Recently I read a book called Currency Wars. The premise of this book is that the Federal Reserve's recent highly expansionary monetary policy (i.e.; increase in rate of printing of U.S. dollars) is forcing countries with export-driven economies, notably China, to make a lose-lose decision between depreciating their currencies (thereby weakening the price competitiveness of their exports) or importing inflation by also printing their currencies at a speed equal to that of the Federal Reserve (thereby keeping the FX rate constant).
There is plenty of evidence that this is actually occurring. Of course most readers of this article know about the Fed's quantitative easing, which essentially means the Fed is printing additional U.S. dollars at a rate of $1 trillion per year. In addition, the new government of Japan has explicitly stated a policy of printing yen in "unlimited amounts" in order to depreciate the Yen (this is working well for the Japanese) while Switzerland has been busy easing Swiss francs against the euro.
Currency Wars further explains that in today's light-speed, hedge fund filled, multilateral global economy, national governments simply do not have the collective power to control FX rates in the way that they did via the 1980's Plaza Accord, where everybody who mattered at the time "agreed" that yen was to appreciate.
Therefore, implies the book, money printing will increase out of control such that all money becomes worthless and another epic global economic meltdown will result. In other words, it turns out the Mayans were mainly correct, but they were just off by a little because they didn't account for the switch of calendars from Julian to Gregorian.
Of course, most skeptics would bet that some other, less-dramatic future will unfold. I am in that camp. Still, Currency Wars does paint a lucid picture and it is not really enough to simply disagree without painting an equally lucid alternative. So that got me to thinking, what does that other, less-dramatic future look like?
I believe it will look like this: Currencies continue to be printed at accelerated paces, by and large in unison, for the next 1-3 years. This keeps future global FX rates roughly in line with that of today (i.e.; plus or minus 25% of today's rates) while much more money circulates globally, chasing after a pool of goods and services that hasn't increased nearly as much.
China suffers the most from this, though they endure. At the same time, the U.S. economy emerges from its long malaise, fueled by (A) a still increasing and young population that finally grows enough to soak-up the housing bust overhang, (B) lower oil and gas prices, and (C) a restructured healthcare sector. Long time U.S. strengths, such as IT, autos, aerospace, and agriculture keep chugging along, too.
With the U.S. improving, the U.S. increases purchases of foreign-made goods, causing foreign export-driven economies improve in lock step with the U.S. Moreover, the U.S. government's budget deficit shrinks due to increases in tax revenue. Unemployment declines and renewed inflation prompts the Fed to wind down its monetary expansion, probably first by just letting its bond stockpile mature naturally, then finally increasing short-term rates.
And once the U.S. economy strengthens to say, a 3% annualized increase in GDP, all sorts of other economic problems in Europe and Japan simply fade away, behaving in a way consistent with what has happened since the end of World War II. FX rates stay constant while pools of goods and services catch up to money.
Barring getting into another sizable war or radical fiscal policy failures or changes (which I doubt will happen), this is the most likely future, in my view. In short, I find it much more likely that a global economic recovery occurs, starting this year.
Looking at this from a "future-history" point-of-view, while we say that the 1930's Great Depression was ended by a massive global fiscal expansion (a side effect of World War II), we may also say that the 2008-2012 Great Recession was ended by a massive global monetary expansion initiated by the Fed and imported by the rest of the world.
What does this mean for the reader? It means its time to cash in some of those gold bars and get into stocks. Its time to buy.