The mechanisms of a currency war (21st century trade war)

Now that we know WHY countries want to debase their currencies, let's explore HOW they are doing it. If a sovereign central bank wants to devalue the local currency, they simply buy USDollars. Buying USDollars has the net effect of selling the local currency, driving down the value of that local currency. The intervention mechanisms are becoming more complex, as central banks are using derivatives in the foreign currency markets. But all things being equal, they buy the USDollar and short their local currency. The Fed and US Treasury are more than willing to print more USDollars to accommodate Congress, the Administration, and US government and consumer spending. The global financial system is built on a glut of USDollars--and the debt resulting from the creation of said dollars. Of course, this puts a higher burden on US taxpayers.

The world is awash with USDollars--that is the lighter fluid. Money velocity--the so-called multiplier effect of money exchanging hands, is the match. Once lit, prices rise as multiple dollars chase a finite supply of goods and services. This causes price inflation, something the Fed believes is under their control, as they attempt to fight a spiraling deflationary environment. The problem is that inflation can turn into hyperinflation overnight. A controlled fire can morph into an out of control, ranging combustion.

A depression is terrible, but hyperinflation is much worse, as it causes a complete loss of confidence in the currency.

Philip Manduca: America giving away wealth and power

For years, financial and mainstream media have been demonizing gold. Ten years later, after appreciating over five-fold, CNBC is just now acknowledging the legitimacy of gold and gold-related assets. At some point in the future, they'll be claiming they were gold bulls all along. Bull manure.

A quick primer on inflation

According to monetary theorists, inflation or deflation is created through the easing or tightening of our money supply, respectively. The Federal Reserve Bank controls our money supply, so its monetary policies ultimately determine the rate of inflation.

Here is the St. Louis Federal Reserve Bank's chart on monetary velocity:

http://research.stlouisfed.org/publications/mt/page12.pdf

The empirical formula is m x v = p x q, where
m = money supply
v = velocity of money
p = price level
q = level of economic activity

Looking at the two charts above, we can see money supply growth has been astronomical since 2008, while monetary velocity has remained moribund. The financial crisis has depressed economic activity due to lack of money velocity, i.e. banks aren't lending as they recapitalize their broken balance sheets. Velocity of money is the only fuse to stoke the fire of inflation. And when it does, look out. The other components are already in place for soaring prices.