Thursday, November 7, 2013

Race to the Bottom

The headline out of Europe last night:

ECB Cuts Key Rate to Record Low to Fight Deflation Threat

"Both traditional and unconventional monetary-policy tools have become impotent to kick-start the euro-zone economy," said Carsten Brzeski, senior economist at ING Groep NV in Brussels. "Nevertheless, there is little worse for a central bank than having to admit that it has reached the limits of its zone of influence."

The race to the bottom continues. There is little hope for recovery in the western world if the Eurozone is still cutting rates. If the U.S. was recovering it's buying power Europe would have no need to cut rates. Interest rates and thus currencies around the world are being cut/devalued in an ongoing effort to stimulate domestic industry and exports. But one countries exports are another countries imports. And after a couple of decades of China manipulation of currency values and the unfair advantage they gained by that strategy the rest of the world is trying the same thing.

I believe this is the reason the Fed is keeping easing in place. They are trying to devalue the USD in order to stimulate US exports. Japan is doing the same thing for the same reason. And China is reluctantly and very slowly allowing their currency to rise. Attempting to retain their export advantage while growing their middle class, who they hope will buy domestic goods.

Japan, China, Europe, and North America. All attempting to devalue their money. This is not the "comparative advantage" that makes economies efficient. This is mercantilism. The blatant effort to artificially stimulate economies by currency manipulation.

So the race to the bottom in currencies and the all out effort to avoid any deflation. Why so scared of deflation? It must be that assets are still our claim to solvency. And we must avoid asset deflation at all costs. What those costs will be may be more than we willingly pay or are able to avoid.

The dollar may be up today, but the heads are already talking about what the US Federal Reserves next move will be and what ammunition the Fed has to counter this move in the Eurozone.

Gold will come back as the goldbugs have been saying all along......

Tread carefully,

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