"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Wednesday, August 10, 2011

Central Banks losing in the Wars of Currency Interventions

It was just last week that we witnessed the Bank of Japan intervene into the Forex markets to derail the Yen's rally back towards the former intervention level. It had completely erased the losses that it suffered after the round of coordinated intervention by the BOJ, the ECB and the Fed back in March of this year. It was evident from their action that the Ministry of Finance was dealing with political pressures from industry leaders whose exports were suffering as a result of the surging yen and were complaining quite vocally about its levels. Out came the intervention gun by the BOJ and down went the Yen.

But look out! The Yen has come back once again and it has only taken it FOUR TRADING SESSIONS to erase all of the losses that the intervention had resulted in. Talk about a gigantic waste of resources by the Central Bank!

The problem is the sheer volumes of liquidity that are tied to carry trades using the Yen as the funding currency. Traders continue to unwind those trades and run from risk with the end result being a repurchasing of the Yen. That buying is overwhelming any efforts by the Japanese monetary authorities to rein in the Yen.

There is now an effort by the SNB (Swiss National Bank) to derail the Swiss Franc, which is also attempting to take the Franc lower as it has been the recipient of huge inflows tied to safe haven flows. I expect that they will meet with the same "success" as has the BOJ.

Based on what I am seeing, the Central Banks have now become victims of their own policies. They created this beast of liquidity in an attempt to preserve the status quo and now that it is surging back towards their own shores, they are powerless to stem its tide.


  1. Dan,

    Thank you for this excellent analysis and for drawing our attention to this scenario of currency wars.

    Let me add to this the following :

    a) These are some of the settings of the end game (of the current financial system) we have entered already. This can be seen in open light already. WE ARE IN THE END GAME !!!!

    b) More factors to look at are :

    The balance sheets of the CenBanks are being bloated out of any proportion globally. There are two main types of CenBanks :

    Those taking in enormous quantities of foreign exchange (Japan, Switzerland etc.) in the form of foreign government debt instruments (mostly in US$ and euro) with the aim of making their own currencies go lower. This carries external currency and credit quality risk.

    And those taking in enormous quantities of domestic government debt instrumennts (US, UK, ECB) carrying credit quality (from downgrade to final default) risks.

    c) For both of these types of CenBanks the day of reckoning will arrive fast (example Switzerland) or at lightning speed (Fed, BoE, ECB). The difference is that the Swiss National Bank (SNB) is marking to market their currency holdings quarterly while the others seem to be in a delay mode on marking to market.

    d) The quarterly report for Q 2-2011 of the SNB showed they lost CHF 10.8 bill. in Q2 on revaluation of their currency reserves. At the beginning of Q 2 their capital showed a total of CHF 44 bill. How long can they go before the SNB needs to recapitalize ? The shareholders will get pressed hard to cough up the money.

    e) The SNB is holding eurozone periphery government bonds (incl. Greek bonds) as part of their currency reserves. What will be the effect of marking those to market ?

    f) With the strong evaluation of Yen and CHF the real economies of these two countries are already suffering. These CenBanks are cornered as you described so well. This seems to be the road into depression for export driven economies.

    g) The Fed, ECB and BoE have become Bad Banks clearly, containing their government debt instruments. The SNB, Peoples Bank of China and Bank of Japan (and others) have become Bad Banks containing the depreciating currencies and thus debt instruments of other countries.

    h) The currency wars are ongoing. The CenBanks are apparently lacking the knowledge of how to fight them successfully.

    Conclusion : we are approaching the point where CenBanks and private banks, funds and investors will have to write down the majority, if not all, of the troubled financial assets. The credit quality risk is trending towards 100%.
    It started with derivatives (mortgage backed etc) then took out Lehman and the people in charge worldwide tried to contain the contagion by sweeping the problems under the carpet, i.e. throwing freshly printed money at it. But the damage has been done. The contagion has spread worldwide.

    We should get ready for a completely new start to avoid enormous suffering. We need a new system. Gold seems to be showing the way to go.

    This has become vaguely perceivable in the mists of the future months.

  2. VZOPF - thank you for an EXCELLENT post....


  3. Dan,

    All great reading, but wouldn't mind if you spent a little time back on silver. It appears silver is building a base and with the COT now in more bullish position, could silver be redy to confirm golds recent move??

    Your thoughts would be appreciated.



Note: Only a member of this blog may post a comment.