The Bottom: Where Is It?

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\"RobinTalk about “race to the bottom,” what’s happening on a global economic scale should scare the heck out of all of us. Listen to this. It’s no longer just the devaluing of goods, through discounting or growing through the expansion of outlet stores instead of full-price stores; or the “Amazonian” business practice of losing money to gain share by undercutting competitors’ pricing. It’s also about the devaluing of currencies across the globe. Such a currency devaluation in the U.S., for example, is driven by our blatant and ongoing printing of more “greenbacks,” (supported by “nada” I might add; just the blind hope that things will eventually get better). Originally intended to spur domestic investment and growth through the compression of short-term interest rates to stimulate borrowing, it has instead been used primarily for the “speed trading” of equities for short-term gain. It is also intended to stimulate exports, as the dollar falls in value against other currencies around the globe, making it cheaper for other countries to buy American goods. Sounds terrific, doesn’t it?

Well, whatever your view might be on the Fed’s success in stimulating domestic growth (which cannot be effervescent, given our puny GDP growth), its effect on export growth, while perhaps a short-term lift, is likely to be the victim of long-term unexpected consequences. Actually, the consequences are beginning to surface, and better minds than mine have come to expect these outcomes. Indeed, they are now issuing some dire warnings.

As reported in the Wall Street Journal, a “Who’s Who” list of global finance and political leaders comprise some of the “Cassandras” warning of a global “currency war” (German leader, Angela Merkel, Federal Reserve Bank of St. Louis President James Bullard, Bundesbank President Jens Weidmann and Mervyn King, outgoing governor of the Bank of England, just to name a few).

When countries including China, Japan, Brazil, South Korea and others, even in Europe, all largely dependent on exports for growth, begin to experience an economic contraction in their own economies, what becomes a “path of least resistance”? You got it. It’s called currency devaluation.

Ironic, is it not? Kind of like in our retail “wars;” one retailer discounts, and they all get swept into the downwardly spiraling vortex. It is the race to the bottom, and where it ends, no one knows. One thing is certain; if you choose to jump out of the race, you lose. On the other hand, what happens to those that stay in? Eventually, they’ll lose as well. I guess Amazon will be the last man standing.

So, if this currency war, protectionist scenario plays out on a global scale, what happens?

Mohamed El-Erian, chief executive of Pacific Investment Management Co., comments on what’s going on: “I don’t remember central banks so deep in experimental mode. It is equivalent to a pharmaceutical company that feels forced to bring a new medicine to the market even though it has not been properly tested.”

Worse, James Rickards, a veteran financier and author of “Currency Wars: The Making of the Next Global Crisis,” predicts an apocalypse. He says, “People ask me who’s winning (in the currency wars). I say nobody. I expect the international monetary system to destabilize and collapse. There will be so much money-printing by so many central banks that people’s confidence in paper money will wane, and inflation will rise sharply.”

But, what if this time is different from all past deflationary and inflationary cycles? What if the international monetary system destabilizes and collapses and inflation does not rise sharply?

What if people around the world simply view the “money” they have as worthless, or worse, not know what it is worth, therefore losing trust in it?

Maybe we’ll go back to bartering, where borrowing, debt and interest rates will not exist. A time when the value of goods and services actually meant something.




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