18 September 2011

The Next Phase in the Currency Wars Among the US, China, Japan and Europe

"Double, double, toil and trouble;
Fire burn and cauldron bubble.
Cool it with a baboon's blood,
Then the charm is firm and good.

O well done! I commend your pains;
And every one shall share in the gains;
And now about the cauldron sing,
Live elves and fairies in a ring,
Enchanting all that you put in.

By the pricking of my thumbs,
Something wicked this way comes."

Wm. Shakespeare, Macbeth, Act 4, Sc. 1

"...The entire global system is at a critical juncture with sovereign bonds, currencies, stock markets and the fate of politicians all in play. The hidden purpose of QE and QE2 was always to cheapen the dollar by causing inflation in China and forcing its hand. Critics have said that QE did nothing to help with unemployment and consumption. But that was never the main purpose – the purpose was to weaken the dollar to help exports and get jobs that way, but it takes time.

I removed QE3 from my set of expectations late in 2010 when it became clear that Fed rollovers were enough to keep the yield curve tame and, more importantly, China was finally starting to move on the currency.

For now, QE3 is still off the table. But if the eurozone weakens and China weakens, that is the signal for more QE. It’s hard to know how this will play out, but at least we know what to look for. If you want to see QE3 ahead of the market, watch the euro.

Finally, it is not quite true there are no winners in a currency war. There is always one winner – gold."

Secrets of QE, Gold, and Currency Wars - Jim Rickards