Global Competitive Devaluation continues

We've been predicting Global Competitive Devaluation here for years.

Now, The Economist discusses:

What are the potential implications of a world in which many large economies are weighing the benefits of competitive devaluation?

The first point to make is that Japan is not particularly good at this game. Large, one-off interventions against a backdrop of sustained deflation are unlikely to be effective; markets know the yen will be going back up again in no time. Second, a real intervention would be very good for Japan. Consumer prices are falling in Japan, as they tend to. Were the Bank of Japan to make a concerted effort to print yen and sell them for other things—dollars, say—then deflation might finally be vanquished and the economy might stumble into sustained growth for a change.

Third, that kind of intervention would have a direct, negative impact on other economies, whose currencies would appreciate relative to the yen. This negative impact could easily be offset, however, if those economies were to respond by printing their currencies and using them to buy yen. No one would get an exchange rate advantage, but broad monetary easing would lead to reflation, a higher level of aggregate demand, and better conditions in depressed economies. If everyone plays along, the net effect is of a coordinated monetary stimulus. Fourth, however, if other central banks are reluctant to play along, then elected governments may respond to pressure from foreign exporters by adopting trade restrictions. This was the common response among gold bloc countries to devaluations by other economies.

In sum, a crummy economic situation will encourage economies to pursue competitive devaluation. This action needn't be globally harmful and it could kick off a beneficial series of imitative efforts, approximating coordinated stimulus. There is a risk, however, that it will lead to a troubling unravelling of liberal trade regimes. It would therefore seem to be a good idea to skip right to the coordinated stimulus, which would reduce the pressure for risky economic policies in the first place.

And in the wake of The Economist's post, today the Australian central bank, custodian of one of the world's recently relatively sound currencies, takes a first step toward easing by cutting interest rates.

Shall we play a game?

Love to. Let's play Global Competitive Devaluation.

Wouldn't you prefer a nice game of chess?

Later. Let's play Global Competitive Devaluation.

Fine.

Got gold?

Competitive devaluation begins

You knew it couldn't last -- Euro Currency Board resolve to defend their currency as the Fed destroyed the dollar. Airbuses just aren't competitive against Boeings when the dollar is 50% off.

So the competitive devaluation begins.

Euro falls on speculation European consumer demand faltering, ECB may cut rates.

And continues.

Singapore May Slow Currency Gains to Aid Exporters at Expense of Inflation

What to do when countries around the world get into competitive devaluation to make their exports attractive? Hmmm.... what's the one store of value that dirty central bankers can't print? That's right, GOLD! And it's 10% off its recent high -- a perfect buying opportunity for you.

As the Realtors used to say, "Buy now or be priced out forever."

Barron's: Time to Print, Print, Print

Yes, that's actually the title, and this is actually the illustration, for this article ($) by serious columnist Jonathan R. Laing making a serious policy prescription in a serious financial newspaper.



Barron's makes the common mistake that stuffing the banks with more free money will somehow cause more lending to consumers who don't want and can't handle more debt, and that this lending would be a good thing. Au contraire. More debt is the last thing we need. As I've said before, printing money to buy Treasuries will cause asset bubbles, not wage inflation, in a 10% unemployment / 20% underemployment environment. How will consumers benefit if the cost of food and gas doubles but they still have no jobs?

Easy-money asset bubbles worsen the "wealth gap" by enriching asset owners (shareholders, real estate speculators, gold hoarders, vampire squid) while impoverishing the paycheck-to-paycheck working stiff.

Laing has it partially right. Devaluation is the only way out. But we've got to get the newly printed money directly to the people of America, not circuitously through more debt from the dirty banksters.

Regardless, the prime takeaway is that QE2 is coming:

Signs of a sea change in attitudes toward quantitative easing are growing, even in unusual quarters. Last month, the European Central Bank quietly invited Vincent Reinhart, a powerful figure in the Greespan Fed as director of the Division of Monetary Affairs from 2001 to 2007, to conduct a seminar on quantitative easing for its top staffers. That was momentous, given the institution's history as a bastion of monetary conservatism and rectitude.

