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It’s Currency War! – And Japan Has Fired The First Shot

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Currency War - Public DomainThis is the big problem with fiat currency – eventually the temptation to print more of it when you are in a jam becomes too powerful to resist.  In a surprise move on Friday, the Bank of Japan dramatically increased the size of the quantitative easing program that it has been conducting.  This sent Japanese stocks soaring and the Japanese yen plunging.  The yen had already fallen by about 11 percent against the dollar over the last year before this announcement, and news of the BOJ’s surprise move caused the yen to collapse to a seven year low.  Essentially what the Bank of Japan has done is declare a currency war.  And as you will see below, in every currency war there are winners and there are losers.  Let’s just hope that global financial markets do not get shredded in the crossfire.

Without a doubt, the Japanese are desperate.  Their economic decline has lasted for decades, and their debt levels are off the charts.  In such a situation, printing more money seems like such an easy solution.  But as history has shown us, wild money printing always ends badly.  Just remember what happened in the Weimar Republic and in Zimbabwe.

At this point, the Bank of Japan is already behaving so recklessly that it is making the Federal Reserve look somewhat responsible in comparison.  The following is how David Stockman summarized what just happened…

This is just plain sick. Hardly a day after the greatest central bank fraudster of all time, Maestro Greenspan, confessed that QE has not helped the main street economy and jobs, the lunatics at the BOJ flat-out jumped the monetary shark. Even then, the madman Kuroda pulled off his incendiary maneuver by a bare 5-4 vote. Apparently the dissenters——Messrs. Morimoto, Ishida, Sato and Kiuchi—-are only semi-mad.

Never mind that the BOJ will now escalate its bond purchase rate to $750 billion per year—-a figure so astonishingly large that it would amount to nearly $3 trillion per year if applied to a US scale GDP. And that comes on top of a central bank balance sheet which had previously exploded to nearly 50% of Japan’s national income or more than double the already mind-boggling US ratio of 25%.

The Japanese are absolutely destroying the credibility of their currency in a last ditch effort to boost short-term economic growth.

So why would they want to devalue their currency?

Well, there are too main reasons why nations do this.

One reason is that it makes it easier to pay off debt.  The government debt to GDP ratio in Japan is approximately 250 percent at the moment, and the total debt to GDP ratio is approximately 600 percent.  When you have lots more money floating around, servicing crippling levels of debt becomes more feasible.

Secondly, nations like to devalue their currencies because it makes their products less expensive on the world stage.

In other words, it helps them sell more stuff to other people.

But in the process, this hurts other exporters.  For example, what the Bank of Japan just did is already having serious consequences for South Korean automakers

In Seoul, shares of auto makers Hyundai Motor and Kia Motors fell 5.9% and 5.6%, respectively, on Monday.

South Korean and Japanese companies often compete head-to-head in the same product groups in global markets, notably cars and electronics goods.

From the Bank of Japan’s standpoint, “you’re giving your industry a head start relative to someone else’s,” said Markus Rosgen, regional head of equity strategy at Citi in Hong Kong. “The perception in the equity market will be that they [South Korea] will have to take a hit from the lack of competitiveness versus the Japanese.”

This is why I said that there are winners and there are losers in every currency war.

If you boost your exports by devaluing your currency, you take away business from someone else.  And ultimately other nations start devaluing their currencies in an attempt to stay competitive.  That is why they call it a currency war.

For now, the Japanese are celebrating.  On Friday, Japanese stocks surged almost five percent for the day and reached a seven year high.  Investors tend to love quantitative easing, and they were very pleasantly surprised by what the Bank of Japan decided to do.

But of course rising stock prices are not always a good thing.  As Kyle Bass recently explained, wild money printing caused Zimbabwe’s stock market to skyrocket to unprecedented heights as well and that turned out very, very badly…

Amid the euphoria… Kyle Bass provided a few minutes of sanity this morning in an interview with CNBC’s Gary Kaminsky. Bass starts by reflecting on the ongoing (and escalating) money-printing (or balance sheet expansion as we noted here) as the driver of stock movements currently and would not be surprised to see them move higher still (given the ongoing printing expected).

However, he caveats that nominally bullish statement with a critical point, “Zimbabwe’s stock market was the best performer this decade – but your entire portfolio now buys you 3 eggs” as purchasing power is crushed. Investors, he says, are “too focused on nominal prices” as the rate of growth of the monetary base is destroying true wealth. Bass is convinced that cost-push inflation is coming (as the velocity of money will move once psychology shifts) and investors must not take their eye off the insidious nature of underlying inflation – no matter what we are told by the government (as they will always lie when its critical). Own ‘productive assets’, finance them at low fixed rates (thank you Ben)…

And just like we have experienced with quantitative easing in the United States, Japan’s money printing has done very little to help the real economy.  Here is more from David Stockman

Notwithstanding the massive hype of Abenomics, Japan’s real GDP is lower than it was in early 2013, while its trade accounts have continued to deteriorate and real wages have headed sharply south.

