Currency Wars: The Invisible War

Over the past month, there was a lot of fuss over the United States’ possible war with Syria. Many people adamantly believed that such a war would inevitably lead to World War 3. But there are a few of us who, for the most part, knew that there’d be no war. Why is that? Because we understand that for at least the past 4-5 years, World War 3 was already underway. This war isn’t being fought on the battle fields, at least not amongst developed countries. The developed countries of the world are now engaging in currency wars. What exactly are these currency wars of which I speak? For starters…

In recent years, the U.S. military has hired some of the sharpest minds from Wall Street to train them on the use of financial instruments and economics. The military has been secretly learning about derivatives, bonds, currencies, etc. Why would do they do this? Because, the military understands that it is possible to launch an attack against a country’s economic system, thereby derailing that country’s entire economy. Instead of using guns, bombs, tanks and other weapons, wars can now be fought over a computer screen.

For the past couple of years, you may have noticed countries around the world printing money. The U.S. has it’s Quantitative Easing program in which it prints money, China has been printing money, Japan has also launched their own QE-style program. The only central bank that isn’t printing money is the European Central Bank because they aren’t allowed to. China and Japan are printing money for the purpose of devaluing their currency which will give them a trade advantage. Since China and Japan both rely on exporting their products in order to thrive, a weaker currency gives them a great advantage. The U.S. on the other hand is printing money (devaluing it’s currency) to stimulate it’s economy. In other words, these countries are fighting deflation. Yep — with all of the talk we hear about hyperinflation, countries are actually worried about deflation.

Some of you may remember during the 2012 Presidential elections when republican Presidential candidate Mitt Romney referred to China as a “currency manipulator.” Romney’s statement flew right over the heads of most people, but those who understand the currency wars that are taking place, also understood that Romney was taking a big step towards one of the major issues of the world. Why is that such a big issue? It’s like this — by China manipulating it’s currency (usually by devaluing it), they make their economy cheaper to not only buy from but for American industries to outsource to China. Such a move has had a major impact on American society for quite some time now. Some may wonder how would it be cheaper to do business in China if America is also devaluing it’s currency and the answer is simple. America is devaluing the dollar but there’s no production in America which increases the cost of everything in America, but China is producing more than America, and with a weaker currency makes China’s business environment ideal.

If you still aren’t convinced of how disastrous a currency war can be, let me take you back to 1923 when the German Mark was attacked and hyperinflation ensued. Shortly before hyperinflation occurred, Germany (Weimar Republic) had lost World War I. Due to their loss, Germany was made to pay reparations for it’s part in the war. To do this, they had to switch their own currency for other currencies, which drove down the price of German Marks. After catching wind of this, currency traders around the world began shorting the Mark, thereby launching an attack on Germany’s currency. Germany was powerless to stop the attack. During this time, one American dollar was worth more than $4 trillion German marks! Things had gotten so bad that citizens of Germany were showing up with a wheel barrow full of cash just to buy a loaf bread.

There are many more stories of this type — attacks launched against a country’s currency. The U.S suffered a currency attack during the 70’s under the Jimmy Carter administration. That attack pushed the value of the U.S. Dollar higher which made it tough for American businesses to sell their products overseas, mainly industrial companies. Since other countries already have weaker currencies, many investors borrowed currencies with a low interest rate and bought U.S. Dollars which had a higher interest rate (Positive Carry Trade). Such a demand for dollars only served to strengthen the dollar, which made it even more expensive for them to buy from U.S. companies. The high interest rates of the 80’s were the doing of former Fed Chairman Paul Volcker in an attempt to fight the rampant inflation of the 70’s. Interest rates were as high as 20% at one point during this period! It would be safe to say that America still hasn’t recovered from this time period when you take into account that America runs a trade deficit that grows wider every year.

Conclusion: Currently, we are undergoing a currency war in which other nations are not only seeking to gain trade advantages but are willing to sabotage another country’s economy if they desired (although they wouldn’t gain much by exercising this option). Currency wars are how wars are now fought. Besides, central banks can make more money on the interest for the dollars they print than they probably would by traditional war. With the relentless printing of money that is taking place (not to mention the debt attached to each bill of currency), there can’t be any good in the long-run to result from such activity. One thing to bear in mind is that this isn’t the first time that countries have devalued their currencies at once. The same thing happened after the Great Depression which lead to the Bretton Woods system. Things were more interesting back then because there was no European Union, therefore, there were more countries participating in these currency wars.

Some people have predicted that hyperinflation would occur as a result of these currency wars (and other dire predictions) and they often cite the Weimar Republic as an example but they’re sadly mistaken.

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