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Global Currency Wars in Full Escalation

Companies / Fiat Currency Sep 27, 2012 - 03:00 AM GMT

By: Michael_Pento

Companies

The worldwide currency debasement war has now entered a new and more deadly phase. Central banks have escalated the combat plan to bring about the world’s weakest currency for their individual countries. On the heels of the Federal Reserve and European Central Bank’s promises of unlimited counterfeiting forever, the Bank of Japan announced last week that it would expand its purchase of Japanese Government Bonds (and other assets including equities) by 10 trillion Yen. This brings the latest round of BOJ intervention to a total of 80 trillion Yen!


The sad fact is that the developed world’s central banks are in a desperate battle of one-upmanship. The ill-founded goal is to wreck their currency’s value in relationship to other fiat currencies in order to boost manufacturing and stimulate economic growth. But once again these central bankers have their economics backwards.

A weak currency that is caused by printing money cannot create a more competitive market for a country’s exports because it increases the cost of goods sold in terms of the domestic currency. Central banks reduce the value of their currency by lowering interest rates and boosting the money supply. This causes aggregate prices to rise, especially on manufactured goods that are a key component of exports. While it is true that foreign currencies will have a more favorable exchange rate, the price of domestic goods and services will have increased in commensurate fashion—thus, offsetting the change in currency valuations. Therefore, there is no improvement in the balance of trade and no improvement in economic growth from competitive currency devaluation.

For example, the U.S. dollar peaked at 160 on the Dollar Index back in 1985--the USD Index is comprised from a basket of our 6 largest trading partners. This index has lost 50% of its value since that time and stands at just 79 today. According to the economics of today’s central bankers, this should have engendered a U.S. manufacturing renaissance, a huge trade surplus and a vibrant economy.  However, the U.S. economy has been mired in anemic growth for years. The trade deficit has been a chronic problem for decades and was $559 billion last year alone. And manufacturing as a percentage of the economy has dropped from 18% in 1985, to just 12% today.

You just cannot ignore the fact that governments and central banks are engaged in a global currency war. But we already know who the losers are in this battle; they will be the middle classes and the economies of the developed world. There will be no sustained economic growth until they make peace with their currencies and put aside the notion that prosperity can come from inflation.

The foundation for strong economic growth comes from having competitive tax rates, limited regulations, attractive labor costs, stable interest rates, a low debt to GDP ratio, price stability and a sound currency. By actively destroying a currencies purchasing power, money printers work against all those principles. Until those in charge of fiat currencies reach that epiphany, the only winners will be those that can afford to place a significant portion of their investments in hard assets.

Michael Pento

President
Pento Portfolio Strategies
www.pentoport.com
mpento@pentoport.com

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.
               
Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 
       
Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.
       

© 2012 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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