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The Dangers of Currency Wars
No matter who you are, where you come from, and what you do for
a living…
You know one thing:
These four words are code for “brace yourself”...
Before I get into the meat of the discussion, however…
Allow me to rewind for a moment.
Over the past few weeks, as the currency wars have been screaming toward white-hotness, Graham Summers has kept us in the light… “It is clear,” he told us this week, “the global economy is beginning to suffer from the ongoing trade war between the two largest economies: the U.S. and China.”
You know one thing:
These four words are code for “brace yourself”...
Before I get into the meat of the discussion, however…
Allow me to rewind for a moment.
Over the past few weeks, as the currency wars have been screaming toward white-hotness, Graham Summers has kept us in the light… “It is clear,” he told us this week, “the global economy is beginning to suffer from the ongoing trade war between the two largest economies: the U.S. and China.”
Bad news: Things have gotten MUCH worse between the two
nations.
Graham gave us the short-list:
1] The White House floated the idea of implementing an additional 10% in tariffs on $300 billion worth of China’s goods.
2] China devalued the Yuan against the U.S. dollar.
Graham gave us the short-list:
1] The White House floated the idea of implementing an additional 10% in tariffs on $300 billion worth of China’s goods.
2] China devalued the Yuan against the U.S. dollar.
3] The U.S. officially labeled China a currency manipulator.
4] The White House floated the idea of ending trade negotiations
with China completely.
“We can expect,” he said, “central banks to
start getting involved directly in the markets.”
Specifically, Graham’s talking about MASSIVE currency interventions happening on a “near weekly basis…
Specifically, Graham’s talking about MASSIVE currency interventions happening on a “near weekly basis…
In order to fully understand how bad it can
get, however, says Graham, “We need to talk about the U.S. dollar.”
How it affects every dollar in your bank account…
How it affects every dollar in your bank account…
The
Currency Wars’ Dangerous Effect on the Global Economy
A brief outline of that issue is as follows…
The U.S. dollar is the global reserve currency of the world. All
told, it comprises over 90% of global currency transactions.
So as an example, if a Chinese firm wants to make a deal with a
German firm, it doesn’t simply convert its Chinese Yuan to Euros. It first
converts its Yuan to U.S. dollars, which are then converted to Euros.
On the one hand, this is great – the world has a preferred
medium of exchange that literally any country can use to get access to capital.
This is especially true for foreign countries or corporations
that are looking to issue debt. If they choose to issue their debt in U.S.
dollars, they gain access to a much larger pool of potential investors.
And therein lies the problem.
If a foreign country or corporation issues debt in U.S. dollars,
it needs to pay both the debt itself AND the debt payments in U.S. dollars.
The problem with this is that neither of these two groups
(foreign countries or corporations) can
print U.S. dollars… only the U.S. can. So unless they can
gain access to U.S. dollars some other way (selling assets for instance), they
quickly have a U.S. dollar shortage.
This alone is a massive issue if you owe debt in U.S. dollars.
And if the U.S. dollar starts
strengthening against your own domestic currency while this is happening… it’s
game over.
Let me give you an example.
The
Global Economy Weakens as the U.S. Dollar Strengthens
Let’s say you have a business based in Brazil. And let’s say
your business issues $1 million in U.S. dollar-denominated debt for five years
at a yield of 10%.
This means that every year for the next five years, you need to
come up with $100,000 in U.S. dollars. Then, to top it off, in five years’ time
you need to come up with $1 million to pay back your lender.
Because your business is in Brazil, both your revenues and your
profits are denominated in Reals (the Brazilian currency). Now, imagine that
during the course of the five years, the U.S. dollar rises 20% against the
Brazilian Real.
Because of this, your debt just became even MORE expensive to
service. The $100,000 in U.S. dollars you need to come up with each year as
well as the $1 million you need to come up with on year five is going to take A
LOT more Reals to acquire.
Now, let’s say that while the U.S. dollar is strengthening
against the Real, your business is also suffering because the global trade war
is hurting Brazil’s economy. Very quickly you are facing a perfect storm of
declining sales, debt that is more difficult to service, and a U.S. dollar
shortage.
THAT is the situation facing much of the world today. The global
economy is weakening at the exact same time that the U.S. dollar is
strengthening.
SIDEBAR
Investors
Flock to Gold and Silver
as the Stock Markets Dive
as the Stock Markets Dive
The major U.S. stock indexes are down more than 2% today as the
bond market signals that a recession could be on the horizon.
Bank stocks have been hit particularly hard, with Bank of America
and Citigroup both dropping more than 5% in trading. The ongoing Trade War and signs of
weakness in global economies has shaken consumer confidence while bringing
attention to the precious metals market, which many believe is still greatly
underpriced, even with the recent run-up.
Investors who get in early will have the most to gain if the
prices of gold and silver continue to climb.Metals
News From Around the Web:
- Dow
Plunges 650 Points Read more from CNBC »
- Recession
Indicator Blares Loudest Warning Since 2007 Read more from Fox News »
- Countdown
to Catastrophe Read more from Bloomberg »
Yours in Freedom,
Bruce ‘the PoorMan’
Additional News…
More Free Resources:
One of the most worrisome threats that the United States
faces is an EMP. With just a single nuclear weapon, a hostile force could
dismantle a majority of the nation’s electrical grid, rendering everything from
major power plants all the way down to hand-held electronics inoperable.
Of course, an EMP detonation certainly
isn’t the only thing that can cause the lights to go out. In this article,
we’ll take a look at how to tell the difference between a simple power outage
and an EMP.
What is an EMP? - Before we begin
discussing how to tell the difference between an EMP and a power outage, it’s
important to first define an EMP...
EMP or Power Outage? How to Tell the Difference
What You Need to Know About Zippos and Lighter Fuel Alternatives
When it comes to lighters,
Zippos, and lighter fuel in general, there is a lot of misinformation to be
found on the Internet. Learn about lighters plus the various types of lighter
fuels that are available. Hint: there are alternatives to Zippo lighter fuel!
How to
start a neighborhood barter club
A Final Note…
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2 comments:
Gold n silver I understand. This global stuff is beyond me!
There tends to be an inverse relationship between the US Dollar and Gold. When the Dollar rises, the gold price tends to fall and visa versa.
However, the dollar rallying during July failed to dent the Gold bull run, which illustrates just how strong the current breakout is. Which suggests that the Gold price is reacting to the long-term pent up pressures of the Inflation Mega-trend. Remember folks all currencies are in a perpetual state of free fall which means exchange rate stability is an illusion.
I expect the Gold price to soon resume it's bull run. Before this analysis I would have expected resistance at $1500 by Late September / Early October. However, I now think that $1500 is not going to hold for long so it looks like the Gold price could be eyeing a break of $1600 by early October and to have at least reached $1570
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