The global currency wars are gaining momentum this month on the heels of a new concerted attack by the world’s leading central banks to combat deflation.
The euro has gained 7% in March and has cut its losses to just 2% against the dollar in 2009 following sharper losses just seven days ago. The dollar has plunged this week on renewed inflation fears as the Fed grows desperate to grow credit expansion in an increasingly dangerous deflationary environment.
But the euro, like all major currencies, is heading to the bar for a fresh round of intoxication as quantitative easing lurks in the shadows of this 20-month long credit crisis. And, unlike the United States, Japan and Switzerland, the European Union’s (EU) fragmented bond market makes this task monumental because of the diverse nature of its debt and credit ratings across the region.
Four major central banks and several other peripheral ones have now set a course to “quantitative easing,” a process whereby a central bank monetizes or purchases its own debt. The long-term consequences of these actions are inflationary as money is literally created to support domestic credit markets and grow the money supply. It also creates a dicey chain of interdependence as participants grow accustomed to central bank debt purchases. Just how long will this process last? What happens when it stops? Will traditional sources of funding (China, Japan) continue to buy Treasury or euro zone debt?
The United States, England, Japan, Switzerland and other countries have now embarked on a process of buying government and corporate issued debt to keep interest rates low and effectively weaken their national currencies.
Everyone wants a cheap currency as the global economy contracts for the first time in more than 60 years. This entire process is out of control with central banks throwing everything they’ve got at the financial system to keep it afloat. The endgame will be inflation – but not until the credit system begins to expand again. Still, gold and other inflation assets are beginning to discount this scenario following big rallies over the last 24 hours.
Europe is especially in deep water because the European Central Bank (ECB) doesn’t issue debt directly; through its financing arm or the European Investment Bank (EIB), governments in the euro zone issue debt individually, not collectively.
It’ll be pretty challenging for the ECB to begin quantitative easing because it’ll have to decide which countries’ bonds should be purchased; will it buy only AAA debt issued by Germany and France or will it accumulate bonds recently downgraded to AA and A in Spain and Greece?
Whatever the outcome for the ECB, quantitative easing is inevitable. The ECB will likely spread its debt purchases across the entire euro-zone, including corporate debt in order to get the lending spigots opened again. And of course, we all know where this story is going. The entire global exchange rate mechanism is largely dysfunctional and will remain a highly volatile forum until some sort of calm is restored to the financial system.
Until then, gold will continue to be the ultimate safe haven. I expect gold to break decisively through $1,075 before the summer and quite possibly hit $1,250 by August as the currency wars intensify. Currencies are dropping like flies with virtually everyone debasing their units simultaneously to fight deflation.
The next catalyst for higher gold prices will be an announcement of ECB “quantitative easing.” It’s inevitable. Deflation or inflation, gold prices will remain strongly supported as we dig deeper into the financial abyss this summer.
Have a good weekend. See you on Monday.
The euro has gained 7% in March and has cut its losses to just 2% against the dollar in 2009 following sharper losses just seven days ago. The dollar has plunged this week on renewed inflation fears as the Fed grows desperate to grow credit expansion in an increasingly dangerous deflationary environment.
But the euro, like all major currencies, is heading to the bar for a fresh round of intoxication as quantitative easing lurks in the shadows of this 20-month long credit crisis. And, unlike the United States, Japan and Switzerland, the European Union’s (EU) fragmented bond market makes this task monumental because of the diverse nature of its debt and credit ratings across the region.
Four major central banks and several other peripheral ones have now set a course to “quantitative easing,” a process whereby a central bank monetizes or purchases its own debt. The long-term consequences of these actions are inflationary as money is literally created to support domestic credit markets and grow the money supply. It also creates a dicey chain of interdependence as participants grow accustomed to central bank debt purchases. Just how long will this process last? What happens when it stops? Will traditional sources of funding (China, Japan) continue to buy Treasury or euro zone debt?
The United States, England, Japan, Switzerland and other countries have now embarked on a process of buying government and corporate issued debt to keep interest rates low and effectively weaken their national currencies.
Everyone wants a cheap currency as the global economy contracts for the first time in more than 60 years. This entire process is out of control with central banks throwing everything they’ve got at the financial system to keep it afloat. The endgame will be inflation – but not until the credit system begins to expand again. Still, gold and other inflation assets are beginning to discount this scenario following big rallies over the last 24 hours.
Europe is especially in deep water because the European Central Bank (ECB) doesn’t issue debt directly; through its financing arm or the European Investment Bank (EIB), governments in the euro zone issue debt individually, not collectively.
It’ll be pretty challenging for the ECB to begin quantitative easing because it’ll have to decide which countries’ bonds should be purchased; will it buy only AAA debt issued by Germany and France or will it accumulate bonds recently downgraded to AA and A in Spain and Greece?
Whatever the outcome for the ECB, quantitative easing is inevitable. The ECB will likely spread its debt purchases across the entire euro-zone, including corporate debt in order to get the lending spigots opened again. And of course, we all know where this story is going. The entire global exchange rate mechanism is largely dysfunctional and will remain a highly volatile forum until some sort of calm is restored to the financial system.
Until then, gold will continue to be the ultimate safe haven. I expect gold to break decisively through $1,075 before the summer and quite possibly hit $1,250 by August as the currency wars intensify. Currencies are dropping like flies with virtually everyone debasing their units simultaneously to fight deflation.
The next catalyst for higher gold prices will be an announcement of ECB “quantitative easing.” It’s inevitable. Deflation or inflation, gold prices will remain strongly supported as we dig deeper into the financial abyss this summer.
Have a good weekend. See you on Monday.
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