Best of the Week
Most Popular
1.Is the Stocks Bull Market Over? Dow Trend Forecast into End January 2015 - Nadeem_Walayat
2.Gold and Silver Stocks Apocalypse Now, Bear Market Review - Rambus_Chartology
3.NHS Baldrick Plan to Spread Ebola Across UK - Sheffield, Newcastle, Liverpool, London Hospitals - Nadeem_Walayat
4.Ebola Terror Threat Suicide Bio-Weapons Threatens Multiple 9/11's, Global Plague - Nadeem_Walayat
5.Second-Richest Man Says Mortgages Now a "No Brainer" - Dr. Steve Sjuggerud
6.Gold And Silver Still No End In Sight - Michael_Noonan
7.NHS Baldrick Plan to Spread Ebola Across UK - Sheffield, Newcastle, Liverpool, London Hospitals - Nadeem_Walayat
8.The Gold Bug is Set to Bite Back - EWI
9.How Alibaba Could Capitalize on the EBay-PayPal Split - Frank_Holmes
10.The Consequences of the Economic Peace - John_Mauldin
Last 5 days
Gold Stocks Analysis – FNV, CG, NCM, SBM - 19th Oct 14
Stock Market Primary IV Wave Counter Trend Rally - 19th Oct 14
Gold And Silver - Financial World: House Of Cards Built On Sand - 18th Oct 14
Anatomy of a Stock Market Sell-Off - 18th Oct 14
Why OPEC Has Declared an Oil War on Russia - 18th Oct 14
Gold and Silver Extreme Shorting Peaks - 18th Oct 14
Bitcoin Price Fall to $350? - 18th Oct 14
Tesco Supermarket Crisis Worse To Come as Customers Vanish! - 18th Oct 14
Sheffield Roma Crisis School Place Application's Fraud Perfect Storm - 17th Oct 14
Stock Markets, Commodities and Indicators - 17th Oct 14
“Save Our Swiss Gold ” - Game Changer For Gold? - 17th Oct 14
How to Trade the Ebola Stock Market Sell-Off - 17th Oct 14
When... Not if... Crude Oil Price Drops Below $70 - 17th Oct 14
Either You're The Butcher or You're The Cattle - 17th Oct 14
Gold Benefits from Market Uncertainty - 17th Oct 14
Stock Market Pullback Underway, Euro downside, Commodities - 17th Oct 14
Stock Market Seven Year Cycle and A Correction Ahead? - 17th Oct 14
Three Ways to Play Uranium: Top Stock Picks - 17th Oct 14
America Flirts With Deflation - 17th Oct 14
Why the Fed Should Consider Delaying the End of QE - 16th Oct 14
Gold Prices Since 9-11 - 16th Oct 14
The Inflation Imputation, Dear Saver, May You RIP - 16th Oct 14
Flight To Safety - Gold Rises As Stocks, European Bonds Sink - 16th Oct 14
The March Of History And The End Of Nations - 16th Oct 14
Stocks Bear Markets Move Fast and Are Intensely Emotional - 16th Oct 14
Stocks Got Their Piece – Now It’s Our Turn - 16th Oct 14
Why This Stock Market Selloff Is the Next "Buy the Dip" Opportunity in Stocks - 15th Oct 14
Possible Stock Market Runing Correction - 15th Oct 14
Get Your Tactics Ready for the Ebola Stock Market Event - 15th Oct 14
Secret Scheme To Manipulate Silver Price - Lawsuits Against Banks Proceed - 15th Oct 14
Stocks Bull Market Over? Trend Forecast to End Jan 2015 - Video - 15th Oct 14
Stock Market Dow The Contrarian Play - 15th Oct 14
The Ukraine, As We Know It, Is Gone Forever - 15th Oct 14
We Can Police the Dark Web / Bitcoin - 15th Oct 14
The Safest Stocks in the World - 14th Oct 14
Building an Ark: How to Protect Public Revenues From the Next Financial Meltdown - 14th Oct 14
9 Ways to Retire Rich - 14th Oct 14
Silver, Warfare and Welfare - 14th Oct 14
Swiss Gold Referendum “Propaganda War” Begins - 14th Oct 14
What Happened To The Fourth Estate? - 14th Oct 14
How To Blow Up OPEC In 3 Easy Steps - 14th Oct 14
Investment Myth - Wars are bullish/bearish for Stocks - 14th Oct 14
Powerful Reversal and Shakeout in the Junior Gold Mining Stocks at May Lows Around $33 - 13th Oct 14
When The Economy Went Ponzi - 13th Oct 14
Stock Markets Get Ugly – and May Be Getting Uglier - 13th Oct 14
Cycle Failures Point to a Stock Market Correction - 13th Oct 14
Bill Ackman: I'm not a Crybaby Shareholder - 13th Oct 14
U.S. and World Stock Markets Chartology - 13th Oct 14
Stock Market Intermediate Downtrend Confirmed - 13th Oct 14
Gold and Silver Price To Rally Or Not To Rally - 13th Oct 14
Is the Stocks Bull Market Over? Dow Trend Forecast into End January 2015 - 12th Oct 14
Has Obama Changed His Mind About Syria? - 12th Oct 14
New Zero Bound Only Game In Town - 12th Oct 14
The 5–Year U.S. Treasury Bond is Emblematic of Careless Risk Taking in Bond Markets - 12th Oct 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Stocks Epic Bear Market

