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All the other kids are doing it—many central banks weakening their own currencies to protect exports

Posted by John Reed on

Copyright 2013 John T. Reed

My book How to Protect your Life Savings from Hyperinflation & Depression, 2nd edition says that inflation/deflation is just one side of a 13-sided coin. If you mess with any of the 13 sides, it affects the other 12.



With each passing month, it seems, another nation deliberately weakens its own currency. This is done by lowering interest rates and/or by “printing” more money. Lowering interest rates in a particular currency-issuing country or the Eurozone makes the people of the world desire the currency in question less. So does “printing” too much money.

‘Draw gold from the moon’

One of the memorable quotes I found in my research of monetary history was during the Great Depression, a DC official was talking about raising U.S. interest rates. They were concerned about people preferring gold to U.S. dollars. Because we were on a gold standard back then, whenever people liked gold more than USD, they traded the USD in for gold, and vice versa. Discussing one relatively high proposed interest rate, the official exclaimed, “That rate would draw gold from the moon!”

Get 3% to 4.65% on your savings in Australia

Today, high interest rates in a country like Australia, which has federal deposit insurance and a AAA credit rating (US is AA+ with S&P) cause people all over the world to buy AUD so they can be in Australian bank accounts where they get that high interest rate. Australia’s federal discount rate today, after lowering it, is 2.75%.

My bank in Australia is Westpac. Here is their web page about their eSaver account which is what I have because it allows instant withdrawal. And here is their Reward Saver which pays higher interest rates. And here is their term-deposit page which offers still higher rates if you tie the money up for six months or more—would you believe as much as 4.65%!?

Again, I remind you that this is a federally-insured deposit (Up to $250,000 AUD per bank and they may, like the U.S., let each family have four or five accounts in each bank, all insured, by having them in the the names of his, hers, theirs, etc.) and the government of Australia has a AAA credit rating, which is higher than the U.S. and equal to the best in the world.

My Australian banker’s contact info is Caden Blumenthal
Personal Banker, Westpac Retail & Business Banking
60 Martin Place, Sydney, NSW, 2000
T 02 8253 3171 | E cadenblumenthal@westpac.com.au

Sydney is seven hours behind California PDST time and it is tomorrow there. To dial Bulmenthal’s number from the U.S. I believe you must dial 011 (to get an outside-the-U.S. line) 61 (Australia country code) 2 (not 02—you only dial the 0 when you are inside Australia) then 8253 3171.

The Australian central bank got into the Journal’s story for lowering their rate by .25%. The did that, roughly speaking, to discourage people like me from encouraging people like you to buy AUD. Nice try.

Risking hyperinflation

As a result, both lowering interest rates and “printing” money cause inflation which is better described as the purchasing power of the currency falling. Inflation is a mirror-image symptom of the currency becoming weaker.

The problem is inflation can become hyperinflation. In hyperinflation, the currency loses ALL of its purchasing power. In other words, the portion of your life savings that is in U.S. dollar (USD)-denominated assets goes up in smoke. Inflation is to hyperinflation what a lightning bug is to lightning—no comparison.

Beggar thy neighbor

These countries that do this claim it is to stimulate their domestic economies and to protect their exporters. The problem is is creates bubbles that eventually burst in domestic economies and is a beggar-thy-neighbor joint suicide pact with regard to exports.

“Beggar thy neighbor” is a phrase you increasingly see in articles about this spreading fad among central bankers around the world. Here is the first sentence from the Wikipedia article about it:

In economics, a beggar-thy-neighbour policy is an economic policy through which one country attempts to remedy its economic problems by means that tend to worsen the economic problems of other countries.

Essentially, if one country weakens its currency, that will cause the exports of that country to go up, at the expense of all the other countries in the world, as long as that country is the only one that weakens its currency. But if ALL or many of the other countries do the same, then they have simply increased the probability of a bursting domestic bubble, hurt their savers and pensioners, and risked totally destroying the purchasing power of their own currency.

Today’s (5/14/13) Wall Street Journal has an article titled “Banks Rush to Ease Supply of Money.” Google that title to read the article. It lists 10 countries and the Eurozone who are lowering their central-bank-set interest rates in order to deliberately weaken their own country. They are:

U.S.
U.K.
Canada
Japan
South Africa
Eurozone
India
Australia
Poland
Korea
Israel

13-sided coin

I have also read that Hungary and Switzerland are doing the same although perhaps they were left off the list because they are not starting with the federal interest rate side of the 13-sided coin.

1. imports (includes outgoing tourism)/exports (includes incoming tourism)
2. interest rates/bond values/availability of credit
3. unemployment
4. value of the dollar relative to other currencies
5. boom/bust
6. hard-asset values (commodities, real estate, inventories, vehicles, factories, equipment)
7. incidence of financial fraud
8. liquidity of all asset classes
9. inflow/outflow of funds to and away from the country
10. price-earnings ratios of stocks
11. leveraging/deleveraging by business and households
12. incidence of bankruptcies
13. inflation/deflation

Currencies I recommend on the list

Note that two of the currencies I recommend are on the Journal list: Australia and Canada. And that another, Switzerland, is one of the two countries they left off the list. Am I concerned about those three countries? Sure. I have always been concerned about all five of the countries whose currencies I own: AUD, CAD, CHF, NZD, and USD. I have always monitored all five daily. For example, I get Google alerts which perform a daily search for the word trouble and the name of each foreign currency I own.

