Nowhere To Run – A Monetary Crisis

Nowhere To Run – A Monetary Crisis

Saturday, March 6, 2010

Executive Summary

• Nations around the world are insolvent and on their way to bankruptcy, a fiscal crisis, a currency crisis, or all three.
• World markets are currently interlocked to a troubling degree.
• A falling currency is always a cross-border event.
• The German DAX, the Dow Jones, and the FTSE 100 charts are nearly indistinguishable.
• A bigger trigger than Greece will be needed to set off the next round of global trouble.
• The UK is a highly qualified candidate for that role; Japan is also a likely possibility.
• Expect the unexpected.  The future is going to change suddenly and rapidly.

A significant issue facing all of us concerns the idea of a large decline in the value of our home currency, whatever currency that may be.  History is full of examples of currencies suddenly, and sometimes permanently, losing value.  Certainly, there is no greater financially traumatic event than having all of your perceived wealth evaporate like water on hot steel simply because your currency fails.

Once upon a time, evaluating the relative risks of various currencies was pretty straightforward, as they were independently run and market forces gave pretty clear signals.  Today, the major currencies are hopelessly intertwined, manipulated by central banks, and are therefore providing relatively poor information to market participants.

The dollar is the worst currency in the world, except for all the rest…

The larger problem, especially for those managing large tracts of money, is that there’s really no place to hide.  In the 1920s, if one was concerned about German monetary policy, one could have hopped over the nearest border and found sanctuary for one’s money.  In 2000 in Argentina, if one was paying attention, getting one’s money to Uruguay was relatively easy.

But where can one hide today?  Should one hold wealth in Euros?  Yen?  Pounds sterling?  Dollars?

Without a border to cross, the idea of protecting oneself against reckless fiscal and monetary policies becomes extremely difficult to conceptualize.  If all currencies are being managed recklessly, then where does one go and what should one do? 

This is not a trivial concern, and it has enormous implications.  In times past, investors with the ability to scurry away from reckless monetary regimes imposed a sort of control on the system.  If a government got carried away, big money would leave, their currency would fall, and austerity would be imposed.  But there is no meaningful way to “vote” anymore.  Now that all the major currencies are being similarly subjected to printing (i.e., “quantitative easing“) and/or shoveled in obscene quantities into the coffers of the reckless and imprudent (Goldman Sachs, Greece, etc), the final restraint has been removed from government actions.