Competitive Devaluation and Gold, or Gold and the Bond-Bubble(s)

I was torn between two titles in this piece, before realizing it needed both. Writer after writer talks about the global currency game of “competitive devaluation”, and their writing implies what the impact of this will be on the gold (and silver) market, however I have yet to see our current scenario explicitly laid-out.

Before I get into the heart of this analysis, let me briefly summarize the concept of “competitive devaluation”, for readers who may understand what is happening, but not why. The premise which is guiding the policies of our “leaders” (and the “experts”) who advise them is that the way for each nation to solve its massive, domestic debt/deficit woes is to get other countries to fund their deficits.

How does this relate to the phenomenon of competitive devaluation? The idea is that if any particular nation drives-down the value of its currency that it forces one's own citizens to buy fewer imports (by destroying their wealth), while simultaneously making one's domestic manufactured goods cheaper and (supposedly) more-appealing to both domestic and foreign consumers. In other words, every country is planning to fund their domestic deficits with “trade surpluses”.

Obviously, as many have written and most can figure out on their own, it's impossible for every nation to simultaneously have trade-surpluses, since trade is (by definition) a zero-sum game: for every “surplus” there is a corresponding “deficit”. This means that with everyone trying to do this at once, that (roughly speaking) at least half the nations are doomed to fail – on that basis alone.

To further amplify the idiocy of this monetary ritual-suicide (by Western governments), these governments are engaging in competitive devaluation, irrespective of whether they have anything to sell and/or irrespective of whether there is anyone to buy their goods. The only people with any spending-power (in aggregate terms) are the citizens of Asian/developing economies. However, Japan and the Western debtor-nations are generally only competitive (even with debauched currencies) in producing high quality/hi-tech goods – goods which are still out of reach for most of the low-but-rising incomes of the surplus nations.

This means that even if only one Western nation was engaged in this form of economic devolution that the likelihood of success could not possibly justify the guaranteed harm which comes from destroying the wealth of one's own citizens, compounded by the ever-increasing risk of hyperinflation if these monetary lemmings are too “successful” in destroying their own currencies.

It is ironic that it is our debt-pushing bankers who are 100% responsible for this voluntary mass-destruction of all the fiat, paper-currencies which they claimed were our path to prosperity. Even more ironic, the only possible end-result of this hopeless gamble is that investor wealth will flee all forms of banker-paper.

Unlike “hard assets”, like gold, silver and the raw materials which fuel our world, the banker's paper-assets only retain any value at all as long as the (paper) currencies they are expressed in retain their value. This means that destroying currencies also means destroying all banker-paper and the entire paper-empire of Western bankers. This brings us to the bond market.

As I read article after article about Western debtor-nations (and Japan, the surrogate “Westerner”), there is a common theme in the writing of all these commentators (at least by all the competent ones). In very nearly all of these economies, there is an enormously strong case to be made that the bond-markets of each/every one of these nations represent a massive bubble, on the verge of bursting.

What should be terrifying here to any/every person idiotic enough to hold any sovereign debt of the Western-debtors is that the argument being made about these bond-bubbles (and their imminent collapse) is 100% independent of the effect I just described: that destroying currencies must destroy all-banker paper.

Bond-holders can crow all they want about the “fabulous prices” these bonds currently fetch. Presumably bond-holders still retain enough of a vestige of intellect to understand what those nominal bond prices really mean – once converted into worthless currency. Yet even when totally ignoring the monetary argument which concludes that all Western bonds must go to zero, we have analyst after analyst arguing that on pure, domestic fundamentals alone, these markets already represent ridiculous bubbles – ripe for spectacular implosions.