'cause, you know, Greenspan's easy money worked out so great for everybody!

Shall we play a game?

Love to. Let's play Global Competitive Devaluation.

Wouldn't you prefer a nice game of chess?

Later. Let's play Global Competitive Devaluation.

Fine.

Get thee to a gold dealer, my friend.

Global Competitive Devaluation comes to Switzerland

Remember that Global Competitive Devaluation thing we've been talking about? The idea is that when the US and EU start printing money and devaluing their currencies, all other fiat currencies will have to devalue in order to keep their export and labor markets competitive.

Well, here it is with a vengeance. The Swiss Franc, long known as a rock solid, safe haven currency, just went Full Bernanke. Goldman Sachs elaborates via Zero Hedge.

In reaction to the sharp appreciation of the CHF over the past couple of weeks, the SNB announced a rate cut this morning, reducing its 3-month CHF Libor target to 0.00-0.25%, from 0.00-0.75% previously. Given that the SNB was targeting 0.25% within the old range - and 3-month rates were actually below that target – this change in target should be seen mostly as symbolic. However, it also shows that the risks to the monetary policy outlook have shifted significantly and our rate forecast is under review.

The SNB also announced that it would increase the supply of liquidity to banks by raising banks’ sight deposits at the SNB from around CHF30bn to CHF80bn. The idea behind this measure seems to be that, by increasing the liquidity available to banks, some of that liquidity will flow into Euro-denominated assets, thereby reducing the pressure on the CHF. Put differently, the SNB is aiming at the exchange rate channel in this latest ‘quantitative easing’ exercise.

Got gold?

Swiss National Bank goes Full Bernanke

For decades, the Swiss Franc has had a reputation of quality and stability, as the Swiss could be counted on for sane fiscal and monetary policy (not to mention a refreshing lack of entanglement in foreign military quagmires).

No longer.  Swiss Franc Collapses 7% - Swiss National Bank to Fix CHF to EUR and Debase Currency.

[...] the Swiss National Bank has decided to fix the country's exchange rate at 1.20 Swiss francs per euro. The SNB indicated it would buy an unlimited amount of euros regardless of the risk to maintain that value.

[...] The SNB said in a statement that it "is prepared to buy foreign currency in unlimited quantities."

The SNB has once again clearly indicated that the so called safe haven currency that is the Swiss franc is set to be debased alongside the dollar, the euro, the pound and all fiat currencies.

 We've discussed global competitive devaluation here for years.  The idea is that as the U.S. and Europe debase their currencies to try to prop up their bad banks, other countries will devalue as well in order to keep their export and labor markets competitive.  No country can afford to have the only sound currency in a Zimbabwe Ben world.  Not even Switzerland.

We've recommended positions in Australian and Canadian dollars in the past.  While these currencies are healthier than Bernanke Bucks (and have performed well since our recommendations), they are not immune to the forces of Global Competitive Devaluation.  Get thee to a gold dealer.

From beggar-thy-neighbor to bugger-thy-saver

Bill McBride at Calculated Risk agrees with Zimbabwe Ben when he says that today's money-printing orgy isn't a case of "beggar-thy-neighbor."

Zimbabwe Ben:

Indeed, the decline in the value of the pound after 1931 was associated with a relatively early recovery from the Depression by the United Kingdom, in part because of some rebound in exports. However, according to this view, the gains to the depreciating country were equaled or exceeded by the losses to its trading partners, which became less internationally competitive--hence, "beggar thy neighbor."

The idea behind beggar-thy-neighbor is that by devaluing your currency, you make exports cheap and imports expensive, and steal manufacturing jobs from your trading partners.

