Saturday, May 26, 2012

The Debasement Of Major Currencies

Since the global economy largely went off the Bretton Woods system where gold deposits was secured by issuance of currency, we have not encountered such a drastic debasement of major currencies. Basically when a country prints their own currency without "significant backing or financial reserves", you are assuming the rest of the world are idiots. If Malaysia tries to do that, nobody will accept the ringgit at 3.0 vs the USD, it becomes monopoly money.

However, the USD is a reserve currency, closely followed by the Euro and the British pound. Its OK to print as long as the central bank also "withdraws" the money from circulation later on. Do you see that happening over the next 5 years?

Supposed when you print (irresponsibly), the worth of that currency adjusts itself in the markets, but we all know that has not been the case. 

First, if a country prints more currency to manage their affairs, this results in higher inflation. This is what most developed countries are doing today. Secondly, and most importantly, the value of the country's currency becomes less valuable due to inflation (currency debasement) since over time inflation is a killer of currency value. Finally, the cost of borrowing will eventually rise. This becomes tricky because when the cost of borrowing rises it becomes much more difficult to repay the borrowing. A vicious cycle can develop. We are seeing that today with Greece.

However, we see little inflation as we are all in a liquidity trap. Banks and other institutions just hoard the money. If the samae amount of money goes to work in the system, you have a strong multiplier effect, which meant that more funds will chase for the same goods and services, thus driving up prices of everything, stock prices and real estate included. Again, none of that has happened in those country.

However when things really "stabilise" in Europe and the US, we will see the above chain reaction. Technically, when that happens the central banks should "withdraw" some of the printed money from the system. However, they are unlikely to do that till much much later, and even that, rest assured it will be a minor fraction of the amount they actually pumped. Look at the "amount of currency debasement" by the central banks. It has gotten to a point of no return.

So, who loses out, the rest who did not print their currencies irresponsibly. The more we invest in USD, Euro, the more we are showing our backside and telling them to please screw us.

Everything being equal, if they die, its no good for the rest of the world's economies. Is that part of the insurance we pay? So, when you buy that New York or Florida apartment, when you buy the high yielding foreign currency bond, think again. The rest of the world MUST PUNISH these "bad behaviour".

So, we have to strike a balance. If you are very rich, try to shy away from assets denominated in these currencies. As I think they will not do the prudent moves over the longer term. Its best to consider other asset classes that will be able to withstand the cycle of currency debasement, which has reached gigantic proportions.


Arable land with a dependable climate

Oil-refining capacity

Electricity generating capacity

Water-treatment capacity

Drinking water, bottled or piped

Coastal access, harbours and ports


Real estate in long-standing, distinctive locations

Antiques, fine art, stamps and coins

Commodities without futures and options markets

Or, if you are just another middle class person like me, if you have excess cash, put in HKD and SGD. The latter is financially one of the strongest currency. The former is very ripe to unpeg from the USD, which should bring forth at least a 20% revaluation. No way can the HK economy continue to be pegged to the USD. I suspect they will revert to a combination peg of the yuan, yen, euro and usd .... sometime. When will that happen? When the USD falls into a hole (i.e. dropping more than 30% in a year in value).


Agent Diary said...

It will be worst if EuroBond is launched. Even the recent US govt's move to allow PBOC to bypass Wall St. to directly buy the treasury bonds is pretty disturbing.

By looking through the histories, as far back as Romans, Chinese Dynasties i.e. Song, Yuan and Ming, Republic of China (under KMT) and Wiemar Germany (and recent Zimbabwe), von Mises' theory on money proves right again and again (unfortunately) that any debasing spree (without restrain) will only ended with an ultimate burst.

Honestly, I really worry because the is the first time ever, in the human history, all nations engaging uniform fiat currency debasing synchronously without restrain.

How it will end? I don't think even if Mr. Mises is alive today, he would ever dare to imagine.

Agent Diary said...

Agree that HKD will have to eventually re-value but based reference with what? I think is RMB.

clk said...

