Stratrisks: “Currency wars are back, though this time the goal is to steal inflation, not growth.
Weak price growth is stifling economies from the euro region to Israel and Japan. Eight of the 10 currencies with the biggest forecasted declines through 2015 are from nations that are either in deflation or pursuing policies that weaken their exchange rates, data compiled by Bloomberg show.
“This beggar-thy-neighbor policy is not about rebalancing, not about growth,” David Bloom, the global head of currency strategy at London-based HSBC Holdings Plc, which does business in 74 countries and territories, said in an Oct. 17 interview. “This is about deflation, exporting your deflationary problems to someone else.”
Opinion: This is really important, but first we need some definitions:
- Inflation – A general increase in prices and fall in the purchasing value of money.
- Deflation – A general decline in prices, often caused by a reduction in the supply of money or credit.
- Hyperinflation – Price increases are so out of control that the concept of inflation is meaningless.
Deflation then is the opposite of inflation. Deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.
In addition to increased oil inventories due to fracking, oil prices are falling due to deflation. While that may feel good when you get gas, it is a very bad sign for the economy. Deflation is the evil twin of inflation as lack of demand for goods and services brings unemployment.
Central bankers are attempting to manipulate economies to try to avoid deflation while at the same time trying to cause mild inflation by injecting new money into their respective economies and keeping interest rates low.
The Federal Reserve has been printing money and holding interest rates down for 7 years. Picture holding a beach ball underwater and taking your hands away, it pops to the surface.
Currency manipulation or exporting deflation to some other nation is the equivalent of kicking the can down the road. One day, deflation can cause a collapse of a nations currency which then brings rapid hyperinflation.
And hyperinflation is what I believe the rider on the Black Horse (Revelation 8:5-6) is all about.
We are not there, yet – because “we” are still here.