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Despite What You Don't Hear In The Media, It's ALL OUT (Currency) WAR! Pt. 1 The premise of this book, depicted to the right, is that Western countries are ultimately controlled by a group of private banks, which, according to the book, runs their central banks. This book uses the claim that the Federal Reserve is a private body to support its role. The book's author correctly predicted a banking crisis in the US in 2008. More than one million copies of this book have been sold. I've finally been convinced to manage others' money. This series of posts l outline my investment thesis going in. The world is at war, yet it's citizens don't even know it! First, a backgrounder, as excerpted from Wikipedia:
Of course, it seems to be lost on many that competitive devaluations (currency war) only really works for strong net export nations such as China, Japan, Germany and the US. If you are highly reliant on imports vs. exports and try to become a currency warrior then the Marshall–Lerner condition will likely occur. Best case scenario you get a significant lag in true economic benefits, likely scenario... You just piss off your neighbors and lose economic benefit as the higher price of your imports simply outweight the internal generation of economic activity and exports. After all, if you buy more than you sell, why raise the price of your purchases? The Three Methods of Currency Manipulation Countries and their central banks can: Buy and sell currencies in the open market. This takes horsepower. Just ask the Swiss National Bank whose balance sheet swelled 3x in 2 years - and that's before the ECB QE announcement (which would have easily doubled the pressure, if not more). If you want to move upscale, ask the Bank of England after their conversation with Soros, et. al.
If you haven't picked up on the theme yet, this central bank buying currencies in an attempt to over power the markets (dirty float) stuff really just doesn't work. Over time, mother market takes charge and extracts one hell of a price in return. Central banks can also just attempt to talk rates down or up. I'll not waste anymore words on this as CBs around the world have lost creditiblity. Talk is cheap! Lastly, and this is the kicker, banks can engage in quantitative easing (QE). QE is essentially the injection of money into the economy by openly purchasing public and private assets, oftentimes dead assets that no private entity would touch with a ten foot pole. The PC way of putting it is this is creating money, but more aptly put this bailing out failed institutions by creating a market for things that the actual market has priced at, or close to, economically nothing. This practice was invented by the Japanese, and it didn't work! Do you guys remember the 26 year lost decade? It's not that hard to rememer since, although it started in 1990, it's still ongoing. That's Japanese central banker math for you. As per Wikipedia: The Lost Decade or the Lost 10 Years is the time after the Japanese asset price bubble's collapse within the Japanese economy. The term originally referred to the years from 1991 to 2000, but recently the decade from 2001 to 2010 is often included, so that the whole period of the 1990s to the present is referred to as the Lost Two Decades or the Lost 20 Years . Over the period of 1995 to 2007, GDP fell from $5.33 to $4.36 trillion in nominal terms, real wages fell around 5%, while the country experienced a stagnant price level. While there is some debate on the extent and measurement of Japan's setbacks, the economic effect of the Lost Decade is well established and Japanese policymakers continue to grapple with its consequences.
Now, there are some who said Japan did start recovering earlier, but they used the very malleable (in terms of definition) GDP numbers to prove their point. Asset values didn't back the story... QE was taken to the next level by the only central bank that I know of that is actually owned by, and controlled by, a coterie of private, for profit, publicly traded banks. It is also the most powerful central bank in the world, bar none. Here's a hint... Between QE1/2/3, the Fed has injected well over $3 trillion dollars and has exploded its balance sheet both in terms of size and composition... Despite many proclamations that things are getting better, the Fed has increased its purchases of both MBS (the housing market's financial underpinnings are still in trouble of the Fed wouldn't be doing this) and US Treasury securities (the treasury issues the securities to fund the US and the Fed creates money and buys them - as wel all know, we are financing our credit cards with newly acquired credit cards). It is the Fed that ISthis country (US), almost literally with a balance sheet that is over 25% of the US GDP. Remember who owns the Fed? Well, if you do you realize why the ECB is doing this QE thing to the level that it is. Their banks are still in trouble, material trouble. Reference "Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe" from 5 years ago and tell me if you think its gotten better... Well, it's all relative. The banks are smaller, leverage is down - and that's after 6 years of global QE, ZIRP and now NIRP, yet each and every bank is big enough to collapse the country that it's domicled in... And since the big global banks are so interconnected as they daisychain their hedges and act as counterparties with each other (6 banks hold over 85% of the multi-trillion dollars global derivatives exposure), once one goes down hard, it brings the rest with them. And as you can see from the size of each individual bank relative to their domiciled country, such an event will still drag the countries down with them.
Okay, now back to this discussion of currency wars, something's got to give. Countries cannot (or at least, have never) successfully pursued all three methods of currency manipulation without failing. According to Wikipedia:
It is both a hypothesis based on the uncovered interest rate parity condition, and a finding from empirical studies where governments that have tried to simultaneously pursue all three goals have failed. The Impossible Trinity or "The Trilemma", in which three policy positions are possible. If a nation were to adopt positiona, for example, then it would maintain a fixed exchange rate and allow free capital flows, the consequence of which would be loss of monetary sovereignty. So, either balance sheets get burned trying to buy and sell currencies, capital controls are implemented, or QE (sovereign monetary policy) fails. All three are likely not going to succeed. Stay tuned for part two of four of this series in roughly 24 hours. Anyone who wishes to chit-chat can reach me at reggie AT ultra-coin.com.
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