Look around and you see wars everywhere. In Iraq, in Afghanistan, in Africa and elsewhere destruction and the loss of life have become such a routine daily event that most people ignore them and go on about their daily lives. Yet with all their savage methods and the physical destruction traditional wars cause their effects usually last until the politicians/generals come to their senses and put an end to them. It is that simple. A decision is made and wars stop. You know when the physical destruction ends and when the rebuilding starts.
There are other kinds of less visible but more destructive wars whose effects are difficult to quantify and whose end almost always impossible to call until years later. The impacts of such wars are long lasting albeit less obvious because their destructive power gradually and slowly eat at their prey. These kind of wars are called trade wars. They take different shapes and venues. The most common are tariff wars and currency wars. Their intended, but never stated, goal is to improve the lot of one economy at the expense of another. The latest such wars was last week direct intervention by the Japanese government in the foreign exchange market in direct support of the Yen. Such direct intervention is rare among democratic economies and usually undertaken only as a last resort. Although currency intervention can be either to the upside or the downside the Japanese action was to weaken the Yen which has recently hit a 15-year high against the Dollar. The obvious goal of such an intervention is to strengthen Japanese exports. However, this should not be looked at in a vacuum.
Trade wars have been going on for several years between all the major economic blocks or countries as part of the seismic economic shifts shaking the global economy. Trade wars in the form of tariffs between the U.S., China and the EU are nothing new but are very worrisome at this time in particular because of the deteriorating, or at least stagnant, economic activities worldwide. The consequences of such action at this time are much more grave because there is no counter balance economy to pull the other way. Because trade wars usually feed on themselves and become a vicious circle the fear is that such wars could have the unintended consequence of dragging the world economy further down.
The Japanese may have other geopolitical reasons for their action such as putting pressure on the Chinese to actually do the opposite and let the Yuan appreciate. The Chinese may turn out to be their own worst enemy. By keeping the value of the yuan artificially low for so long in order to encourage exports they have kept a lid on the purchasing power of their middle class when world economies were expanding. In order to avoid a wider currency war the Chinese may now be forced by the Japanese action, as well as pressure from Washington and Europe, to let their currency appreciate. However, this may still not afford the Chinese middle class to show off its purchasing power because the desire may not be there at a time when other economies are shrinking. But such interventions, while in the short term, may seem beneficial to the initiating party actually may have long lasting adverse impact on the intended target. That is because such actions usually trigger a similar response from others that results in a distortion of true market activities leading to uncertainties taking years after the cessation of such actions to work themselves out of the system. Any undue interference by any government in any market leads to the same distortion, although to a varying degree. Additionally such actions come at a cost of a declining purchasing power of the domestic consumer and may end up feeding a deflationary cycle.
In the midst of all this there emerges a winner in gold. While China, Japan, Europe and the U.S., in their own way and for their unique reasons, seem to be clamoring over each other in destroying the value of their currencies in the name of stimulating depressed economies, one thing stand out as a fact: the value of all these currencies is falling in terms of gold. In other words, the value of the true measure of wealth is on the rise. While traditionally a rise in gold is associated with inflationary pressure, I believe we are now witnessing the formation of a rare phenomena during which the convergence of several factors as a result of decisions taken by politicians, rightly or wrongly, in the name of stimulating world economy, are giving gold an opportunity to shine the like of which we have not seen in a long time. Presently gold is acting as a reserve currency and its value is on the rise because of all the currency devaluation going on. So currently gold is a play on deflation and fear. After this cycle ends, and it will, the rise in gold will continue but this time in its traditional role as hedge against inflation. Gold is in a win win position over the next several years. In the meantime it will go through its ups and downs just like any other asset class. While there may be better buying opportunities for gold in the coming weeks and months, make no mistake about it there is nothing invisible about the glitter of this shiny metal.
Inflation or not it really doesn't matter. The bigger force here, at the moment, is fear of the unknown. Fear of the huge amount of debt accumulated by western governments to fight what is a natural and necessary deleveraging process that will give us a better chance at a better life. Fear that the "paper tiger" economy is really not vibrant enough to lift all others because it is dependent on all other economies. Fear that the establishment has to move away from the falling major fiat currencies.
The time to fear inflation will eventually arrive. In the meantime enjoy the glitter courtesy of fear of the invisible wars.
