The Currency Wars Reignite

by Tyler Durden

Via Mark J. Grant, author of Out of the Box,
“Always remember, your focus determines your reality.”

                  -George Lucas

 Our reality has changed in the last twenty-four hours. The Bank of England and the European Central Bank have re-affirmed their old positions since the Fed has changed tacks. The initial reactions will be a spike in equities and a fall-off in the valuations of the Pound and the Euro to the Dollar. These, however, are first blush reactions as the color fades from the bloom.

It may well be, as Europe is in much worse financial condition than the United States, that there is a policy reason for the European positions but it may well also be a calculated move to devalue the major European currencies. Whatever the actual reasons, the European statements have certainly sounded the trumpet that the “Currency Wars” have reignited.

The Gods Of The Marketplace

by Mark J. Grant, author of Out of the Box,
"It's the lure of easy money. It has a very strong appeal."

                 -Glenn Frey, Smuggler's Blues

 

Investors borrowed $384.4 billion in April, a 1.3% gain from the previous month and a 29% rise from the same month last year. This is an all-time record for margin debt and it exceeds the previous high mark set in June 2007. Some may see this as an increased sign of investor confidence but I am not one of them. To me this is a giant red warning flag blowing in the financial breeze indicating the leveraging of dumb money making very risky bets.

"Every swindle is driven by a desire for easy money; it's the one thing the swindler and the swindled have in common."

                     -Mitchell Zuckoff

Substances based upon some sort of white powder are quite dangerous. They can overcome your good sense and then they it can be quite difficult to extricate yourself from them. The Great Depression was caused, in large part, by massive leverage utilized in the equity markets. This was the white powder of 1929. It took a decade and a World War before America was able to loosen the grip of the stuff.

Preparing for Inflationary Times

by Jeff Clark
 

"All this money printing, massive debt, and reckless deficit spending – and we have 2% inflation? I'm beginning to believe that either the deflationists are right, or the Fed's interventions are working." – Anonymous Casey Research reader
The CPI, in our view, does not accurately measure inflation, which accounts for some of the discrepancy our reader is pointing out. However, the proper definition of inflation is "an increase in the quantity of money," which we've had in spades. We've not experienced the concomitant increase in prices, which is what we're addressing in this article.
It's logical to assume that when you create more of something, you dilute the value of what's already in existence. That's exactly what has happened to the US dollar since the 2008 financial crisis hit. Economics 101 says this should lead to higher inflation – yet official Consumer Price Index (CPI) levels remain benign.
It's this unexpected development that led a reader to pen the above quote. Is the inflation argument dead? If so, does that mean gold's big run is over? It's a timely question since the current selloff in gold is largely attributed to low inflation expectations.

How Government “Works”, Part II

 Bill Bonner

By Bill Bonner

by Bill Bonner

In the case of Egypt, people listened and obeyed — at least, as much as they did — because Pharaoh was, in theory, a god. In the case of Rome — with the exception of Caligula’s claims — and the Mongol empires, the theory was similarly simple, though different. Tamerlane made no claim to divinity. He merely made it clear what he would do to you if you resisted him. Towns that submitted were generally governed passably, according to the standards of the day…and taxed, but not razed to the ground. Those that contested his authority were destroyed, often with all the inhabitants killed.

Russia Flips Petrodollar On Its Head By Exporting Crude, Buying Record Gold

by Tyler Durden
 
China has been a very active purchaser of gold for its reserves in the last few years, as we extensively covered here and here, but another nation has taken over the 'biggest buyer' role (for the same reasons as China).


Central banks around the world have printed money to escape the global financial crisis, and as Bloomberg reports, IMF data shows Russia added 570 metric tons in the past decade. Putin's fears that "the U.S. is endangering the global economy by abusing its dollar monopoly," are clearly being taken seriously as the world's largest oil producer turns black gold into hard assets. A lawmaker in Putin's party noted, "the more gold a country has, the more sovereignty it will have if there’s a cataclysm with the dollar, the euro, the pound or any other reserve currency."
Putin’s gold strategy fits in with his resource nationalism, statist agenda, as Bloomberg notes when Russia defaulted in 1998 it took 28 barrels of oil to buy one ounce of gold, was 11.5 barrels when Putin came to power and when in 2005 it had fallen to 6.5 barrels (less than half what it is now), he went all in, telling the central bank to buy.