So up to this point Japan’s experiment in crazy money printing has been a dismal failure.

Will printing even more money turn things around?

We shall see, but I wouldn’t hold your breath.

Meanwhile, there are reports that the European Central Bank is getting ready for more quantitative easing.  Central banks all over the planet are becoming increasingly desperate for answers, and the temptation to print, print and print some more is extremely strong.

Nobody is quite sure how this currency war will play out, but I have a feeling that it isn’t going to be pretty.

  • Mike Smithy

    Riddle me this: If all nations were to devalue their currency at the same rate, wouldn’t the net effect on the global economy be inconsequential?

    • Firstgarden

      Great question. Even if this were possible, everyone’s currency would be worth less. Did I say worthless?

      • Ian B.

        Possible? It’s what’s happening now.

      • Mike Smithy

        Ahh Yes, inflation is a stealth tax by any other name.

        • Firstgarden

          Methinks everyone would keep on printing. How watery can a stew be until it’s not stew anymore?

    • tom

      inflation

      • Ian B.

        inflation for the people holding the paper, a dream come true for the banks printing (digitally) the money.

    • Ian B.

      For the Lords, yes.

      For the serfs, no.

    • MichaelfromTheEconomicCollapse

      Interesting thought. Although you have to also take into account the destabilization of the global financial markets, transactions costs, etc.

      Michael

  • DJohn1

    This is Keynesian economics at its worse.
    But what choice does Japan have? They have gone through some of the worst economic times lately.
    Europe is also quite a mess. So printing money is a very attractive way of solving the problem. Switzerland has a real problem with this. They have been financially responsible for years and their currency is on top of the value heap.
    I suggest a lot of people are going to be sitting on their hands waiting to see what happens world wide. I suggest a lot of currency will gravitate to the most stable currencies in the area. Switzerland looks awful gppd right now. Their currency is undervalued. That and since world war II it has increased in value to the tune of 1 to 3500%.
    Germany did this around 1922. Pretty soon the currency went broke and was worthless. That could easily happen to other currencies right now. The printing press is alive and well and being used to devalue the entire world!
    What will eventually happen is either the solvent nations will put up barriers to foreign currencies such as tariffs or we will end up with a closely regulated world currency for everyone.
    My bet is on the world currency coming into being. We will have to exchange all cash for the new currency. Probably over a period of less than 3 months.

    • Ian B.

      I agree with your conclusion except for the time frame. I wouldn’t put a date on it. Where do you get 3 months?

      • DJohn1

        Logistics of making a change over can be faster but I would suggest it will take 3 months to make a complete change over given the amount of currency involved. Then you have all that money in safe deposit boxes and people that are not here to make the exchange. There is also a huge underground of money from sources that are not exactly legitimate. These too have to be changed over by a certain date or they are worthless.

        • smallergovnow

          The biggest objectors will be the illegitimate sources of money…. That is the argument they will use and that will f&ck people who have saved off the grid…

      • Mike Smithy

        I suspect the NWO will push for a digital crypto currency based upon the Bitcoin model.

        • Ian B.

          I agree. The first thousand that sign up get their new currency on a shiny new iWatch. Or we’ll get chipped when the Ebola vaccine comes out.

    • SodThat

      Given the Euro experiment has gone horrible wrong I can’t see how a world currency would work. You simply can’t have such disparate economies on the same currency, it just doesn’t work. I suspect what will happen is the SDR will move to the foreground and become the new world reserve currency, this will ensure US hegemony for a while longer once the dollar dies.

      • Ian B.

        After Agenda 21 is complete it will be easy to implement a world currency.

    • MichaelfromTheEconomicCollapse

      I once gave a speech about Keynesian economics when I was in college. At the time, I didn’t even know how to pronounce it correctly. And of course we were all being taught how great it was.

      It was only after I got out of school that I learned that truth.

      Michael

  • DJohn1

    IF the countries wanted answers they would have found them a long time before this. They are stuck. They have painted themselves into economic corners with no way out.
    I think they are getting ready to leave. They are going to take their real money and make a run for it. The question is where can they go?

    • Firstgarden

      How many private islands are there in Micronesia?

      • jakartaman

        The over 13,000 Islands -private?

        • Firstgarden

          Just figuratively speaking. The mega wealthy are buying private islands where it suits them. Folks like John Malone, Larry Ellison, Celine Dion, Eddie Murphy, Mel Gibson, Johnny Depp, Tyler Perry, to name just a few.

