Race To The Bottom


The Yen intervention this morning brings up an important point. As Keynesian fools play Russian roulette with the U.S. Treasury, as the ECB declares it will cap interest rates when time comes to get Euros off the market (thus limiting its ability to do so), as the fiscal situation in the developed world looks dire, those attempting to defend their currency risk by converting it to other currencies run a serious risk of getting hit by the ‘race to the bottom’. This race is the attempt by the more stable currencies to catch up with those on decline. And how do they do that? It’s simple: Their central banks just need to print the stable currency and use it to buy the declining one. If the intervention is done by the treasury of the stable currency, it’s more benign. The treasury coffer is replacing local currency with a foreign one, thus it has less local currency to use. It may shake speculators off the tree, but it is not inherently bearish the local currency in the long run. And such operation has a limit, namely the amount of local currency the treasury coffer has. But if the intervention is done by a central bank like the Bank of Japan just did, that is definitely bearish. The money the central bank prints is added to the existing base. And in theory there is no limit to what they can print in order to buy the declining currency. The Bank of Japan could say “we will print as much Yen as necessary to keep a 83 yen floor against the USD”. And they have the printing presses to back that threat!

The important point this brings is that, if you want to defend your currency risk, you need to diversify. The Swiss Franc and the Yen may look attractive every time you see Obama and Pelosi, but if the U.S. dollar collapses, the Swiss and Japanese central banks may not sit idle. I know it sounds cliché, but get also a hold of metals, white and yellow. Keep some Swiss Francs and Yen, but don’t go overboard. Diversify. I personally like the white metals (silver and platinum) but get some gold too.

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