Yellen’s Plan to Destroy the World’s Currency

Yellen’s Plan to Destroy the World’s Currency


Geese and ganders and pots and kettles and all that.

Michael Mauboussin: Here’s what active managers can do

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Remember all that rigmarole about the death of the euro back in the heady days of the Greek debt crisis? All that talk that the euro was doomed to fail because it wrapped its politically correct and antiseptic currency around a gaggle of nations that had little in common, save for continental boundaries.

How could a collection of random economies, in countries that have spent much of their history beating each other senseless, possibly survive under one interest-rate regime? What’s good for manufacturing-heavy Germany is horrible for tourism-dependent Greece. And what might be great for the Greeks would surely send Germans into a fit of hyperinflationary hysteria.

Well, that’s the goose.

Now, let me tell you about the gander…

We are sitting on the cusp of the Federal Reserve raising interest rates for, potentially, the second time in about a decade. “Sitting” and “cusp,” I realize, are inaccurate words. More like we’re standing on a ledge made of brittle sandstone, every footfall sending chunks of our perch into the chasm below.

No matter, the smart guys and gals with economics pedigrees tell us from their aeries overlooking Wall Street. We’re safe. Our footwork is sure. We have the dollar to guide us.

And it’s high time, they preach, for the arbiters of American monetary policy to raise rates in America! Just like American workers now demand $15 for flipping burgers and taking your order, American economists now demand 75 basis points because the millions of new jobs flipping burgers and taking your order are proof that the American economy is a brawny beast propelling our limp-wristed world ever forward.

We will easily absorb a mere 0.25-percentage-point bump in interest rates. The economy is certainly healthy enough for that. Wall Street wants it. And the Street, like any spoiled brat, always gets what it wants after throwing enough temper tantrums. So, just get on with it already.

But, see, that’s where the goose and the gander get hung up with the pot and the kettle.

The Bretton Woods Currency Hangover

Wall Street isn’t the only brat in this particular playpen. The American economy isn’t the only economy that cares what the Federal Reserve does.

Turns out that when the Allied nations gathered in Bretton Woods, New Hampshire, back in the summer of ‘44 to crown the dollar king of the world, they wrote the script for the economic horror movie playing today.

The Bank of International Settlements tells us that nearly $88 of every $100 that trades hands in the forex market these days is a greenback. We know, too, that 60% of the global economy happens in the “dollar zone,” or in currencies pegged to the buck directly or through “dirty floats” that see monetary policy makers manipulate their free-floating currencies to match or counteract the dollar in some fashion.

Sounds a lot like a euro problem…

Because what’s good for America isn’t necessarily good for a bunch of other nations who’ve tethered themselves to the buck in various ways. And what’s good for a bunch of nations tethered to the buck isn’t necessarily good for America.

But that’s where Bretton Woods has left us. It’s where it has left the Fed.

The dollar is the world’s currency, for better or worse, and the Federal Reserve is the world’s central bank — and I’m pretty sure that is for the worst. Tough spot to be in if you’re Janet Yellen — and be thankful you’re not. She’s on a no-win career path.

If she raises rates to keep America’s economists and Wall Street happy, her actions will strengthen the U.S. dollar … which will weaken every other key currency … which will make repaying dollar debts that much harder for all the foreign companies that have taken on trillions in dollar debts since the era of low-dollar rates began, but who still earn their incomes in local currencies that would be falling in value … which will beget an economic slowdown in various countries or maybe even a debt-inspired currency crisis (probably some place such as Ukraine or Brazil, maybe Southeast Asia) … which will spill over into most of the emerging markets … and circle back ‘round to alight on the American economy because roughly half of all S&P profits happen overseas … and if overseas sales are plunging, then you can be pretty sure America’s largest companies are laying off workers here at home to make their profit targets for Wall Street … which means rising unemployment and even slower economic growth … forcing the Fed to then cut rates quickly and impose new forms of quantitative easing … that would ultimately lead to negative interest rates, and, potentially, something that smells of hyperinflation.

And if she doesn’t raise rates? Well, then, she risks the continued expansion of already excessive asset bubbles in stocks, bonds and real estate … which at some point must be deflated … only, as we all know, bubbles don’t deflate — they explode. And the next time they explode, they will do so with a force far greater than the Great Depression. Good reason to own gold, I should note. More specifically: physical gold.

So, getting back to the goose, the gander, the pot and the kettle…

At Least They Share a Border

If the euro must die as a pancontinental currency incapable of managing the disparate economic needs of 27 nations that, at the very least, share borders and a mutual history of managing their problems (even if it required guns) … why mustn’t the dollar die as a global currency incapable of managing the disparate economic needs of 60% of the world economy that generally shares no borders and has no meaningful history with one another?

Just a thought.

Until next time, good trading…