How to Make a Fortune If the Currency Wars Go Atomic

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There's a lot of talk about currency wars these days, but very little understanding about what that means for specific countries, economic growth, inflation, and your pocketbook.

Let's fix that.

First of all, there has been no declaration of any currency war. And there likely won't be.

That's because open currency warfare could quickly lead to a mushrooming global crisis.

But that doesn't mean countries aren't already engaged in currency battles; they are. They almost always are.

Here's an over-simplified explanation about how currency wars affect you.

What You Need to Know About Currencies

If Japan exports cars to America and America exports grain to Japan, each has to pay the other. American grain exporters want to get paid in dollars, so they can spend those dollars in the U.S. The Japanese want to get paid in yen so they can pay their workers in yen, pay their taxes in yen, and spend their money in Japan.

Americans (in this example it wouldn't be you, but the cars importers) can "buy" yen with their dollars to pay the Japanese for their cars, or the Japanese can accept dollars as payment and then use those dollars to buy yen themselves.

Of course it works the other way around if you're a grain farmer selling to Japan.

But the value of yen to dollars, or dollars to yen, isn't constant. There is no set exchange rate. Exchange rates are set in open currency trading markets where currencies are bought and sold to the tune of several trillions of dollars a day, every day. One day a dollar might buy 100 yen and the next day it might buy only 98 yen, or it could buy 102 yen.

Lots of factors determine exchange rates, but the biggest, by far, is interest rates. I'll get to that, and then you'll understand the whole currency thing, and never forget it.

Currency wars, which are waged all the time, but not dramatically, are all about the value of your "home" currency relative to other countries' currencies. Our home currency in America is the U.S. dollar, in Japan it's the yen, in the 17-nation euro-currency bloc it's the euro, in Great Britain it's the pound, and so on.

Countries that export a lot of goods want their currency to be "cheap" relative to other countries, especially those countries who are buying the home countries' exported goods.

If the value of American dollars to Japanese yen is strong, meaning a dollar can buy a lot of yen, when you buy a Japanese car, for example, it will take fewer dollars to pay for it.
If the value of the yen goes up relative to the dollar, that car is going to cost more because your dollars don't buy as many yen as they did before.

Currency exchange rates have nothing to do with what kind of car you are buying from Japan or what features it has; the currency "cost" is a separate component of the cost of that car. That's true for all products imported and exported around the world.

Because Japan exports a lot of cars, not just to America, but around the world, it wants its currency to be "cheaper" than other currencies so it doesn't take as many dollars, or euros, or pounds to buy a Japanese car, or any product exported from Japan.

Here's the problem. America is a huge exporter of goods and services, too. So is Germany, and of course so is China. From a political perspective, all governments want to support their exporting industries. It's about manufacturing and jobs, and revenue and profits, and economic growth and standards of living.

The easiest way to facilitate an export-driven economy, like Japan's, like China's, like Germany's, and like America's (especially lately as domestic demand in the U.S. has softened as a result of the Great Recession) is to keep the home currency "cheap" relative to other currencies.

If exporting countries, especially those that don't have big domestic demand bases, meaning less-developed and "emerging-markets" economies, are all trying to export their way to growth (as is the U.S.) and they all want to have their currencies be "cheap" on a relative basis, that can't happen. Everyone's currency can't be cheap at the same time.

That's what precipitates currency wars. Governments who want to stimulate growth through exports (and who doesn't?) usually subtly, but sometimes overtly, take measures to lower the value of their currencies.

Japan's new Prime Minister, Shinzo Abe, in an unusual exception to the pacifist approach to currency skirmishes, recently fired a shot heard round the world. To lower the value of the yen, Abe is demanding domestic monetary easing, aggressive stimulus, and more dangerously, has openly been talking down the yen.

While Abe's bold-faced rhetoric is provocative, G20 finance ministers and Christine Lagarde, Managing Director of the IMF, have been calmly trying to defuse any mounting tensions that could trigger any country-specific retaliation and a global race to devalue currencies.

Is Japan to blame? No. America really started the latest round of currency battles.

In order to "stimulate" our way out of the Great Recession, which included President Obama's articulated policy of dramatically increasing America's exports, the Federal Reserve, in conjunction with the Administration's wishes and its own interest in re-capitalizing the nation's big banks the Fed is beholden to, has kept interest rates low, as in very low.

