Tags: Currency | Interventions | Ultimately | Fail

Why Currency Interventions Ultimately Fail

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Tuesday, 01 Nov 2011 10:08 AM Current | Bio | Archive

We all know the old investment saying, “There’s always a bull market somewhere.”

Well, in the currency markets, there’s always a printing press being fired up somewhere. On Monday, Japan fired up, so they could buy U.S. dollars and lower the value of the yen.

Why does that matter? The Japanese yen has been making large gains against the U.S. dollar, reaching an all-time high until yesterday’s intervention, the second in three months.

A strong currency (one that’s gaining in value relative to other currencies) is bad for a country’s exports. And Japan, the world’s number three economy, is a huge exporter of cars, electronics and computers.

Those are high-value goods where astute customers are always looking for bargains. Japan needs a weaker yen to keep their economy afloat. That’s a hint to the market that the global economy isn’t as strong as expected.

The market expects a stronger price for the yen. That’s a bit ironic, as the yen is still seen as a “safe-haven” currency in times of tumult. But, like prior interventions, this one will ultimately fail.

A free market reflects the truth. Price is a market signal based on all aggregate knowledge, and it changes rapidly as that knowledge changes.

In short, market prices are the best known information about the relative scarcity of one good versus another (including currencies).

When governments try to change that, they’re essentially trying to change that truth. The end result is a more chaotic system.

Japan isn’t alone in intervening, although other countries use other means. The Swiss have tried to peg their currency to the euro. The United States has engaged in quantitative easing programs which have let the value of the dollar slide. Greece used the money it gained from the bonds it sold to finance a lavish retirement program for its citizens, and now can’t afford the full repayments.

The question investors have to ask about these interventions is simple: Who benefits from this, and who suffers as a result? The specifics always vary. Governments benefit first, as they get to spend the newly printed money. Individuals see the decline of their purchasing power over time, as they’re on the bottom end of the fiat currency food chain.

Japan’s numerous interventions are part of a wider attempt to print its way out of a multi-decade bout with deflation. So far, it hasn’t worked.

Just like a child at the beach building a sandcastle too close to the water, eventually the wave of market forces will wash away that labor.

When that happens, some children cry. Others laugh in delight and rebuild again and again. The latter, it would seem, grow up to be central bankers.

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We all know the old investment saying, There s always a bull market somewhere. Well, in the currency markets, there s always a printing press being fired up somewhere. On Monday, Japan fired up, so they could buy U.S. dollars and lower the value of the yen. Why does...
Currency,Interventions,Ultimately,Fail
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2011-08-01
Tuesday, 01 Nov 2011 10:08 AM
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