Currency Wars

We seem to be headed for a currency war between the world’s big economies. The USA has a big trade deficit, so they want to export more and import less. A weaker USA dollar would promote that.  High labor costs in the USA are going to render the Trump plan of rebuilding the domestic manufacturing industry impractical. The exception would be if the manufacturing is almost all done by robots with artificial intelligence, but that doesn’t create jobs.

The European Central Bank is creating money to try to liquefy Europe’s economy. Germany, with its racial memory of hyper-inflation, isn’t eager for that, but for now, the ECB is pursuing Quantitative Easing.

Japan, with its extremely heavy and quickly growing government debt load (see http://www.nationaldebtclocks.org/debtclock/japan) needs a cheaper Yen so that the debt can be partly inflated away. If they can pay this debt with cheaper yen. Japan benefits.

We also see China tending towards pushing down the Yuan.

We can’t have every major currency depreciating relative to every other major currency. It is impossible. So they sort of take turns. But the time comes when some countries no longer want to wait their turn. That’s when we have a currency war.

Explaining Gold

Gold has been fickle the past few weeks.  Just google a gold chart to see what I mean. From around $1125 mid-December to over $1260 February 27, and the past few days back down to $1215.  The rise happened in an environment of expected increase in interest rates, and that is unusual. Rising dollar based interest rates usually help make the dollar stronger against gold because gold returns no interest.

The market seems a bit different now. The big market is the paper market: certificates, futures, options, gold funds, etc.  The physical gold market is much smaller, and the gold price tends to reflect the supply and demand of the paper market. There are statisticians, with PhD’s in their field, that testify that their studies show that the gold market is manipulated…..it seems to have been manipulated downwards for years and years now. But the movers can’t keep pushing the price down forever when the demand for physical gold is outpacing supply. The paper price has to respond to the economics of the physical market.

The Cashless Society

I confess that I don’t get Bitcoin. I don’t know if I should be embarrassed. I’m a financial professional, and I don’t understand one of the biggest financial fads of our time. Or is it a fad? What I observe is that the price of Bitcoin goes up and down like a whore’s pants. The first week in January the price was over $1100 (USD) and in less than two weeks it was almost down to $750, and then this past week it was up to $1200.  What I don’t understand is what stops the arbitrary creation of Bitcoins. What stops the issuer from creating more of them to feed the market, pocketing the sales proceeds. What prevents Bitcoin inflation?  What drives the price up and down? Psychology I suppose. But what are the factors that trigger that psychology?

Maybe somebody reading this will inform me.

In a world going cashless, such cash substitutes will likely grow in appeal. Sweden reports that only about 2% of payments are in cash. Australia, Turkey and Rwanda are close to achieving that low percentage. Governments of several nations are aggressively seeking to eliminate cash: India, Pakistan, Austria, UK, France.  Who knows why?  Well, I think we can guess. When you have to pay digitally, records are made. Your spending habits are manifested in those records. Your interests and preferences and your habits are there to discover.

The millennials --- Generation Y --- a large generation of children of the large baby boomer generation, seem to be all for it. They are the first generation that grew up with digital methods firmly entrenched in their lives. Maybe they don’t value privacy, accustomed as they are to Facebook and other social websites that make their lives translucent, if not transparent.  

I do not know how problems associated with a cashless society --- lack of privacy and also then ones identified at http://gordonfeil.blogspot.ca/2016/11/the-war-on-cash-and-on-you.html --- can be resolved.