I thought it appropriate to start this piece with a quote from Ludwig Von Mises regarding the global system of “flexible” currencies:
“A general acceptance of the principles of the flexible [currency] standard must therefore result in a mutual overbidding between the nations. At the end of this race is the complete destruction of all nations’ monetary systems. “
That was written in 1949 and essentially prophesied the eventual global currency war that Von Mises visualized unfolding, as countries used currency devaluation strategies in a desperate attempt to prop up their own crumbling economic systems and “protect” their relative export power.
I am not alone in thinking that we are entering a very real and very dangerous global currency war. The highly regarded Comstock Partners issued their view on this four days ago: “If we are correct, the U.S. and global economies will contract and there will be a race to the bottom with “competitive devaluations” rampant. All the countries that need exports for economic growth will be very aggressive in the race to the bottom…”
I remember when I first started looking at the precious metals back in 2001. I read one of James Dines newsletters at the time in which he was promoting gold and mining stocks as the ultimate defense against a global race to devalue currencies to zero. At the time I was unaware that his vision was based on the work by Von Mises fifty years earlier.
Essentially, in a system of flexible, floating national currencies, the currency of each nation achieves relative value in relation to the other currencies based on either relative economic strength or relative supply of the currency. With the weak global economy, nations have resorted to devaluing their own currency in an attempt to keep their respective systems from falling apart from the burdens of too much debt and as a means of making their exports relatively cheaper. The latter strategy is also an attempt to stimulate domestic manufacturing by stimulating foreign demand.
The preferred method of currency devaluation has been through prolific use of the printing press, aka “QE.” As you can see from the two charts below, this process of devaluation has actually been occurring since the start of the new millennium:
This chart shows the rise in the price of gold over the last 10 years relative to the world’s major currencies. Regardless of whether anyone wants acknowledge a general global monetary policy of currency devaluation, there’s no question that all the major global currencies are being devalued relative to gold (the same is true vs. the Indian rupee and the Chinese yuan).
The second chart shows the decade-long currency devaluation of the U.S. dollar:
This chart shows the trade-weighted U.S. dollar index, which is considered to be a better indicator of the overall purchasing power of the U.S. dollar relative to the rest of the world. This index includes 26 different global currencies, as opposed to the standard USDX, which is just six (euro, pound, yen, Canadian dollar, Swiss dollar and Swedish krona). As you can see, the relative global value of the U.S. dollar has declined over 30% since 2002.
Currency war or no currency war?
As you can see from the charts, clearly the world’s major currencies are in decline vs. gold, and the U.S. dollar has been in serious decline vs. a broad basket of global currencies. But what to make of all this “noise” in the media about a “global currency war?” After, just five days ago, the chief of economist of the IMF issued a statement saying that “[t]his increasing talk of currency wars is very much overblown”
Usually when a high-ranking public official makes a point of officially deny something, it’s worth taking a look beneath the surface to see if there’s any substance behind the denial. Ironically, one day after the IMF chief economist made that statement, Bloomberg News conducted an interview with George Soros in which he specifically referenced the process of ongoing global currency devaluations. I would like to note here that back in November it was widely reported that Soros was actively adding to the big position in his funds. Presumably he is doing this as a mechanism to profit from global currency devaluations per the gold/currency chart above.
In addition, several major countries have issued there own warnnigs about the ongoing sovereign currency depreciation and its contribution to an escalating global currency war. Two days ago, Saudi Arabia issued this statement: “Devaluation of currency by certain countries to make them more competitive in the global market has raised fears of a “currency war.”
And this morning I woke to find these news reports issued respectively from economic leaders in Japan, Switzerland and South Korea. Each article either directly or indirectly references specific actions being taken to devalue the respective county’s currency. In the South Korean report, a Central Bank member specifically references the outbreak of a currency war.
So there it is all laid out. I’ll leave it to the reader to decide for themselves whether or not they want to believe that the Von Mises proposition is unfolding before our very eyes. I will say that it appears to me as if the Jim Dines forecast of a coming race to devalue global currencies (mentioned above) that I read in 2001 looks to be very real and in motion. It also appears that the best way to defend your wealth against this insidious paper currency devaluation is to buy gold and silver. I always recommend buying the physical metal and taking delivery of it in some form, as opposed to buying the paper forms like GLD and CEF or buying into these “fractional” bullion paper accounts being promoted by Kitco and Monex.
