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.


CONSIDER:



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


Palladium/platinum/diamonds


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).