How to Make a Fortune If the Currency Wars Go Atomic

Currencies / Fiat Currency Feb 25, 2013 - 12:16 PM GMT

By: Money_Morning

Currencies

Shah Gilani writes: There's a lot of talk about currency wars these days, but very little understanding about what that means for specific countries, economic growth, inflation, and your pocketbook.

Let's fix that.

First of all, there has been no declaration of any currency war. And there likely won't be.


That's because open currency warfare could quickly lead to a mushrooming global crisis.

But that doesn't mean countries aren't already engaged in currency battles; they are. They almost always are.

Here's an over-simplified explanation about how currency wars affect you.

What You Need To Know About Currencies
If Japan exports cars to America and America exports grain to Japan, each has to pay the other. American grain exporters want to get paid in dollars, so they can spend those dollars in the U.S. The Japanese want to get paid in yen so they can pay their workers in yen, pay their taxes in yen, and spend their money in Japan.

Americans (in this example it wouldn't be you, but the cars importers) can "buy" yen with their dollars to pay the Japanese for their cars, or the Japanese can accept dollars as payment and then use those dollars to buy yen themselves.

Of course it works the other way around if you're a grain farmer selling to Japan.

But the value of yen to dollars, or dollars to yen, isn't constant. There is no set exchange rate. Exchange rates are set in open currency trading markets where currencies are bought and sold to the tune of several trillions of dollars a day, every day. One day a dollar might buy 100 yen and the next day it might buy only 98 yen, or it could buy 102 yen.

Lots of factors determine exchange rates, but the biggest, by far, is interest rates. I'll get to that, and then you'll understand the whole currency thing, and never forget it.

Currency wars, which are waged all the time, but not dramatically, are all about the value of your "home" currency relative to other countries' currencies. Our home currency in America is the U.S. dollar, in Japan it's the yen, in the 17-nation euro-currency bloc it's the euro, in Great Britain it's the pound, and so on.

Countries that export a lot of goods want their currency to be "cheap" relative to other countries, especially those countries who are buying the home countries' exported goods.

If the value of American dollars to Japanese yen is strong, meaning a dollar can buy a lot of yen, when you buy a Japanese car, for example, it will take fewer dollars to pay for it.
If the value of the yen goes up relative to the dollar, that car is going to cost more because your dollars don't buy as many yen as they did before.

Currency exchange rates have nothing to do with what kind of car you are buying from Japan or what features it has; the currency "cost" is a separate component of the cost of that car. That's true for all products imported and exported around the world.

Because Japan exports a lot of cars, not just to America, but around the world, it wants its currency to be "cheaper" than other currencies so it doesn't take as many dollars, or euros, or pounds to buy a Japanese car, or any product exported from Japan.

