The Consequences of Currency Manipulation

This is the seventh post in a series entitled Currency, Money and the Economy.

In the last couple of posts, we have discussed currency manipulation. But what exactly are the consequences of it? Well, with all the bonds being issued and all the currency being printed, the bottom line is that there is too much printed currency in the world by all nations. These central banks print this stuff and then manipulate it with other countries. Every country's central bank is guilty of it. Unfortunately, there are only so many places all this currency can flow.

Let’s think about adhering a piece of film to a piece of glass. The glass has some black dots on it, each one with a different name. The names of the dots are commodities, stocks, bonds, and every other type of investment you can think of. In addition, at the center of the glass is one more dot. The name of the center dot is precious metals. Now let’s try to adhere the piece of film to the piece of glass. At first, you will naturally have air pockets that form bubbles between the film and glass. Those air pockets represent extra currency that should not be in the system. As you try squeeze the film tighter to the glass, the bubbles will move around, even joining together to form a superbubble. The central banks, either deliberately or inadvertently, push these bubbles around by squeezing certain areas (currency manipulation). If a superbubble forms over a dot, you get that “irrational exuberance” feeling. One formed over the US stock market between 1996 and 2000 and over the US real estate market between 2003 and 2006. Because the film can take only so much stress, the superbubble eventually goes pop! Now, here is the difference between our analogy and real life. In our analogy, the goal is the squeeze all the air out between the film and glass. In real life, the central banks are actually pumping more air between the film and glass. This is why, despite the calls for increased financial regulation, more superbubbles are inevitable, because there is simply too much currency in circulation to control.

Now the one thing all central banks are trying to do is to keep all the bubbles away from the center of the glass. Remember our historical playbook that all world powers have gone through? The United States have followed steps 1 through 5 and are desperately trying to avoid step 6. If a superbubble forms over the precious metals market at the center of the glass, this means that the population has lost faith in its own currency and are now seeking safe harbor in precious metals, which fulfills step 7. The problem central banks are facing is that they are pumping so much air between the film and glass, it is getting more and more difficult to steer the bubbles away from the center of the glass.

What happens if a superbubble forms over the precious metals market? We will find out in the next post.