The competitive currency devaluation era is upon us

You can fool all the people all the time if the advertising budget is big enough.
Ed Rollins

The competitive currency devaluation era is upon us

Updated Dec 2019

Portugal has just had its credit rating cut, and Greece and Spain are now begging the EU to set up a bailout fund to help the beggar nations (PIIGS) who are unwilling to curb their spending habits. In our previous article, we made the following comments.

Euro Woes, Part II: Spain Joins Beggar Members in Bailout Demand

Indirectly they have been begging for assistance from the very start. This aid package will trigger other beggar members of the PIIGS group to join the handout club eventually. Next in line is probably Spain. If the top members of the EU wanted to send a strong message to the weak members, they should have stuck hard and fast to their previous claims that no aid would be forthcoming. Euro Woes, Part II: Have We Entered the Devalue or Die Era?

Now that Portugal’s credit rating has lowered, Spain has started making noise about setting up a bailout fund. Not too long ago, they stated that all was well and that they should not be compared with Greece. Ironical is it not that they have now joined up with Greece in demanding a fund be set up to help nations that are having problems financing their debt?

The competitive currency devaluation era is here to stay

French and Germany have reached an agreement (the keyword appearing), as the story below indicates.

The safety net – not yet agreed by the eurozone – would total about 22bn euros (£20bn). It would apply only if market lending to Greece dried up. Eurozone countries would grant coordinated bilateral loans, and there would be “substantial” IMF loans. The “majority” funding would be European. EU leaders are poised to discuss the plan at a two-day summit in Brussels. Full Story

We could go on about the potential ramifications of the above idea, but there is something more interesting that we would like to speak off.

Germany and France knew they would eventually come to the table and approve some sort of package even though they made a lot of noise about doing nothing initially. No one has bothered to ask why. By playing this cat-and-mouse game, they have allowed the Euro to lose a significant portion of its value; in effect, they indirectly devalued their currency without officially having to do so.

Eurozone’s Bailout Balancing Act: Shifting Stances and Market Jitters

Each time they put out a story to calm the markets, they leave room to change their position. The story above and the just-released story below are perfect examples of such ploys in action. While France and Germany have agreed to set up a fund, they leave extra wiggle room by stating that this matter would still need approval from the whole eurozone.

The market’s advance fizzled after European Central Bank’s president Jean-Claude Trichet told French television that Europe must take responsibility for its financial problems. That raised concerns about when a rescue for Greece might come. Officials from European nations were meeting late Thursday to discuss their economic issues.

Investors have been concerned for months that problems in Greece and other debt-strapped European countries would spread and spoil a global economic rebound.

Greece’s Woes Unnerve Markets: Eurozone’s Uncertainty and Currency Risks

“Any time we see comments about it, it seems to spook the market,” said Adam Gould, senior portfolio manager at Direxion Funds in New York, referring to Greece’s financial problems. He said traders still expect Greece will get a bailout, but the questions about how unnerved investors. “It’s more the uncertainty.” Full story=

A single nation can quickly devalue its currency, but in the Eurozone, a single nation does not have this power. The prominent members can, however, pretend they are unwilling to help the smaller weaker members and thereby create a mini confidence crisis; the net result is that the Euro loses some of its value.

The US is deflating its currency by printing money at a stupendous rate; China is devaluing its currency by pegging it to the weak Dollar, and countries like Vietnam simply openly devalue their currency to maintain a competitive edge. Expect this trend to pick up steam; it will now be a race to the bottom of the pit and will only end with a full-blown currency crisis. Investors should make sure they have a position in precious metals. Don’t consider it an investment; consider it insurance just in case the house burns down. Use strong pullbacks to add to your positions.

He who doesn’t have legs cannot teach one how to walk
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Originally published May 23, 2015

The competitive currency devaluation era gains momentum