Here's the problem. America is a huge exporter of goods and services, too. So is Germany, and of course so is China. From a political perspective, all governments want to support their exporting industries. It's about manufacturing and jobs, and revenue and profits, and economic growth and standards of living.

The easiest way to facilitate an export-driven economy, like Japan's, like China's, like Germany's, and like America's (especially lately as domestic demand in the U.S. has softened as a result of the Great Recession) is to keep the home currency "cheap" relative to other currencies.

If exporting countries, especially those that don't have big domestic demand bases, meaning less-developed and "emerging-markets" economies, are all trying to export their way to growth (as is the U.S.) and they all want to have their currencies be "cheap" on a relative basis, that can't happen. Everyone's currency can't be cheap at the same time.

That's what precipitates currency wars. Governments who want to stimulate growth through exports (and who doesn't?) usually subtly, but sometimes overtly, take measures to lower the value of their currencies.

Japan's new Prime Minister, Shinzo Abe, in an unusual exception to the pacifist approach to currency skirmishes, recently fired a shot heard round the world. To lower the value of the yen, Abe is demanding domestic monetary easing, aggressive stimulus, and more dangerously, has openly been talking down the yen.

While Abe's bold-faced rhetoric is provocative, G20 finance ministers and Christine Lagarde, Managing Director of the IMF, have been calmly trying to defuse any mounting tensions that could trigger any country-specific retaliation and a global race to devalue currencies.

Is Japan to blame? No. America really started the latest round of currency battles.

In order to "stimulate" our way out of the Great Recession, which included President Obama's articulated policy of dramatically increasing America's exports, the Federal Reserve, in conjunction with the Administration's wishes and its own interest in re-capitalizing the nation's big banks the Fed is beholden to, has kept interest rates low, as in very low.

One of the ways the Fed has done this is by "printing" money. The Fed has the ability, beyond the reach of Congress or the President, to buy what it wants, which is most often U.S. Treasury government bonds (that pay interest). It pays for what it buys by simply issuing "credits" as payment.

Those credits are turned into money as they are spent by the government whose bonds the Fed buys, or by banks who sell the Fed (on a temporary basis, with the intention of buying them back in the future, usually) their underwater mortgage-backed securities. Thus, the banks supposedly have money to lend.

Here's Where It All Comes Together
Because the Fed has kept interest rates so low in America, investors who want more interest income on their money than they get here are parking their money in other countries where interest rates are higher. In order to put your money into a bank in another country that offers higher interest rates than banks offer in the U.S. you have to first buy that country's currency. And that bids up that country's currency relative to the dollars that you are selling.

In addition to the dollar being weakened, on a relative value basis, by investors selling dollars to buy and invest in other countries currencies, the amount of money being printed by the Fed means that at some point in the future all that money in the system will cause prices to rise.

Inflation is the result of a lot of excess paper money chasing a set amount of goods and services.

Inflation, and just the prospect of inflation, causes the dollar to fall further. And if the dollar is falling relative to the Japanese yen or the euro, other countries who want to grow their exports are going to eventually do what they have to in order to lower the value of their own currencies.

That's how we get into currency wars.

The net result is inflation, which arrives in several different ways.

You'll know when it's starting to spread. Interest rates will start to rise; watch the yield on the U.S. 10-year treasury. Commodity prices will rise; you'll see it in your grocery bills. You may already be seeing the incipient signs.

Stocks will rise at first -- then start to collapse. So, make sure you're in the market but keep raising your protective stops as prices rise.

Buy commodities and gold, but take profits on your commodities as they skyrocket; they won't stay high forever.

Don't pay off your mortgage, make the minimum payments. You can pay it off later with cheaper dollars.

Accumulate as much cash as you can, and when prices crash -- which will include real estate -- be ready to buy, buy, buy.

That's how to turn an atomic implosion that could result from currency wars into a personal fortune.

Source :http://moneymorning.com/2013/02/25/how-to-make-a-fortune-if-the-currency-wars-go-atomic/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014