US, EU and Japan Could Trigger “Cold Currency War” by Debasing Fiat

By Avi Mizrahi

The world’s major central banks are waging war to determine who can make their respective fiat currency weaker. With the likelihood of even more money printing and negative interest rates ahead, people need to be ready to see the value of their money evaporate and the price of everything else go up.

Cold Currency War Is Heating Up

Many financial market analysts now expect that interest rates in developed economies will soon be cut again. While this is not unheard of, it could presage a new global currency war with the central banks of the U.S., EU, Japan and other countries all trying to debase their respective fiat.

Besides cutting interest rates, central banks taking part in such a war can also implement negative interest rates and embark on even more quantitative easing. The former simply means that you will lose money by saving it in a bank account and the latter is the policy under which trillions of dollars were already printed.

The reason anyone in their right minds would want to start a currency war is to spur growth by punishing people and companies for saving money. The idea is that if people will know they are losing money over time they will just go shopping as soon as they can, and companies will choose to invest in adding new factories or hiring more workers instead of hoarding cash. Cynics might also say that it helps politicians fake economic growth by having the price of assets such as stocks and real estate skyrocket in comparison to the local currency while they claim there is no inflation in the market.

At the same time, having a weaker currency does make the country appear more competitive in the global market as its goods and services are cheaper in international terms. However, when other countries are messing with their exchange rate to support local industry by making it appear cheaper, like China most notably, many countries just call it unfair currency manipulation.

US to Win Race to the Bottom?

While it is not hard to see who will lose in such a situation, it is much more difficult to guess who will “win” in such a war. There are supporting factors for different viewpoints, but some of the smart money is betting on the American dollar to shed the most value.

“If there is a winner in this ‘cold currency war,’ it’s going to be the U.S. in the sense that the dollar is more likely to weaken than strengthen from here,” Joachim Fels, global economic advisor at investment management giant Pimco, told CNBC on Monday. “Clearly, we are getting back into the situation where everybody would like to see a weaker currency. Nobody, no central bank, really wants a stronger currency and that’s why it’s a cold currency war,” he added.

One major reason for the U.S. to be the likely winner in this fiscal race to the bottom is the strong public pressure President Trump is putting on the Federal Reserve to comply with thinking on the matter. This is in contrast with the established tradition of letting central bankers work independently from national government control, or at least to appear to be so.

“With almost no inflation, our Country is needlessly being forced to pay a MUCH higher interest rate than other countries only because of a very misguided Federal Reserve. In addition, Quantitative Tightening is continuing, making it harder for our Country to compete,” the president exclaimed in a recent series of tweets. “As good as we have done, it could have been soooo much better. Interest rate costs should have been much lower, & GDP & our Country’s wealth accumulation much higher. Such a waste of time & money.”

What You Can Do to Protect Your Savings

Ordinary people around the world have very little power to affect how any of this plays out. Central bankers are not elected by or even accountable to the general public. Political parties, even those that mainly focus on advancing specific economic policies and ideologies, rarely touch upon the matter of the strength of the local fiat in their campaigning. In that respect, President Trump is at least more transparent than most, as he shared his opinions about the strength of the dollar versus other other currencies long before taking office.

Therefore, the only course of action most people have to deal with a currency war is simply to diversify into assets that are less likely to suffer collateral damage. This may mean that we will experience a drive of new investors into cryptocurrency who see it as a hedge against their fiat losing value.

What do you think about the world’s most powerful nations getting ready for waging a currency war? Share your thoughts in the comments section below.

Avi Mizrahi is an economist and entrepreneur who has been covering Bitcoin as a journalist since 2013. He has spoken about the promise of cryptocurrency and blockchain technology at numerous financial conferences around the world, from London to Hong-Kong.

Image credit: Pixbay

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