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Two drunks

In our quest to find out more about risk factors associated with investments, we focused on currency wars during our last meeting. We looked at exchange rates and how the US dollar fared and tried to understand what the printing of money means to us.

The chart below shows that the US dollar is not doing too badly against other currencies given that gold, oil, real estate and bonds are all down but the stock market is up.

US UK EU Brazil China Japan India

$1 63 cents 80 cents R2.5 6.1 Yen 115 Yen Rs 61

We researched the concept of currency wars as set forth in the book by James Rickards where he puts forth an enlightening thesis on the decisions governments make and what it means to currencies and us.

http://www.riosmauricio.com/wp-content/uploads/2014/01/Rickards_Currency_Wars.pdf

There are several interesting sections that describe what a currency war looks like. Some of the following situations look familiar to us:

  • First interest rates go down

  • Governments freely print money to spur growth

  • This inflates asset prices, commodity prices and consumer prices to offset deflation

  • The currency becomes the rope in the tug-of-war between inflation and deflation

Since the US has been printing monies, inflation in other countries have resulted in these countries to adjust spending habits and policies. Given that the dollar is not doing too badly against other currencies, we seem to be warring well.

Of particular interest was the section that explained the current situation of US money printing habits. Typically, the Treasury prints money that the Feds then loan to banks and principal and interest is plowed back into the Treasury to pay back the loan. However, what the Fed is currently writing IOUs to the Treasury so that no money is being plowed back into the Treasury. He referred to the Fed and the Treasury as two drunks propping each other up so they don’t fall.

So what happens when they can’t prop each other up? Stay tuned as we do more research into this situation….

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