We have been using the phrase "global competitive devaluation" here for years, but McBride and Zimbabwe Ben have a point. There's nothing "competitive" in this clubby cabal of money-printing central bankers. They are all printing and devaluing their currencies relative to real assets, but currencies are being devalued at generally similar rates so no one central bank is trying to get way ahead of the others and "beggar-thy-neighbor." It's global co-ordinated devaluation, and the victim is not a trading partner nation but anyone anywhere who has saved money and is now earning 0% while the value of his currency falls.

Welcome to "bugger-thy-saver."

Quickies

We've been talking about competitive devaluation here for years. The most recent Economist agrees: Race to the bottom.

The battle for a cheap currency may eventually cause transatlantic (and transpacific) tension: not everyone can push down their exchange rates at once. For now, though, the dollar holds the cheap-money prize.

Our friend and fellow SLOB Left Coast Rebel has a piece in Daily Caller on global warming deception. Temple of Mut has done some great reporting on that subject recently as well.

Beers with Demo has a post combining two of our favorite subjects: beer and liberty. Though another favorite, states' rights, would be on the wrong side in this case.

We have one. It's called "gold."

Nobel-prize winner backs world currency

In related news, the Swiss refuse to be left out of the global game of Competitive Devaluation. Bernanke is all-in, the UK is all-in, and Switzerland calls short-stacked. Anyone actually think Jean-Claude will fold to preserve his Euros for another day? Fat chance.

Gold: a multigenerational store of value

Welcome to Camp Marston, a historic summer camp near Julian, California, from the early days of the San Diego YMCA.



"Photo from 1928, when boys would meet at the Downtown YMCA at 8th & C Avenue, then climb aboard this old truck for the long ride to Julian.  The fee for a camp session that year was $11.50 plus $1.50 for transportation." - photo caption.

This summer, a child can attend for $685.

That $11.50 in 1928 was just over half an ounce of gold, which was then around $20.66 per ounce.  The price today is just under a half an ounce of gold at $1650 per ounce.

Fiat currencies will come and go, but gold remains a remarkable long-term store of value.  And with central banks only recently ramping up the game of Global Competitive Devaluation, the next 85 years could see an even bigger divergence between gold and fiat than the last 85 years.

In the post-1971 pure fiat currency regime, gold has generated equity-like average returns with the diversifying benefit of a low correlation to equities.  It can be expected to outperform equities in a number of economic and policy scenarios for which the probabilities are decidedly non-zero.  I cannot fathom a valid excuse for any investor having a 0% allocation to gold.

Competitive devaluation

Mish:

Krugman wants a weaker dollar, Mundell wants a weaker Euro, Japan wants a weaker Yen, and everyone wants a stronger Yuan except China.

It is impossible for everyone to get what they want: a weaker currency vs. everyone else hoping to stimulate exports.

Academia is never concerned with such details.

My money is on Zimbabwe Ben. He's a more fanatical debaser of the currency than his European counterparts. The Eurozone will break up before they'll print enough to keep up with ZB.

Global competitive devaluation hits German renters

Germany ought to have low rent inflation, with its sluggish economy and declining demographics.  But a funny thing happens when people lose faith in a currency.  They begin to chase scarce assets with limited supply: fine art, gold, beachfront property, Berlin apartments.

Speigel:

The exploding costs and dwindling supply of urban housing are slowly pushing Germans of average means out of the cities. As September's national election approaches, politicians are jockeying to find viable solutions to a problem they helped create.

[...] Of the 1,200 apartments Mingazzini has sold this year, 150 were bought by Italians seeking to invest their savings in German real estate, which is seen as crisis-proof. "They know full well that if they buy an apartment that's currently being rented for €5 ($6.60) a square meter (about $0.60 a square foot), they can charge a lot more on a new lease," Mingazzini says.

The method being used by Italian teachers and lawyers to protect themselves against the euro crisis is causing turmoil in Germany's capital. Berlin's housing market is going haywire as local rents explode. Since 2007, average rents in the western part of the city have gone up by 20 percent, and other major cities are now experiencing the same development. Even apartments in second-tier cities have become nearly unaffordable for people with average incomes.