          Many are buying in places like the Bahamas, Quebec, Caribbean, Hawaii. Canada has the most islands with over 300,000. These include both major and minor islands, fresh water and salt water islands. Most are opting for warmer climates, though.

          Warren Buffett is sitting on 55 Billion, instead of vesting it in stocks. Back to the original question – where is he squirreling his nuts during the long hard winter ahead?

          • jakartaman

            The smart ones should go for the southern hemipshere.
            When things get real nasty and the nukes start to fly – the northern hemisphere will be a wasteland

    • XSANDIEGOCA

      Gold is the answer. At some point, even the Central Governments can not control the price. It will skyrocket and governments will issue confiscation orders.

      • DJohn1

        Gold is a problem because it is dependent on supply and demand.
        The price of said metal has gone down when nations like Russia dumped huge amounts of it on the market in the 90s.
        It has also skyrocketed after 9/11.

        Right now it is about 400 dollars down from its peak. But I have really not kept close tabs on it.
        Oil is a better commodity for investment. Right now it is way down in price. I personally think it will skyrocket in price over the next 4 years. Possibly going to 5 dollars or even 6 dollars a gallon of gas.
        Right now the big problem is that Arabia is nose diving the price to break Russia’s control over oil.
        Natural gas is also a strong contender for competing with oil.
        I think there will be a shift from diesel fuel to natural gas in this country. I think it is the major trucking lines that will make the change over at a considerable cost savings over diesel fuel.
        The lack of demand for diesel fuel will cause a drop in price for the alternative of gasoline in cars.
        All of which I think will be controlled by a major gas supplier. Watch what Exxon does in the next few months.
        Fuel of any kind is about 1/3 of the cost of any retail product in this country. Transportation of commercial goods across state lines puts it under the federal guidelines of the interstate commerce act.
        That is why a major carrier of goods controls the price of said goods in the market place.
        We are set to become the major player in natural gas production for the entire world.

        • XSANDIEGOCA

          Excellent points but we both agree that keeping your wealth in Fiat Currency is Folly.

          • DJohn1

            What I personally do is keep enough currency out of a bank to last me a month.
            Because if this comes down the way I think it will come down then the banks will have at least a two week bank holiday as they straighten out the mess they have made.
            That means no one will be able to pay their bills.
            This same thing happened in 1988 in Houston when the oil went through the basement. Banks went under. Same banks wanted to collect their mortgage payments but would not recognize the checks from their own banks. People lost their homes because of it.
            Not sure they ever corrected the law that enabled that to happen.

          • XSANDIEGOCA

            I had forgotten that! Thanks for the reminder. I agree the Banks will pull a “Cyprus” on us. Only a matter of time. Also look for 10% or so of your 401ks to be converted to 30 year treasuries.

    • Ian B.

      Physical silver is also good place to go. Silver has many medical and industrial uses and is way under production cost right now.

      • MichaelfromTheEconomicCollapse

        And silver has dropped so low that it is an awesome buying opportunity right now.

        Michael

        • Ian B.

          I feel honored to get a response from you, I really enjoy your blogs. Thanks

          Ian

  • Erik Bergum

    Our media definitely needs to wake up to this

    • Ian B.

      Our media is owned by “this”

    • MichaelfromTheEconomicCollapse

      I will agree with you on that.

  • Priszilla

    Just watched a documentary about the damage and cleanup at Fukushima. It will take them decades. And someone has to finance it.
    Fukushima city has 300000 people. And every building, street, park, roof, wall, signpost has to be scrubbed clean. Every square inch of soil is removed 2 inches deep and stored.
    In the power plant they are packed in like ebola doctors. And can only work 2h shifts. Every contaminated material and water, incl rainwater and groundwater is collected, stored, decontaminated.
    This is a huge operation. Just costs. And someone has to pay for everything.

    • SodThat

      What’s the documentary called?

    • MichaelfromTheEconomicCollapse

      This is something that we never hear anything about from the mainstream media anymore.

      Michael

    • Mark Caldwell

      They are pumping dirty water back into the ocean, they can’t store it all and have quietly quit trying, claiming water sent back into ocean is “safe”

  • Orange Jean

    Any ideas about how this is going to affect Japanese automakers?

    • Mike Smithy

      Theoretically speaking, it is good news for Japanese exports. However, global nominal wages are going down. I am not convinced that the average global consumer can afford to purchase these new vehicles.

    • MichaelfromTheEconomicCollapse

      In the short-term it will probably help Japanese automakers.

  • John Pallyswine

    The printing goes on because people are cowards and willfully ignorant and our leaders are not in jail. Who will put them in jail? When? Good questions. Will it happen?

