Inflationomics

Currency Wars:  Who Wins?  Who Loses?

After 71 years of the world’s being under the U.S. dollar’s dominance and 44 years operating as an un-backed fiat currency, the wheels are finally starting to wobble.  How much longer till they fall off?

While you have the world using the U.S. dollar as the reserve currency, and the currency used to purchase oil and many other commodities worldwide (a stabilizing influence), you have the Fed purposely printing trillions of dollars to reduce the dollar’s value in an attempt to keep U.S. exports competitive (competitive devaluation) vis à vis other currencies (a de-stabilizing influence).  Naturally, other central banks reciprocate by printing more of their currencies…in short, racing to depreciate their currencies faster and farther than the next exporting country.  In the long run, won’t they all be worthless?  It appears to be a highly competitive race to the bottom!

In time, the effects of the currency war become more violent (see the Swiss National Bank’s recent detachment from the Euro and the Chinese central bank’s devaluation of the yuan) and more sudden (but not surprising).  They also take their toll on the businesses that use those currencies (how can businesses plan for the long-term under these circumstances?); witness the world-wide stock market gyrations of late.

As if seven years of near zero interest rates weren’t enough to throw investments into mal-adjustment, now we have the threat from the Fed (that has done a terrible job of predicting the consequences of its actions) to raise interest rates.  In the past, I would have said that there’s no way they would do such a thing because it would surely send the world into a depression and bring the U.S. government into default quickly, but more recently, it has become apparent that the Fed doesn’t really have a clue as to the consequences of its actions, and it may actually go ahead and raise rates (perhaps next spring) just to prove that it will do what it has said it would do.  It’s hard to know.

Nevertheless, it seems evident to me that raising interest rates would raise the U.S. government’s expenses (especially the interest expense on its massive debt), thus increasing its debts and deficits and bringing the day of reckoning (and the day of massive money printing) quickly closer—not something a government usually wants.

On the other hand, perhaps the Fed realizes that the rest of the economy would be better off if savers weren’t penalized by having near-zero interest rates…or that it’s better to accumulate capital than to accumulate debt.  No, neither of these thoughts is likely to cross their minds at the Fed, given its past track record.

One thing is certain, in a world of inter-connected (global) economies, all with fiat currencies, either they will all go bankrupt together (everyone loses), or one country will break away from the insanity of money printing, establish a sound money, and show the rest of the world the better “sound-money” path.

Robert F. Sennholz

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