There was a time in my naive youth when I thought the Euro would be a sounder currency than the dollar because of the "stability pact" which imposed strict fiscal discipline on member states, limiting them to deficits of 3% of GDP.  Little did I realize that the "stability pact" was as big a farce as Gramm-Rudman, Pay-Go, the debt ceiling, or any budget gimmick that will be broken by politicians as soon as it becomes inconvenient.

Fasten your seat belts.  You wouldn't like the Germans when they're angry about inflation.

Protecting yourself in a dollar crash

With gold well above $1500, silver challenging $50, and the dollar index threatening all-time lows even against a basket of other printable fiat currencies, I thought it would be helpful to revisit Advice to a young man on supporting a mistress. This post from a year and a half ago listed investment ideas to protect your portfolio from Zimbabwe Ben. While the positions have performed extremely well since then, I think they still make sense today.

Foreign stocks:
VWO, VEA -- Vanguard emerging markets and EAFE index ETFs
SWISX -- Schwab international index fund
EWA -- Australia stock ETF
EWC -- Canada stock ETF

Foreign currencies:
FXA -- Australia currency ETF
FXC -- Canada currency ETF
Everbank.com -- savings accounts and CDs denominated in many different currencies

Foreign bonds:
PFUIX -- Pimco Foreign Bond (unhedged)

Commodities:
GSG -- Goldman Sachs Commodity Index ETF (yes, they are evil, but their index is OK)
GLD, SLV -- gold and silver ETFs
GDX -- gold miner index ETF
gold coins -- pick them up at your local dealer for $50 -$70 per ounce above the spot price of gold

For most investors with a long time horizon, I'd recommend a very diversified portfolio with most or all of the above in addition to significant chunk of US stocks (VTI -- Vanguard total index is the only thing you need to hold there) and a good chunk of cash/short-term CDs.

I still hold all of the above, or their functional equivalents, with the exception of the the foreign bond fund. With fiat currencies around the world likely to continue competitive devaluation, I'm not that enthusiastic about bonds anywhere.

Since then, I've also come to strongly prefer physical metals over the ETFs. And I'd take the Pimco Commodity Fund (PCRCX, PCRRX) over the GSG.

I also mentioned real estate in the post. Ironically, the one thing Zimbabwe Ben most wants to inflate is the one thing he hasn't been able to yet. It's still an open question whether the dollar collapse will be big enough to overcome today's still-high real estate valuations. But if it does, 4-to-1 leverage with a 30-year-fixed mortgage is a great way to play it.

Gold gold gold

I'd be remiss not to point out that gold hit yet another record high today over $1280, after rocketing $20 Tuesday and edging higher the rest of the week.

Meanwhile, the game of Global Competitive Devaluation continues.

Gee, who could have seen that coming?

Oh, and how's that "sell gold" call working out for you, Richard Wiggins?

EU President: Obama spendfest is the "Way to Hell"

Wait a minute, weren't the Euros swooning over Obama just two months ago?

E.U. President Calls U.S. Stimulus ‘Way to Hell’:

Czech Republic Prime Minister Mirek Topolanek called the U.S. recovery plan "a way to hell," CNN is reporting.

Topolanek may have reason to be bitter: his government collapsed yesterday after an embarrassing vote of no-confidence. The Czech Republic currently holds the rotating office of the presidency of the European Union, but Topolanek's comments significantly break ranks with the rest of Europe.

Topolanek said the Obama administration is following the same mistakes made by FDR that lengthened and worsened the Great Depression -- a view held by some U.S. free-marketers and political conservatives.

The Czech p.m. said he is "quite alarmed" at Treasury Secretary Tim Geithner's toxic asset plan.

"He talks about a large stimulus campaign by Americans," Topolanek said. "All of these steps, their combination and their permanency, is a way to hell."

Maybe they are just bitter that he beat them to the printing presses in the global game of competitive devaluation. No matter, they'll join him soon.

Sing it, boys!