Jim Rickards: Currency Wars Simulation

Lessons From The 1930s Currency Wars

by Tyler Durden  

With Abe picking his new dovish playmate, and Draghi doing his best to jawbone the EUR down without actually saying anything, it is becoming very clear that no matter what level of bullshit histrionics is used by the politicians and bankers in public, the currency wars have begun to gather pace. Japan's more open aggressive policy intervention is the game-changer (and increasingly fascinating how they will talk around it at the upcoming G-20), as if a weaker JPY is an important pillar of the strategy to make this export-oriented economy more competitive again, it brings into the picture something that was missing from earlier interactions among central banks of the advanced economies – competitive depreciation. The last time the world saw a fully fledged currency war was in the early 1930s. Morgan Stanley's Joachim Fels looks at what it was like and what lessons can be drawn for the sequence of events - there are definite winners and losers and a clear first-mover advantage.

Via Morgan Stanley, Back to the 1930s? What Would a Currency War Look Like?
What did the currency war of the 1930s look like?
The backdrop for the currency war of the 1930s was the Gold Standard and the Great Depression (many economists blame the former for the latter). By fixing the value of the currency to the price of gold, the Gold Standard prevented a country from printing too much money. If it did, people would simply exchange it for gold (or for other currencies pegged to gold).

Fractional Reserve Banking: The Source of All Evil?

by Paul Tustain - Bullion Vault

I'm getting very suspicious of anything which regulators think is "safe" collateral... Fractional Reserve Banking is not responsible for the bad practice of 'creating money', writes Paul Tustain, founder and CEO of BullionVault. It is a speed limit on money creation, put in place by a Central Bank to stop banks doing too much of what comes naturally to them. The Central Bank used to leave lending decisions to bankers, and step in to liquidate them when they screwed up. But in a world of Deposit Protection Insurance and bank bailouts, the Central Bank picks up the tab for excessive money creation. To limit the risk, they impose the 'Fractional Reserve' to try to calm the commercial banks down. But it is only necessary because we have a timid central bank which lacks the gumption to swing its axe in the direction of bad banks.

It’s a mad mad mad mad world

By Detlev Schlichter 

Shinzo Abe, Japan’s new prime minister, has some exciting new ideas about how to make Japan’s economy grow. How about the government borrows a lot of money and spends it on building bridges and roads all over the country?

If that doesn’t sound so new, it is because it isn’t. It is what Japan has been doing for 20 years, and it is the main reason why Japan is now the most heavily indebted nation on the planet – and still not growing a lot. Its debt-to-GDP ratio stands at an eye-watering, world-record 230 percent, which already guarantees that the country’s pensioners-to-be (and Japan has a lot of those) will never be repaid with anything of true value for the government bonds they kept patiently accumulating in their pension funds, and that they optimistically keep calling ‘assets’.

But never mind. The Keynesians agree that this policy was a roaring success, and that this is why the country needs more of it, as, strangely, Japan has still not regained self-sufficient growth after 2 decades of such a policy. Hmmm. Well, in any case, surely the next set of roads and bridges are going to make all the difference. I suggest that this should be called the ‘Krugman-doctrine’, after the outstanding Keynesian thinker, Paul Krugman: even if a few trillion of new government debt and a few trillion of newly-printed paper-money have not revitalized your economy, the next trillion in government deficit-spending and the next trillion in new central-bank money will finally get the economy going. “Just keep the foot on the gas pedal until the economy grows, damn it!”

The Trends to Watch in 2013

Rather than attempt to predict the unpredictable – that is, specific events and price levels – let’s look instead for key dynamics that will play out over the next two to three years. Though the specific timelines of crises are inherently unpredictable, it is still useful to understand the eventual consequences of influential trends.
In other words: policies that appear to have been successful for the past four years may continue to appear successful for a year or two longer. But that very success comes at a steep, and as yet unpaid, price in suppressed systemic risk, cost, and consequence.

Trend #1: Central Planning intervention in stock and bond markets will continue, despite diminishing returns on Central State/Bank intervention