  • XSANDIEGOCA

    The Money Quote:
    *
    “Zimbabwe’s stock market was the best performer this decade – but your entire portfolio now buys you 3 eggs” as purchasing power is crushed. Investors, he says, are “too focused on nominal prices” as the rate of growth of the monetary base is destroying true wealth. Bass is convinced that cost-push inflation is coming (as the velocity of money will move once psychology shifts) and investors must not take their eye off the insidious nature of underlying inflation – no matter what we are told by the government (as they will always lie when its critical). Own ‘productive assets’, finance them at low fixed rates (thank you Ben)…
    *
    Buy Gold, Silver, Uncut Diamonds or – failing that – invest in something more pedestrian, wheelbarrow manufacturers, so people can haul around their Geld a la Weimar.

  • DeadManFromIndia

    guys can anyone explain ? US has printed money and dollar is appreciating against most if not all currencies. Japan is printing money and as expected, yen is depreciating, why this behavior ?

    • Mike Smithy

      In my humble opinion, I suspect that the FED is in a Catch22 situation. On one hand, they do not want the USD to lose it’s world reserve currency status. On the other hand, real GDP growth is not attainable at this juncture and they need to create the illusion of economic growth by spawning inflation. For the time being, the USD is still the prettiest ugly girl at the dance. We know that China and Russia among others are cutting deals with one another that prices oil in currencies other than the USD. Perhaps a tectonic paradigm shift is on the horizon that will cause the USD to lose its reserve status. If and/or when that happens look, for WW3 to start in earnest.

      • tacoma

        US Fed massive QE is to bail out the banking system which has lost a great deal from mortgage crisis. The money flows only to the banks under strict rules, and to a small extent to the administration to reduce budget deficits, but not to the general economy. The economy continues to deflate, subtracting out the QE, thus producing low inflation.

        Japan recent QE is also to bail out both government and banks by helping them reduced massive debt holdings. The ‘printed’ money will not flow to the general economy, and thus Japan economy will continue as it is. The only benefit is lowering the price of exports.

        The EU central bank refused to do QE to bail anybody out. The banks will have to fix themselves or die. The general EU economy also have to fix itself – which is called austerity and subject of much doom and gloom. This policy maintains Euro currency strength and increase its status a reserve currency. The EU no-QE policy, along with US Fed’s massive QE policy, is the push-pull that have already moved 10% of world’s reserve currency from the USD to the Euro. Soon, the reserve value of both USD and the Euro will be equal, and this will give the EU a powerful economic and currency might. The EU is paying the price for future gains, while the US is doing the opposite.

    • MichaelfromTheEconomicCollapse

      Japan is printing money faster than we are.

  • Evelyn de Rothschild

    We planed this moron!

  • REMAINFREE

    I’m wondering just what effects, immediate and say thru the next couple of years, and seismic change the current bull run on the dollar makes? How long can the U.S. absorb other deflationary currencies before they have to raise rates? How long will it take before short term rates start to hit home? Some say we’ll start feeling the effects by March of 2015.
    Any thoughts?

    • MichaelfromTheEconomicCollapse

      I think that early 2015 is definitely a key time frame to watch.

      Michael

  • Let me Out

    Dear Michael,

    Can we stop playing their game and call Quantitative Easing by its real name “Money Printing” “Stealing” “Counterfeiting” The FED speak is done to confuse the people and we should not help them.

    • MichaelfromTheEconomicCollapse

      That is a very good point.

      If you or I tried to print money, it would be called counterfeiting. :)

      Michael

  • Billzo

    I believe the world leaders are in the middle of a fiscal crisis. In order to fund indebted economies, the money printing escalates. In the US, reform is needed, however, the American people will not tolerate any cut to entitlements, benefits, or increase in tax. I believe it is too late for reform. Too few of our leaders are trying to solve this problem. The only option I see is an eventual collapse followed by anarchy. Any country could trigger the fall of the global economic house of cards.

    • MichaelfromTheEconomicCollapse

      Without a doubt government debt around the world is at unprecedented levels.

  • JohnC

    If the Japanese banks devalue The Yen will this not only lower the price for exporting products but also increase the price for imports. This might sound good in the short term for the economy but if you know anything about Japan especially more so than the USA, it is this that the country relays on a lot on imports most notably on raw materials and food. If the price goes up in the imports, which if policy is to devalue the Yen more than other world currencies, then you will see a
    slowdown and possibly a crash in some of the major Japanese industries.
    I am certain if this path is pursue vigorously then unemployment will go up.

    Just take one area say the import of food such as wheat. The average Japanese person will see the price goes up and will have to pay more for food. Paying more for food mean they will have less money to spend, save or invest for other things. The non-essentials such as lest say video games (Huge domestically market in Japan, companies such as Sony and Nintendo make a lot of profit from the home market), customers might decide to spend less on this and in turn this may affect this industry and others leading to downsizing and/or cost cutting on this and other industries.

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