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We need to be concerned about countries attempting to devalue their currencies. This race to the bottom is a continuation of the currency wars.
The currency wars started in 2010. At the time Jim said that we aren’t always in a currency war, but when they start they can go on for a very long period of time – 5, 10 or 15 years.
There is no natural resolution.
One country, particularly the US, which started the global currency war in 2010, tried to cheapen its currency.
Then other countries retaliated.
Some cheapen their currency by cutting rates, and others put up import duties or capital controls. There are also other techniques you can use to fight the currency wars, so they keep going on.
The US has said to the world, “Our printing press is bigger than your printing press.” So Brazil tried cutting rates and reducing its currency, and the FED came back and increased Quantitative Easing to try to cheapen the dollar.
There are counter trends, and sometimes when there is a global financial panic then a lot of money rushes into the US dollar as a safe haven. But there are bigger plays, like with the ECB cutting rates.
The problem is there is no natural resolution.
What you usually end up with is collapse or inflation.
Disinflation is a euphemism for deflation.
Deflation is a Central Bank’s worst nightmare. You can actually have a world where you have positive Real Growth, which sounds great, but negative Nominal Growth. The difference is deflation.
We have, for example, -1% Nominal Growth -3% Deflation (which is +3% Inflation) which gives you +2% Real Growth.
The problem with declining Nominal Growth is that your Debt-to-GDP ratio goes up.
Some things are real, and you care about that, but Debt-to-GDP is nominal, so Central have to care about deflation at all costs.
They’re worried about that in Europe, Japan, the US and all around the world.
Deflation is the greatest threat. It will make the sovereign debt crisis far worse than what we saw in 2010 and 2011 if deflation takes hold.
Part of Central Banks cutting rates is the currency wars and part of it is the fear of deflation.
The problem is everyone cannot do it at once.
The way you promote exports is not with a cheaper currency it’s with value added. For example Korea, Singapore and Germany, which have had very successful exports for decades with relatively strong currencies.
You promote exports with technology, education, innovation, value added – you create good products.
The reason countries are cutting their interest rates and cheapening their currencies today is not about increasing exports, it’s about importing inflation.
The US is a net importer. So what we’re really doing is paying more for imported goods. That’s what the Central Banks want.
Same thing in Japan. They tried to import inflation in the form of higher energy prices by cheapening the yen. Jim sees the yen going to $1.10 or $1.20 to $1 US dollar in order to get the inflation they want.
They want the inflation to fight the deflation that is the natural consequence of being in a depression.
The US economy is in terrible shape. We will look back at Quantitative Easing as one of the greatest blunders and failed experiments in economic history.
An economy is just how many people are working and how productive are they.
That’s all there is.
GDP is ‘How many people are working?” and ‘How productive are they?’
Labour force participation is collapsing and there isn’t enough Nominal GDP that the FED wants, so they want to close the gap between Real GDP and Nominal GDP which they need, with inflation.
That’s why they’re trying to cheapen the currency.
They’re trying to get inflation through QE, which Jim believes will not be tapering, and in fact will increase in the middle of next year. Jim sees a recession next year and so an increase in QE.
It’s definitely a bubble. The FED can’t see bubbles because they use the wrong models. They use the Equilibrium Model, Industrial Capacity Model, and Labour Force Models that don’t take into account asset bubbles.
Bubbles can go on a lot longer than you expect and they pop at the most unexpected times.
Jim would say that it is a bubble, but would also say that asset prices are going to continue to go up.
Be careful as an investor. You don’t know when it’s going to pop. Middle of next year? Late next year? There will come a time when the stock market will collapse 30% or more in a matter of weeks, maybe even days.
That will be the bubble popping, but Jim doesn’t see that happening yet. He believes they will continue to rise, but for the wrong reasons.
Another Week on Wall Street
words and music Elaine Diane Taylor
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from the album Coins and Crowns available on iTunes