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Bank of Japan’s Stimulus Could Catalyze Gold and the Currency War End-game
Japan’s recent exponential ramp-up of stimulus-directed currency fabrication has had a seismic effect on global foreign exchange markets. Japan’s new central bank governor Haruhiko Kuroda has expressed his intentions to “do whatever it takes” to dislodge the Japanese economy from its twenty-year deflationary stasis.
The effects on currency markets around the world has been swift and profound.
According to the Wall Street Journal,
“Japanese investors are plowing into European sovereign debt because they are seeking yields higher than those on Japanese government bonds, which have rallied for weeks in anticipation of the central-bank move. When bond prices rise, yields fall.
Many Japanese investors are also looking to pare exposure to the yen, which has sunk to a four-year low against the dollar. Investors often equate monetary easing with a weaker currency, in part because lower rates make a currency less attractive to hold”.
The sudden willingness of Japan to ignore the advice and warnings of other G8 nations signals a new strategy for the island nation – one where the yoke of a strong currency in a deflated economy naturally represses and perpetuates the deflationary effects.
No doubt, China, England and the United States are perturbed by the policy shift, as those countries’ own currency debasement schemes must now either be amped up or else suffer the effects of diminished demand for products due to higher costs of exports.
The United States especially, who has been able to convince the world of the safety of its own debt based largely on Japan’s willingness to keep its currency strong relative to USD, finds itself in a conundrum. The stock market performance that has been essentially subsidized by its continuous output of fabricated capital has responded to the Japanese move negatively, as the cost of U.S. exports will now increase.
For Japan, the risk of investors fleeing the currency in pursuit of better yield will likely be offset very quickly by enhanced orders for its own goods. While the Japanese financial sector will suffer in the near term, Japan’s move could cause it to swap places with the United States – an outcome desirable to the Japanese and anathema to the US.
Bolstering the Race to the Bottom
The shift in the landscape that Japan’s continuing stimulus will effect over the long term constitutes an acceleration of the G8 race to the bottom, wherein those nations attempt to gain economic advantage by debasing their currencies. The all deny that as their intent, yet they are all demonstrating by their actions that this is in fact the case. Through this process, indebted nations such as the United States and England are able to monetize their debt at the direct expense of their most scrupulous savers, and that is an unsustainable policy. Savers will stop depositing their savings into banks and will instead turn to precious metals.
This could, in fact, be the single most important event that catalyzes and explosion in demand for gold and silver. If G8 nations respond to Japan’s gambit by amping up their respective stimulus programs, depositors, savers, and investors could suddenly lose all confidence in their currency and their banks, and flock to gold.
So far, the G8-sponsored, central bank and futures market-contrived cap on gold and silver prices has succeeded in large part because the physical demand for gold and silver has not yet crystallized to the point where it overwhelms the central bank’s capacity for physical delivery. Thus, central banks have been able to continuously and surreptitiously deliver gold from their vaults to satisfy physical settlements.
It is likely that an explosion in demand worldwide would overwhelm that scheme, and if it does, gold would finally be free to soar to a price that would reflect, in strictly nominal terms, an accurate measurement of the amount of fabricated currency in circulation.
That situation would be supplemented by what would have to be a collapse in the debt/currency structure of the whole G8 – a situation that would see stock markets plunge, currencies plummet in value, and precious metals soar even higher.
Countries such as Canada and Australia would likely see their currencies rise dramatically in value, as the absence of significant debt on their balance sheets, and their resource-heavy GDP, would suddenly make those currencies the preferred substitute for USD, yuan, euros, yen, and pounds sterling. Of course, that effect would be tempered by the fact that the largest trading partners of Canada and Australia would suddenly be technically insolvent.
Triggering a Real Recovery
The silver lining in all of this consists of a few definite outcomes, and some hopefully/maybes.
We would certainly have yet another historical example of why governments can never be trusted to manage fiat currencies responsibly. It is the very nature of democracy, that depends on a mandate for leadership from the outcome of a popular vote, that supersedes such a possibility.
We would theoretically see huge political upheaval in G8 nations that succumbed to currency failure due to hyperinflation, or quantitative easing, of stimulus – they are all animals of the same stripe.
And finally, at long last, we might even get to see gold and silver liberated from the restrictive and manipulative confines of futures market influence, as the self-destruction of the currency would necessitate a review and revision of all markets for paper derivatives of real commodities.
A risk-on environment would ensue, and the exploration for precious metals would once again become a viable target for risk-tolerant investors.
Full Circle
This all comes about as a result of the United States’ adoption of monetary expansion policies in the early 2000’s that created the fundamental problem of excessive capital in the system seeking returns on investment. The system that has originated in the United States, where the nation’s treasury, central bank, futures market and media are all cross-owned or controlled, is now clearly unsustainable, and doomed to failure. While it has accommodated a foundation for the pre-eminence of the U.S. dollar as the default unit of trade globally, it has also ensured that currency’s demise.
The question is, as the end-game unfolds, and nations sprint for the finish line by hyperinflating their currencies at ever increasing rates, is whether or not we will encounter an increase in civil protest and violence, as the deteriorating economic picture destroys the prospects of the lower layers of the economic food chain in the process of re-invention.
Certainly the attacks in the United States on members of the justice system is symptomatic of a rising sense of empowerment among criminal enterprises (I mean the street variety, not the government-sponsored variety). And the proliferation of drone licenses within U.S. borders (there are presently over 300) seems to suggest an anticipation of their requirement going forward.
Thus, the world is brought to the brink of a financial catastrophe, and as forewarned by all those sage predictors of the inevitable, the systematic abuse of fiat currencies has once again forced the closure of another chapter in the financial history of the world, and with a bit of luck, a new one will begin.
The post Bank of Japan’s Stimulus Could Catalyze Gold and the Currency War End-game appeared first on Midas Letter.
2013-04-09 07:51:11
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