But lowering their interest rates or threatening to “print” more of their currency is not dispositive per se. The rules about criticizing my recommended currencies apply. If you want to criticize my foreign currency choices you must:

• Prove that the currency in question will hyperinflate more than the USD. If it hyperinflates the same or less, I am better off owning it.
• Name the replacement currency that is better than the one you are criticizing.

Australia, with a 20.7% debt-to-GDP ratio, has a long way to go to catch up with the U.S.’s 107% ratio. Canada is still sharing a land border with the U.S. which means it has great advantages to us Americans as a haven and its debt-to-GDP ratio is still 84% which beats the heck out of America’s. Switzerland’s debt-to-GDP ratio is still 35% and I think their central banker is lying when he promises to “print” as many CHF as necessary to prevent its value from exceeding 1.2 euros.

With regard to my other currency, the New Zealand dollar (35.9% debt-to-GDP ratio), I am about to increase my holdings of that.

Currency risk

This is a good time to remind readers of currency risk. Whenever you live in a country with one currency and do business ina country with another currency—and hold that foreign currency—you are exposed to the risk that the foreign currency may fall in relation to your currency. The Australian dollar was reportedly 60% of a US dollar as recently as 2008. In today’s Wall Street Journal an AUD is worth$.9952 USD. The 2008 level suggests it could fall back to 60¢ or so now as China—Australia’s big customer—fades economically.

Would that mean I was wrong to buy AUD and suggest readers do also?

No. I did not say AUD would go up versus the dollar in 2013 or not go down versus the dollar in 2013.

I said some good things about silver in the first edition of my book, particulary junk silver (pre-1965 U.S. dimes, quarters, and half-dellars), but my bottom line was it was overpriced and overtaxed. Nevertheless, some sloppy readers went out and bought junk silver on my partial commendation. Then, it went way up in value, and some thanked me for telling them to buy it.

1. I did no such thing.

2. My reasons for commending junk silver (convenient denomination, no assay required, durable, etc.) did not include saying it would go up in the near future. Neither I nor anyone else on earth has any idea of what silver prices will do in the near future. Over the long run, they will average what they did in the past, namely $13.41 in 2010 dollars.

Proper perspective in your forex falling in relation to the USD

Here is my thinking on AUD. I recommend you imititate it. Please read carefully because I do not want to hear any guff abut any future drop in AUD versus the USD.

1. I want a certain, significant percentage of my net worth in the four foreign currencies least likely to hyperinflate.

2. Within those four currencies, there is a certain percent of my foreign money I want in each currency. That percentage is based on the USD value of those foreign accounts. If and when that percentage in each currency is altered by a rise or fall in one of the other of the currencies, I will rebalance, that is, buy some currencies and sell others to get the USD value in each back to the percenage I want. For example, in the event AUD fell in relation to the USD, I would buy more of them to get the AUD total back to the percenage I wanted it to be in USD. I might sell one of the other foreign currencies I own to do that.

3. This is my policy until the U.S. debt-to-GDP ratio falls below 35%—approximately the post-World War II low point when Reagan was first inaugurated.

4. Because things chage, I constantly monitor my four currency choices to make sure they are still the four best. If and when I decide one of more of them is fifth best or worse, I will get rid of it and buy the new, fourth best currency.

Now let me point out what I did not say.

1. That I am counting on the currencies not to fall in value in relation to the USD.

2. That I would sell my currencies if they fall significantly in value in relation to the USD. Indeed, I just said the opposite. I would buy more if a particular currency fell but was still one of the best four in the world.

Would you be a hurt by a fall in your forex relative to the USD?

Would you be hurt by a fall in, say, the AUD, if you bought it on my recommendation?

It depends. First, I recommended buying AUD to hedge against hyperinflation in the USD. Does a fall in the AUD change that or undo it? Nope.

Second, I think any likely fall in the AUD in the short-term would eventually be followed by a huge reversal if and when the USD went into hyperinflation. That might look like this:

AUD on 7/1/13, $.75USD

AUD on 7/1/16, $812 USD

If you hung on when it went to 75¢ then it went to $812, would you be unhappy about the fall from 99.52¢ to 75¢? Hell, no! It would be irrelevant ancient history.

Spend it in Australia

Suppose the AUD fell to 75¢ USD and remained there and you wanted to spend the AUD? If you convert it back to USD, you would lose about 25¢ per AUD. But you could go to Australia to spend your AUD. In that case, if $10 AUD still bought as many, say, fresh eggs as before, where is your loss?

If you converted back to USD, you might have a tax-deductible loss. That does not make the loss a good thing, but it does make it less of a bad thing.

Hedge it?

Could you hedge against the AUD falling in relation to the USD? Uh, yeah, but that would lock in the current AUD-USD conversion rate. The whole idea of buying AUD to begin with is to benefit from the value of a hyperinflated USD falling in relation to the AUD. What you are doing with AUD as an American today is buying an assets that is likely to be worth far more than the USD in the event of USD hyperinflation and which will also be far more liquid than the other hedge against USD hyperinflation: hard assets. You have to have a substantial amount of liquid assets in the event of hyperinflation in order to buy food, fuel, other necessities, and to pay your routine bills.

Your USD-denominated debts will become easier to pay with each passing day during USD hyperinflation, but you must make sure you can make all those payments so that you do not lose the asset to foreclosure or repossession or sheriff’s execution sale because of lack of liquidity during the crisis.


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