World QE may mean currencies will race to the bottom

We in America are fairly familiar with the FED’s monetary actions since the financial crisis began in 2008.

Long story short: Dubbed ‘Quantitative Easing’, the FED has steadily pumped money into the financial system (through purchases of mortgage-securities) in an attempt to liquify the lending markets. This has kept interest rates near zero, which has benefited both the US (in lower debt service costs) and borrowers. The FED says they will continue with this policy until the economy picks up and unemployment drops under 6.5%.

The results so far have been mixed. The housing market has picked up, helped by the low lending rates (if you can get a loan with current tighter lending standards), and, employment and the economy are slowly mending. Its debatable if QE is responsible for this of course. But the economy is definitely mending. So that’s good.

In recent months, the Bank of Japan (BOJ) has announced and implemented their own version of QE in an attempt to stir improvement in their economy’s multi-decade sluggish pace. And on May 3, 2013, the European Central Bank (ECB) cuts its key lending rate to 1/2% and hinted at a stimulus package. I’m sure the BOJ and ECB are looking at the economic rebound underway in the US and decided to implement the same medicine in their economies.

So QE is the flavor of the day worldwide. And with it is the expectation that inflation will result from the flood of new currency being pumped into economies. The outcome should then be a devaluing currency base.

So far? No inflation, which is counterintuitive, yet might be the result of slack consumer demand for goods as evidenced by very slow economic recoveries underway around the globe. Without much demand, prices are held in check.

Many hedge funds were betting on inflation through commodity investments. However, without the inflation threat, even gold and other commodities are dropping (see GLD, the ETF for Gold, which is in steady decline). The so-called smart money may be incurring losses for now in those bets.

Still, it seems logical that eventually, inflation will rear its head as currencies race to devalue. Economic recovery or not, devaluation should mean hard assets (commodities) will win out as a hedge against inflation.

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