Wednesday, June 12, 2013

"No More Competitive Devaluation"

This quote/article from Israel's central banker Stanley Fischer may be the shot across the bow that U.S. dollar holders around the world should pay attention to.

He is saying that the competitive devaluation that the world, and mostly Asia, has been engaging in for years if not decades may be ending. Competitive devaluation has often meant selling the local currency and buying U.S. dollars. The U.S. is the largest consumer in the world and the U.S. currency is the reserve currency of the world. The Dollar has been artificially held high for years to stimulate U.S. consumption of the world goods. To the benefit of China, Australia and the Emerging markets in general. And the U.S. has the debt to prove it. We have been on a "low inflation" induced low interest rate borrowing binge for decades. And WE have the bubbles to prove it. Stocks, real estate and bonds. This has been the result of the carry trade that  originated out of Japan and who was the first to engage in competitive devaluation since the 1980's.

How long does it take for a trend that has been going on for 30 years to reverse? The answer is probably longer than most of us think. Bond yields have been declining for that long and much of the reason for declining interest rates has been the carry trade and the effects of competitive devaluation.

In a nutshell, if countries around the world abandon devaluation, or at least do not pursue the tactic with as much zeal, the U.S. dollar should assume the fair value that the policies and the economy of the U.S. warrants. And that will probably be much lower than where we are.......

And do you remember the  "bond vigilantes"?
They were co-opted by the lure of the carry trade! They're back!
And they are looking to the future of a world with a rapidly declining reserve currency.


And furthermore:

Benoit Anne, a senior strategist at Société Générale, said central bank money had arguably inflated a bubble in emerging markets, which was now unravelling as investors priced in a change in Fed policy. “This will not be a short-lived sell-off,” he predicted.

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