Currency Wars Are Here
In a world of fiat currencies that are backed by nothing but a promise, most major Central Banks are attempting to devalue their currencies in an effort to boost exports. A weaker currency makes a countries exports cheaper to buy with other foreign currencies.
Earlier in September the European Central Bank announced plans to cut interest rates and purchase asset backed securities. The program was initiated due to little growth in the EuroZone economy. The short term effect has been a decline in the Euro against the Dollar.
The Bank of Japan has been aggressively attempting to devalue it’s currency through their own stimulus program and according to an article on moneynews.com the Dollar has hit a 7 year high against the Japanese Yen.
In the same article, Diana Choyleva, head of macroeconomic research at Lombard Street Research, is quoted as saying “If both Japan and the euro area go for extensive QE [quantitative easing], emerging markets in Asia would suffer as their currencies appreciate”
The Impact of the BRICS Alliance
In an article on ZeroHedge, Russia's Prime Minister Dmitry Medvedev, told Rossiya TV in an interview that the BRICS should conduct transactions in national currencies bypassing cross-rates with the US Dollar.
The BRICS countries which include Brazil, Russia, India, China and South Africa are seeking to lessen the influence of western economic policies. A shift away from the US Dollar and Euro could have a big impact in the currency markets over the next few years.
The Future of Fiat Money
The result of all of this is two fold. First, countries want to devalue their currencies to promote growth and pay back debt with cheaper money. And secondly, many countries are beginning to question the use of the Dollar as the worlds reserve currency and are looking for alternatives.
One of the reasons we are not real concerned about Gold’s recent decline is because the worlds Central Banks are all engaged in a race to the bottom. It used to be that a nation with a strong currency was something to aspire to as it often corresponded with economic strength and fiscal responsibility.
However, there are very few countries that are strong enough economically to promote a strong currency. So, easy money policies will continue for the foreseeable future. Even if forces of deflation emerge over the short term it will not last.
Gold’s eventual rise will come as a result of Central Bank policy errors and the likely disruptions in the currency markets over the next few years.
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