bitcoin to comment with 100% certainty. However, I advise that no-one invest in anything especially Bitcoin that is trendy/fadish until each investor fully understands ALL of the investment in its totally. That means from A-Z – for example but not limited to transacting, clearing, storage and tax the ramifications. Personally, I would rather miss the train than jump in front of it and risk being run over. Prudence is a virtue. If you are prudent you live to play another day… I’m currently investigating alternative currencies, as the central bankers will destroy fiat currency, but am not yet comfortable committing any funds….
        Good luck !

        • Eve says:

          Read your book. I must say i agree with what you wrote on the book. The problem is that almost everyone I speak with think that I am crazy. Stocks are at record highs. What would happen when central banks stop pumping money to the fat cats via the ‘economy’? Will central banks ever stop printing money?

          • Mitch Feierstein says:

            Gold is starting to look attractive – No corporations are spending on business expansion, earnings peaked in Q2 of last year. This is a debt fuelled rally spurred on by MSM talking head cheer-leaders at the direction of non-elected Keynesian government academics in who reward failure with bailouts and punish savers with confiscation. This rally lacks 4 critical economic basics: Real organic growth from capital spending, savings and sustainable consumer driven growth in earnings. Current markets have all of the classic signs of a monstrous bubble ready to explode. Can stocks go higher? Yes, absolutely but right before it explodes stocks will surge remarkably and there will be no chance to get out. Just remember the: Enron’s that stock that rose over 300% in 8 years and was America’s darling, shortly there after it went to zero, 1st NASDAQ bubble, housing bubble and the credit bubbles of 2005-7 (which thanks to bailout infinity are bigger than ever). Japan, having started a global currency war, is now set up to implode and Europe is broke and in an economic depression. The current frantic media buzz will get retail to buy equities at the top.

  4. mark says:

    Great book Mitch, Enjoy your blog would like you to update us each month, Most people that i speak to on this subject think i am mad, As we can see today Sat 16 March in Cyprus that Greedy ponzi scheme have just nicked those hard pressed savers money. I really do think its time that us savers start to with draw our money from the major banks,leave just enough to live,Buy gold silver but don’t store in the pozi countries,

  5. Carl says:

    When the US stock market does start to pop again, will the US$ shoot up or down? Logic says UP from the move out of stocks to the safe-haven currency?

  6. Alan says:

    Lemmings and ostriches, comes to mind. Alan

  7. Mark says:

    Hey there Mitch,

    I was born in the UK, but lived in Argentina from 1996 on and off up to now. I can certainly say that it is, and still is, the guinea pig to see how things would go for this model of import orientation, import debt for goods and services, not the normal ones of import substitution or export orientation, and then when debt is unsustainable let it all crash and destroy human and social capital. It is now about to go off into hyperinflation. Either way, Argy is periphery and not core, where core economies have a bullet, or drone bomb, backing up every core-country currency, so I find it difficult to homologously relate a peripheral country to a core country. The main difference I see in the core is that the population is humungously ignorant of the global elite’s plans for world domination and is thus naive, whereas in the South, as in Argy, to be a Peronist is to be anti-imperialist. Here in the UK, most people I talk to do not even realise that London is still the centre of the global empire. What empire, they say. The one where they changed the name Empire with Globalisation, I respond. Gee, what is going to happen, mees asks.

    • Thomas says:

      Hyper inflation didn’t happen in Japan where QE and recession has been the norm for 20 years.

      London is the centre of the global empire? Is that why Starbucks and Amazon pay zero corporation tax in the UK?

      • Mitch Feierstein says:

        Japan has only recently begun “Bernanke-Style” QE which will lead to an implosion of that economy and may well trigger the next wave of the financial repression.

  8. Thomas says:

    Mitch, I have read Paul Krugman after reading your book.

    I have more belief in your views however I cannot deny Krugman’s plan to end the depression is better than your “everyman for himself” views.

    Paul made a great representation for fiscal stimulus and targeting 3-4% inflation. I’m pretty much convinced Government spending is the catalyst to growth especially in the current quantitive easing push we have seen. Consumer confidence will not return with job uncertainty and austerity coupled with the debt burden i.e the liquidity trap. Diluting the debt burden via QE seems to be a ‘textbook’ response.

    I’m pretty sure the only people concerned over the debasement of the dollar and great british pound are the people with millions in the bank. This is not about savers from where I stand. The only group to benefit from austerity are the creditors of the so-called irresponsible borrowers!

    • Mitch Feierstein says:

      Thanks for the note Mick, most appreciated. It is Bernenke’s “Steal from Savers Scheme” – Unfortunately, Bernanke a Princeton economics professor and scholar of the great depression has dictated a one size fits all solution that does not fit this problem. “We can’t solve problems by using the same kind of thinking we used when we created them.” – Albert Einstein – Debt is not the killer in this scenario its the structure, products and asset bubbles created by this debt fuelled “irrational exuberance” and QE infinity that will make the 2008 crisis seem mild. Princeton professor Krugman, who has never been wrong about anything – just ask him, has never been able to differentiate between economic experiments and real life application. Krugman has prematurely proclaimed victory because this mess has not yet imploded – only time will tell. A big problem is when Japan and others blow up inflation will quickly escalate out of control forcing interest rates much higher. My view is clear: Numbers never lie and and trying to print your way to prosperity with currency debasement , QE and Bailouts infinity will end in economic disaster. Likely results: Sovereign bond defaults, HY (Junk) bond defaults, US will likely lose its reserve currency status when markets realise Bernanke’s strategy is a failure without an exist strategy resulting in a repudiation of US Bonds forcing gigantic losses on the taxpayers.

