«The world seems to have gone mad,» a friend remarked to me following the disaster in Japan and NATO’s imminent military intervention in Libya. Indeed, the familiar parameters are turned upside down in every sense: the parameters of the financial system, the concept of risk, ways of preserving wealth, trust, solvency, debt, terrorism, natural disasters, and so on and so forth. But this is not madness; rather, it is a set of new rules, a ‘new normal’ which, for the time being—with no historical cycles to draw upon—seems chaotic to us.A chaos that we had already warned was here to stay, and to which we would therefore do well to adapt as quickly and effectively as possible in order to understand its dynamics and navigate the wilderness of this crisis whilst stepping on as few landmines as possible—ideally none at all. But what now seems chaotic to us is probably just a new normal in which fixed income will cease to be income and will cease to be fixed, confidence will turn to mistrust, or strength will in fact be a manifest weakness. It is this latter point we shall address today: the mysterious world of the currency war and its new concepts of strengths and weaknesses.
Traditionally, the strength of a currency has always been underpinned by the soundness and stability of its country’s economy. The stronger the economy, the greater the purchasing power of its citizens, as its currency strengthened against neighbouring and distant currencies. Conversely, the more hardship a national economy faced, the cheaper its currency became. And this had a balancing effect in the long term, as with a weaker currency, that country gained competitiveness against its neighbours and other competitors, thereby stimulating its economy to some extent. Obviously, the effect of a weaker currency was not always enough (otherwise it would all be very easy), and states were often forced into endless devaluations to obtain a false sense of competitiveness that rarely ended well. The other leaders, the true powers, heard the distant explosions of these desperate devaluations, notched another mark on the handle of their economies, and carried on with their own business, as we have already said in The Era of Devaluations, back in January 2009.
But today, the new normal – the apparent chaos – has also turned this former universal financial law of ‘cheap/weak’ and ‘expensive/strong’ on its head. At present, in the midst of a currency war over the survival of economies and their developed, debt-ridden states, The battle to keep the currency weak is fierce. We are witnessing a the sustained and unsustainable appreciation of the euro without any basis. Simply because there are far more pressing fires to put out in the Eurozone, such as rescuing the financial systems of the peripheral countries—or PIGS—to prevent them from dragging down the rest of the EU’s financial system and beyond; or buying up astronomical quantities of worthless pieces of paper (sovereign debt) at prices far inflated above their real value, given the manifest insolvency of their issuers. The leaders of the Eurozone, in the name of God knows what, have flouted legalities and unanimity, repeated referendums until they achieved the desired result, requested that rating agencies stop rating the PIGS, ignored European bureaucratic agreements, bought debt under the table, and engaged in a sinister and opaque etc. All to maintain the union of economies as fragile and radioactive as the Fukushima sarcophagi. Logically, in such a critical situation, whether the euro is expensive or cheap is purely anecdotal. An anecdote that the rest of the economies—with fewer fires in their mattresses—are taking advantage of, effectively devaluing their currencies as much as they possibly can. But of course, currencies must be devalued against others that consequently appreciate. Who will be the counterpart? The European sucker.Well, much the same has happened with the yen since simple concerns about deflation or the country’s endemic recession have given way to despair over extreme national emergencies. The vultures of the currency war have pounced on a currency whose economy has suffered a critical crash, sending it skyrocketing. To such an extent that the Bank of Japan (BoJ) was the first to intervene, selling yen and buying dollars and euros by the bucketful in the midst of a national nuclear scare. Just a couple of days later, the G7 took pity on the Japanese situation and threw a monetary lifeline to deflate the yen against the euro and the pound (and in those turbulent waters, coincidentally the euro has risen even further against the dollar). And that is precisely what a currency war is: a Darwinian warfare in which people don’t hesitate for a moment to kick someone when they’re down. No today for you, and tomorrow for me. Unfortunately, this is either you or me. And when the going gets tough, the speculators make a killing.
P.S. As a rather embarrassing anecdote, I should mention that even today most analysts they talk about the «strength» of the euro when it keeps rising, to infinity and beyond. The problem is that the beyond It’s getting closer and closer to Greece, Portugal, Ireland and Spain. As Humphrey Bogart said in *Casablanca*, «We’ll always have Paris»…