Why You Won’t Find a Winner in This Financial War…

All wars ultimately lead to failure.

Even the ‘winner’ in a war finds it hard to hang on to the gains.

That’s because most of the gains aren’t real.

Or often the win is a Pyrrhic victory — that’s when the cost of winning far exceeds the reward of winning.

It’s important to understand this, because the outcome of the current ‘war’ will be a Pyrrhic victory for the winner too…

The war we’re referring to is the Currency War.

This is global in proportion. The latest addition to the Port Phillip Publishing team, James Rickards, has written about the currency wars for a number of years.

His 2014 book, The Death of Money, went into some detail on the matter.

And his latest book, The Big Drop, takes things a step further.

The currency wars are in full flight, and when things reach a head, the result will leave everyone a loser.

The growth mirage

This article explains it all. Tim Dohrmann tipped me off about it. Tim is our local link to Jim Rickards. The article from Reuters explains how the supposed spoils from the currency wars rarely last:

The unexpectedly large jump in Japan’s first-quarter GDP happened almost entirely because its exporters have joined in a race to the bottom by major trade currencies. Whether the economy can retain this momentum depends on just how keen these companies are to share the spoils with their workers.

Japan’s export industries are investing in new machinery because they are now playing for market share. The dollar prices of their wares have fallen in the United States by 2 percent over the last six months, four times the discounts they offered between April and October 2014. Competition from Europe may be forcing their hands. The yen has weakened about 16 percent against the greenback since October; while the euro has depreciated almost 14 percent.

That’s not much of a victory.

Yes, Japan’s GDP expanded at an annualised rate of 3.9%, but the value of the yen has fallen by 16%.

That may be great for the exporters. When they repatriate their revenue into yen, they’ll get more yen for their dollars.

Trouble is, the weaker yen also increases import costs. So businesses and consumers that rely on imports will find that their costs are 16% higher.

That’s not so good.

The big question that everyone wants answering is, ‘What will be the outcome?’

That’s why we’ve dispatched Tim Dohrmann to Baltimore to catch up with James Rickards at the ‘House of Cards’ Symposium. At the event Jim will explain why the world’s central bankers and governments are pushing the limits when it comes to money printing and low interest rates.

We’re looking forward to hearing Tim’s report. At the moment, he’s in Boston catching up with some old buddies from his institutional broking days. You’ll see below that it’s not just low interest rates and currency wars on Tim’s mind!

No winners from this war

It’s a fool’s game to join in the race to the bottom in the currency wars.

Yes, there will be some apparent benefits in the short term. Japan is seeing that now. And for the past year or so, the US has seen it too.

The devalued currency results in more exports. But then, as higher exports flow through to the GDP numbers, the weak currency begins to rise.

Soon enough, the ‘benefit’ of the lower currency wears off. The market realises that it was all just a mirage.

That then puts the central bank in a bind. The higher currency acts as a ‘reverse stimulus’. It counteracts their money printing and low interest rate policies.

They know the only way to recreate the previous ‘success’ is to print more money and cut rates even lower. But they also know that they more they use those policies, the less effective they become.

So beforehand, they have to play a little gamesmanship. That’s where they try to fool the market into believing the economy is stronger than it is…they start talking up the prospect of increasing interest rates and withdrawing stimulus.

So far, the markets have fallen for it. But even that game is beginning to wear thin.

That’s why we’re putting our lot in with Jim Rickards. Jim told his Twitter followers last year that interest rates would never rise. We figure he’s right.

Make no mistake, the currency wars won’t have a happy ending. Years of low interest rates and money printing won’t result in a victory that anyone can be proud of.

It will be a Pyrrhic victory of immense proportions. That means, it will be a war without any real winners…only losers.

Cheers,
Kris

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Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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