Friday, May 13, 2016

The Coming War Of Central Banks
"History has shifted, and we're leaving the era of central bank convergence and entering the era of central bank divergence, i.e. open conflict. In the good old days since the financial crisis, central banks acted in concert to flood the global banking system with easy low-cost credit and push the U.S. dollar down, effectively boosting China, commodities, emerging markets and global risk appetite.
That convergence trade blew up in mid-2014, and the global central banks have been unable to reverse history. In a mere seven months, the U.S. dollar soared from 80 to 100 on the USD Index (DXY), a gain of 25% ..  The net result of this reversal is global markets have struggled since mid-2015, when the headwinds of the stronger dollar finally hit the global economy with full force. In one last gasp of unified policy convergence, G20 nations agreed to crush the USD again in early March 2016, to save China from the consequences of a stronger yuan and the commodity markets .. The problem is there is no win-win solution to this foreign exchange battle. Japan and the Eurozone benefit from a stronger USD as the euro and yen weaken, but China loses as the USD soars. Commodities lose when the USD gains, but the domestic U.S. consumer's purchasing power increases as the USD strengthens .. This sets up a war between central banks everywhere in which winning may be as disastrous as losing. The conventional central bank policy is to lower interest rates to weaken their currency, as a means of boosting exports .. But the unintended consequence of lowering rates is capital flight, as capital flees devaluation and negative returns and seeks higher returns elsewhere. This is a self-reinforcing process, as capital flight causes the currency to lose value, reducing the purchasing power and wealth of all who hold the currency. This motivates everyone who anticipates this devaluation to get their money out of the depreciating currency, which further weakens the currency which then triggers even more capital flight, and so on .. Welcome to a currency war in which victory depends on your perspective. If the USD continues strengthening, the winners will be those holding USD, as their currency will increase its purchasing power as other currencies devalue .. No nation ever devalued its way to hegemony or empire."
- Charles Hugh Smith*
LINK HERE to the essay

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