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461: Currency Wars and Erosion of Living Standards

02-22-2013 team


*  The Japanese have a new premier that has promised to print money – huge quantities – to boost inflation. He claims this will get the economy moving.

*  The US Fed continues to print around $90 billion a month as part of an open ended quantitative easing programme.

*  The European Union is providing injections of liquidity on an as required basis to depress interest rates for peripheral European member states and boost bank’s balance sheets.

*  China is ready to step in at any time to provide more printed money to boost spending.


Currency Debasement: After the financial crisis of 2008, and further problems through to 2013, the latest global central banking strategy seems to be informal currency wars. On 15 Feb the G20 met and announced all was well with no negative commentary towards the Japanese money printing plans – it seems they did not want to make it too obvious that a currency war has broken out. Instead, discussions on the currency war are likely being held behind closed doors.


Gold Support and Consolidation: All this is good news for gold and silver because eventually there will be further currency debasement and higher inflation leading to far higher gold prices. However, the initial view of the markets seems to be that these injections of money should help economic growth and economic stability – and hence gold prices have dropped on the news. The US was also giving out some mixed messages about the benefits of QE which probably confused and/or spooked the gold markets. But this is likely to be only temporary. Gold prices are currently been impacted by lower Indian demand after gold import taxes rose and perceived future taxes are thought likely to rise which is likely to further depress Indian private sector demand. Meanwhile Russian and Chinese central banks continue to buy large quantities of gold – looking ahead to a dollar currency decline.

Defer the Problem: All these QE measures are merely efforts to kick the can down the road – delay the fateful day that the “**** hits the fan”. It gives politicians an opportunity to give the illusion of economic growth when in fact there is none – worse still – there is economic decline. Let us explain.

Manipulated Inflation Figures: Firstly – official inflation figures way under estimate the real extent of inflation. In the UK and the USA – inflation including housing, fuel and food costs – without any substitutions – is more like 7%, not the officially quoted 2.5%. This means if GDP growth is claimed to be 2%, it really means there is a recession of 2.5% (that’s 7% - 2.5% = 4.5%, then 2% - 4.5% = -2.5%). In the UK we have been in recession since early 2008 – by about 1.5% a year on average – it’s just that no-one has told the general public. The inflation numbers are manipulated – if anyone wants more details of how severely things become distorted, refer to In summary, the UK as a whole has been in a depression and the only region that is not is London/SE England.

Higher Employment – Lower Paid Jobs: Doubters will point to the higher employment levels and stable unemployment levels – but underlying these numbers are some disturbing trends. Firstly the amount of part-time work is increasing. Secondly many of the new jobs are low paid manual labour jobs or services jobs – such as house maids, babyminders, building labourers, servants, attendants, fast food service hands etc. Many of these new jobs have been created in London to service the super-rich. The super-rich are normally migrants, and so are generally these new low paid jobs. Anyone travelling around London will notice this. Many jobs have been lost in the public sector – well-paid jobs requiring fairly high education levels – the majority of these jobs being held by women. So we have seen a shift from well-educated public sector women’s jobs, to low paid private sector women’s jobs requiring very little education. Overall, it looks like the employment is reasonably strong, but the jobs are far less well paid. Women have been losing jobs faster than men, in part because the proportion of women in the public sector is higher.  

Northern Depression: In the north and rural areas, jobs have been declining significantly. In northern areas apart from Manchester, possibly Leeds and a few other wealthy small cities and towns (e.g. York, Harrogate) – there has been a depression since 2008. This has affected house prices which have dropped about 20% from their peaks. Meanwhile in London, house prices recovered to levels higher than in 2008 whilst most of the rest of the UK have seen house prices drop significantly – as the depression has worked its way in.

Rural Depression: Anyone in any doubt about this only has to walk down the average high street of a rural town or city many miles from London. You will see occupancy rates at decades low, at least 20% of shops empty or boarded up and many originally active shops in prime sites transformed into charity shops. This trend is likely to continue as living standards decline to sustainable levels – which is far lower than they are at present. Any rural area further than 2 hours car trip from London will see a general decline, higher fuel prices, inflation and stagnant or declining property prices along with reducing public sector jobs - all these factors will impact the regional rural economies. It became totally unsustainable to have >50% public sector employment in rural areas – the country cannot afford this with deficits running at 8%.

Massive Gaps Open Up: As the gap between the rich and poor increases, governments get more pressure to raise taxes on the rich. But this really does not help much – because the super-rich are so mobile – they just move themselves, their business or their HQ somewhere else with a lower tax rate. They will have access to the top tax accountants that drive their tax bills down to 10% or lower. And if they do leave the country, then the economic impact is massive because armies of servants get laid off or have to leave the country. We are talking about an almost feudal system – with each super rich international Londoner directly or indirectly employing about 100 servants supporting their building, business, leisure, educational, shopping, transportation and other extended family activities. This system if anything is likely to become more pronounced because of further currency devaluation, money printing and increasing inflation. This will hit the poor the hardest. The rich will be protected from the ravages of inflation – it seems they always have been and they always will.

Savers Destroyed: As inflation rises, the prudent savers are destroyed. The waves of printed money get used to speculate or invest in – often in the stock market or commodities market – and this drives stock prices higher for the rich. Food and fuel prices rise – so the poor are hit by this as well. The gold prices rise – and the rich will benefit from this – they own the gold. As the waves of money bolster the property market – inflation also leads to higher house prices. So the rich will also see their net worth increase because of this.

