Friday, May 1, 2009

Plus What to Buy to Stay Out of the Fray

By Sean Hyman Back in the good ole days of central banking, banks just lowered and raised interest rates to take care of their economies. By lowering and raising interest rates, they effectively managed the amount of money floating around in the economy, so they could reign in inflation.

At the time, interest rates could vary big time. You would see rates anywhere from literally 0% to over 8%. But of course, that was before the credit crunch and global recession…

Today, central banks are literally throwing everything they have at this global recession. And now, over 17 months into this global recession, most central banks have used every weapon in their very limited arsenal to boost liquidity in their respective nations.

Most of the Anglo nations have already lowered rates to at or near 0%. In other words, they’ve fired their only true weapon, and they’re running out bullets.

However, just when you think central bankers’ guns are empty…we’re seeing central banks around the world dive back into the battle once again.

And their latest weapon of choice? Two words: Quantitative Easing…

In the War on Deflation…Quantitative Easing Is the Latest Weapon

My colleague, Chuck often talks about quantitative easing, but I wanted to give a refresher just in case you’re new to FX University.

Quantitative easing is a deflation-fighting tool that central banks use to make money as cheap as they possibly can. They do this by cranking up the printing presses and pumping this new money into the system.

We didn’t always have the quantitative easing option. Back in the day, money represented something. The U.S. backed its money supply with gold (so did Switzerland until a few years ago.) Then most other countries pegged their currency to the gold-backed dollar. In other words, money stood for something tangible, so it held its value. In fact, at the time, you could even trade your dollars for gold if you chose.

An old-fashioned dollar…backed by gold.

Well, Richard Nixon fixed that by taking us off of the gold standard in 1971. Actually he didn’t have a lot of choice. At the time, the U.S.’s debt started to mount, and the U.S. government simply didn’t have the gold to repay our debts. It was only a matter of time before one nation noticed and started requesting gold for their reserves (turns out that was France at the time.). So President Nixon took us off the gold standard.

Suddenly, the U.S. government could simply print more money at will to cover its debts. Sure enough, they’ve been doing it ever since.

So you may think that since the U.S. has had a history of printing more money since the 1970s, that it should be no big deal right? Wrong! Because they’ve never printed money at the rate they are now.

But this “printing of money” used to be more of a habit of the U.S. Fed more so than for other central banks around the world. However, in light of the global recession and the credit crunch, they’ve almost all hopped on the money-printing wagon.

Over-Printing Money…in the Hundreds of Billions

So who’s involved in this “Quantitative Easing?” Well of course the U.S .is…that’s no surprise. We’re masters at cranking up the printing presses.

However, the U.K. has hopped in as well. They’ve dropped rates to the lowest they’ve ever been in their entire 300+ year history. They have printed over 75 billion pounds thus far.

Who else has jumped on the bandwagon? Switzerland. The SNB (Swiss Central Bank) has intervened in its currency to drive down the value of the franc across the board but in particular to the euro (EUR/CHF). So they are selling francs and doing a little printing themselves.

The Bank of Japan didn’t want to be left out either. They printed over 21 trillion yen! (And that’s on top of the quantitative easing campaign they engaged in earlier this decade to fight their private battle on deflation).

This is your advance warning: Central banks are watering down currencies’ values left and right.

Fortunately, you don’t have to sit back and take it.

You can go back to the “real” currency: gold. Gold is a great place to go when everyone is willingly driving down the value of their currencies. It retains its value and even can go up when central banks lose their mind like they are doing right now!

Also, in this month’s Currency Capitalist, my colleagues, Chuck Butler and& Ashish Advani are giving you several investment strategies to avoid the central bank’s latest war on deflation…including two incredibly easy buy-and-hold investments that let you profit as the rest of the central banks continue to run the presses.

Have a great weekend!
Sean

P.S. Remember, sign up for Currency Capitalist today, and you’ll receive the May issue (full of strategies to fight off QE). Plus, you’ll also receive a special MP3 of the three-hour long currency bootcamp from this past Wednesday in Bermuda. Click here to order now.

Sean Hyman, “Professor FX” and Long-Time Currency Analyst Explaining How You Can Succeed in the Currency Markets.
Sean Hyman spends his days teaching his fellow professionals in the industry how to trade the $4 TRILLION currency market. Now he brings his 15 years of financial experience to you. From long-term currency strategies, to quick FX-trading moves usually reserved for the professionals, Sean will tell you everything you need to know to succeed in the currency markets.