  9. James Tydal says:

    Just want to say your article is as astounding. The clarity in your post is simply cool and i can assume you’re an expert on this subject. Well with your permission allow me to grab your RSS feed to keep up to date with forthcoming post. Thanks a million and please continue the rewarding work.

  10. Juliet says:

    Since I read your book I refuse to spend ANY money (what little I have). Upon your advice I am slowly withdrawing the tiny pittance I have out of the banks. My dillema is a relative died last week and now I am faced with an inheritance. Given that I hold dual citizenships – please advise me – if you were facing this problem – which currency would you hold these funds in? I am desperately poor and cannot afford to get this wrong? Thank you for any advice you can lend.

    • Mitch Feierstein says:

      Thanks for reading my book and contacting me. Everyone has unique circumstances and needs guidance in accordance with their particular financial profile. As such, my book informs people what works for me and
      presents a global macro-economic overview of risks not discussed by the MSM’s talking heads. You can keep money in the bank but only up the amount guaranteed (the Cyprus model) – Open separate accounts at different non-related banking groups. Currencies –: I do not know which two countries you reside in and would add currencies of countries with the least debt will outperform. The USD stands to benefit from the all out currency war (Japan, UK) and the coming crisis. However, I do not like the USD dollar long-term as the US debt is out of control. Diversification and capital preservation are key considerations you need to focus on and apply accordingly to your financial profile, ASAP. For example: I purchased physical silver below 21.00 per ounce last week – it’s part of my long term strategy. Sorry, that I am constrained by regulatory guidelines on giving specific investment advice to individuals; but hope this helps a wee bit.

  11. Gerard says:

    Hi Mitch,
    Here’s my question.
    If one was to purchase a house and fix an interest rate for 15-30 years, won’t the coming high to very inflation effectively pay off my debt as wages/rents rise. So is buying residential property with debt the a great investment?

    • Mitch Feierstein says:

      Thanks Gerard,
      Property lacks the essential characteristics to qualify as an asset class, it’s a place to live.
      Fed MBS intervention and hedge funds front running the Fed have totally distorted the housing markets – Its possible that we will see another crash during the next “credit event”. At which point, the current inflated prices in property, equities and bonds will all decline precipitously. For example; Property prices in Japan declined nearly 90% after the “Boom” years. Other considerations would include currency exposure in the country your property investment is domiciled in as well as municipal, state and local property taxes. One needs to assume that as more municipalities go bankrupt, property owners will be put on the hook. If you are locking a 30 mortgage on a foreclosure or short sale as a place to live or a second home its likely mid-market.
      All of the above said, I am not investing in property at current levels as there are better risk adjusted returns elsewhere.
      Hope this helps.

  12. gareth says:

    Mitch you said “I am not investing in property at current levels as there are better risk adjusted returns elsewhere.” Could you give me some idea of where those returns are. Thanks

    • Mitch Feierstein says:

      Hello Gareth,
      It depends upon each individuals age, financial position, current exposures and financial objectives.
      For me, Asymmetry in European bonds and spreads offer better upside potential as well as a few foreign exchange & commodities trades, thats my quick view. US Housing has seen a remarkable bounce that, in my view, the macro-economic data does not support. Yet the MSM talking heads hype it up. Foe example: Durable Goods yesterday were flat Ex transport (huge uptick (not sustainable) do to dream-liner related sales and leases) – “Numbers never lie, bankers, politicians and lawyers do.” – Planet Ponzi 2012 : ) It’s in how data sets are presented – which is what my book details. It helps investors understand where to look and what to look for; Due to regulatory and compliance restrictions, I am not allowed and have never given specific investment advise to individuals. Planet Ponzi allows everyone to see what I’m doing and why I’m doing it with the caveat; every persons circumstances and financial objectives differ. There is no “on size fits all” except in “Bernankeland’. In general, everyone investor needs to do much more DD and make their own decisions based upon extensive analysis.

  13. gareth says:

    Thanks Mitch – much appreciated – I am at the moment reading Planet Ponzi – I am a UK citizen and as a matter of interest, you might be interested to read David Craig’s book “Greed Unlimited” subtitled “How Cameron and Clegg protect the elites while squeezing the rest of us” – a very enlightening read concerning the UK – with obvious comparisons to the USA. Thanks again.

    • Mitch Feierstein says:

      No problem Gareth, The UK property market is due for a major correction. Unfortunately, most investors get caught up into buying into the scheme at the peak of the market..
      I will have a look a Greed Unlimited, thanks.