Commodities Prices: The printed money also drives up commodities prices as a hedge against inflation – because after all, these are real physical assets. So the rich like the printed money because they can see this coming and get into commodities to make sure their wealth is not destroyed. Governments claim the printed money is used to boost employment and growth for the average person, but really it takes from savers, pensioners and the poor, and gives it to speculators for “risk on” investments. The most shrewd investors use it to make money in equities, commodities, London property and gold.

£ Sterling Decline: The pound Sterling has benefited and stayed reasonably strong partly because the markets and rating agencies believed Chancellor Osborne’s promises of reducing borrowing and reducing the deficit. But he was dealt a dreadful hand by his predecessor – and no amount of austerity will solve the underlying problems as tax receipts dry up in the broader economy. The deficit has stayed stubbornly high at 8% and government borrowing if anything is actually rising – so the market will in 2013 turn against the UK Sterling benchmarked against the Euro and Dollar – and this will lead to may be a 12-18% drop in the currency value and far higher inflation. Import costs will rise for oil and essential and non-essential imports – so watch official inflation which we believe will rise to 5% within the next year. This is based on our prediction of the UK currency's decline.

Follow The Rich: So what is our guidance on what to do in the current environment. It’s quite simply to follow what the rich are doing. Follow the money. These asset bubbles will cause inflation and pressure on the bond markets – it’s just a question of when they crash, or the bubble pops. The printed money has created all kinds of bubbles around the world – and one needs to be careful not to get into anything that is a bubble about to go pop.

Out of FSTE 100 Now: At this particular time, it’s very difficult to see any investment that is likely to see prices rise in inflation adjusted terms in the next few years – apart from gold. The clearest and most dangerous bubble is the US and UK bond markets. The stock market is also in bubble territory – particularly the FTSE 100 at 6400. So despite these having been a very good investment in the current cycle from 2008 to 2013, we would steer well clear at this time – particularly of the UK stock market. One could argue West London property prices look a bit like a bubble – and hence care is required here as well.

Gold Number One Despite The Detractors: Probably the best investment at this time in the UK is gold and silver. It’s been beaten down and everyone thinks the global economy is improving. But this is a phantom mirage.

Trade War: They say that the following cycle occurs historically:

1. Stable growth

2. Money printing

3. Currency debasement

5. Currency wars

5. Trade wars

6. Military wars

Mid-End Cycle: We are well into the currency wars - the third phase – with USA, UK, Europe, China and Japan all competing to debase their currencies through gigantic money printing. Eventually this will lead to trade wars. Big military wars are also now on the horizon with Israel, Iran, Japan, North Korea and China all looking far less stable – then there is trouble in Egypt, Syria, Lebanon, Mali, Nigeria, Iraq, N Korea, Pakistan, Afghanistan, South China Sea and Somalia to name but a few hot-spots. Eventually, as economic hardship increases - water, food and energy shortages increase – the governments of countries will want to blame others and will start military excursions to boost their power, influence and votes. The situation in the Levant looks like an accident waiting to happen. Everyone knows trouble is festering just below the surface.

London Property Attractive: One of the reasons why London property prices have risen so high is because:

*  The global rich elite buy a secure home in London for when problems arise in their own base country

*  The UK Sterling has declined making London property more affordable

*  It is considered one of the safest places to live in the world for foreigners – low crime rate, practically no guns, safe to walk the streets, privacy and human rights are generally well respected – no-one asks questions – a trusting, open and honest environment - multi-cultural open society

*  Cool summers and plenty to do in the winter

*  Banking, tax and investment services on one’s door-step

*  Tourist attractions

*  Traffic jams and parking not too bad- compact city

*  Excellent shopping, theatre, food, private schools, universities

*  Excellent public transport, safe taxis and buses

Improving: It’s tough to see this changing – in fact London has improved as a place to live enormously in the last ten years. If you live in Africa or the Middle East – you will understand all these attractions. Simply being able to cycle to the shops and take a tube and then walk home in the dark at night for women – without being hassled – and not having to worry about guns – it a real bonus. The Olympics helped, the East London Rail Line helped, and the new Crossrail and High Speed Rail lines will all give further boosts in the next 10-15 years. Some of the top hotspots are probably Farringdon, Ealing, Tottenham Court, Nine Elms and London Bridge that should benefit hugely by Crossrail and other developments.

Boost As Sterling Declines: When UK Sterling declines a further say 18% - we should see London property prices increasing by a further 10% on top of normal increases because this devaluation should attract more international investors and super rich into West London property – with the associated ripple effects to other London prime and mid-market areas.

Waves of Printed Money: In summary, the printed money will lead to inflation, debasement, currency wars, trade wars then military excursions. We are quiet some way through this cycle now – no-one knows when it will end. But when you see very high inflation, market panic and the gold price skyrocketing – into a final blow off phase, you will know the cycle is drawing to a close. Whether this will be in 2013, next year or any time in the next five years is tough to call. But it will happen. After, there will be some form of re-set then stock and property prices will be at all-time lows in inflation adjusted terms and the next 18 year cycle will start.

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