Since the SGD or HKD are essentially backed by the reserves in the big three, wouldn't the death of it kills these currencies as well? Similarly with RMB in which PRC is the largest lender to the USA. Looks like the big three are too large to fail?

Would an asset as suggested above and perhaps gold which is essentially the world's oldest "money" as a storage of value be a safer bet?

clk said...

Let me re-phrase my earlier comment, when I said gold I mean Physical gold, not paper gold.

trusbx said...

Hi Dali, what do u think of îndian Ruppee over the long term, recently i went to India and found out that they're FD is giving a 9.5% return. Please advice

trusbx said...

Hi Dali,recently i went to India and was surprised to find out that theyre FD is giving a 9.5 % return.
What do you think of INdian Rupee in the long term ?

Salvatore_Dali said...


u r right, but these smaller currencies are backed by smthg, the big ones r not

Salvatore_Dali said...


always treat high yielding currencies with a lot of caution, it masks a lot of problems

DanielXX said...

Indian rupees! hahah that country is hopeless. Stock market went up 20% in 2012 then retraced all of it and now it is in the red. They could well be the biggest hitherto unrecognised victims of the European financial crisis because they're so dependent on foreign debt funding.

Videos I Like said...

Let's say I am a newbie in all matters financial but happened to be so lucky to suddenly inherit rm25 mil.

What's the 'right' thing to do with all that money ? This is a serious question, no fooling around. Even to get a proper certified financial planner is problematic. Anyone willing to offer venture some help ? overly technical jargon...remember, I am a finance idiot, if there's such a term.


hishamh said...

Dali, slight problem with using central bank balance sheet size as a measure of monetary stimulus. You see, the same thing will happen if central banks are engaged in withdrawing excess liquidity from their financial systems. Balance sheet size alone tells you nothing of what's going on.

Second and more fundamentally, you're ignoring context and assuming that central banks are the ONLY arbiter of how much money is in a system. This is only true (under a reserve backed fiat money system) under fractional reserve banking. But fractional reserve hasn't existed for 80 years. It would be more correct to call today's monetary system as essentially a non-reserve system.

Under "normal" circumstances, all money creation lies within the system itself through credit creation, and not through its regulator the central bank. High powered money at the central bank (i.e. reserves) are not necessary for there to be "too much money chasing too few goods" or vice versa. But if credit creation also creates money, deleveraging (i.e. repayment of loans, or loan delinquencies) is tantamount to money destruction.

And guess what's been going on for much of the last 4 years? The growth path of monetary aggregates suggest that QE programs in major economies is barely keeping up with private sector money destruction.

I think what you'll find is that there will be little to no withdrawal of new money created through QE, and more important, little to no direct inflationary consequences, for the simple reason that it won't be necessary to.


The natural limit to money printing is the max potential output of an economy. It's one thing to print money to maintain financial system liquidity when economies are operating below the max potential threshold and faced with debt deflation, it's quite another when you do it with an economy already at or above max output.

Up to the mid-1990s, as a matter of policy, all government deficits in India were financed through the central bank i.e. money printing. Even today, some portion of government debt is taken up through new money creation.

India is operating dual deficits - both government and trade. That signals an economy operating well above its actual capacity to produce (like the US in the early 2000s). The optimal policy solution is to induce a recession to reduce private sector demand (via high interest rates - dangerous with already tight banking liquidity), or to cut back on government spending (difficult given India's social problems). The alternative is higher inflation.

I've had a sell-call on the Rupee for the last three years. Even with its depreciation this year, its still 40%-50% overvalued against the Ringgit alone. My advice is to avoid it like the plague.

clk said...

"Videos I like", Dali has mentioned some of the things you can invest, arable land for example is one of them. I like physical gold or silver. The key is not to pay too much for it, which is your challenge. At which price do you enter is the main question, rather than what you should buy.

Serendipity said...

Thanks clk, for your reply. Having a lot of money suddenly can also be quite problematic, although it is definitely far better than having to budget all the time.