One of the ways the Fed has done this is by "printing" money. The Fed has the ability, beyond the reach of Congress or the President, to buy what it wants, which is most often U.S. Treasury government bonds (that pay interest). It pays for what it buys by simply issuing "credits" as payment.

Those credits are turned into money as they are spent by the government whose bonds the Fed buys, or by banks who sell the Fed (on a temporary basis, with the intention of buying them back in the future, usually) their underwater mortgage-backed securities. Thus, the banks supposedly have money to lend.

Here's Where It All Comes Together

Because the Fed has kept interest rates so low in America, investors who want more interest income on their money than they get here are parking their money in other countries where interest rates are higher. In order to put your money into a bank in another country that offers higher interest rates than banks offer in the U.S. you have to first buy that country's currency. And that bids up that country's currency relative to the dollars that you are selling.

In addition to the dollar being weakened, on a relative value basis, by investors selling dollars to buy and invest in other countries currencies, the amount of money being printed by the Fed means that at some point in the future all that money in the system will cause prices to rise.

Inflation is the result of a lot of excess paper money chasing a set amount of goods and services.

Inflation, and just the prospect of inflation, causes the dollar to fall further. And if the dollar is falling relative to the Japanese yen or the euro, other countries who want to grow their exports are going to eventually do what they have to in order to lower the value of their own currencies.

That's how we get into currency wars.

The net result is inflation, which arrives in several different ways.

You'll know when it's starting to spread. Interest rates will start to rise; watch the yield on the U.S. 10-year treasury. Commodity prices will rise; you'll see it in your grocery bills. You may already be seeing the incipient signs.

Stocks will rise at first — then start to collapse. So, make sure you're in the market but keep raising your protective stops as prices rise.

Buy commodities and gold, but take profits on your commodities as they skyrocket; they won't stay high forever.

Don't pay off your mortgage, make the minimum payments. You can pay it off later with cheaper dollars.

Accumulate as much cash as you can, and when prices crash — which will include real estate — be ready to buy, buy, buy.

That's how to turn an atomic implosion that could result from currency wars into a personal fortune.

From Executive Editor Bill Patalon: How We Beat Soros By Eight Months on This Currency Call…

One of our promises here at Money Morning is to keep you ahead of the curve – and certainly ahead of Wall Street. Frankly, this is what you come here for, and we take very seriously our responsibility to deliver. So when we succeed, we want to sing it from the rooftops. Like this time…

Money Map Press Chief Investment Strategist Keith Fitz-Gerald was fully eight months ahead of George Soros (and other hedge-fund heavyweights) in identifying this latest currency profit opportunity: the yen.

According to the Wall Street Journal, betting against the Japanese currency "has emerged as the hottest trade on Wall Street over the past three months." That’s when Soros shorted the yen – in November 2012.

But it was February of 2012 when Keith told my Private Briefing subscribers that the yen was headed for big fall – and he even recommended an ETF that would let them profit from his prediction.

The upshot: Keith's recommendation has so far reaped a 44% windfall – which is more than double the 20% yen decline the hedge-fund Johnny-come-latelies have been able to profit on. And there's more to come.

If you would like to join the thousands of investors Private Briefing has already helped to make big money in the markets, you can do it for just 26 cents a day. I'm proud to say that in a little over a year, we've had more than four dozen winners, including four that have doubled and two that have tripled in price. Click here to learn more.

>>Don't miss Is Japan About to Fire the First Shots in a 1930s-Style Currency War?.

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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Short-Side Fortunes, Shah shows the "little guy" how to make massive size gains – sometimes in a single day – by flipping large asset classes like stocks, bonds, commodities, ETFs and more. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. Jerry C | February 25, 2013

    I get the part about currencies going down but then you say to build cash for when other assets like real estate go down. why build up and hold cash if it's losing value? I like PMs and other commodities and then be ready to make the switch. might be a time delay between commodity/PM peak and RE bottom so you need to be nimble but that's what it's about with good investing.

  2. Joe | February 25, 2013

    This is the outline from the book I sent you "Aftershock". Interestingly everyone is now catching on. Get Rickards book on Currency Wars. Rickards was hired by the Pentagon to study the effects on a currency war. The book provides an excellent history of prior currency wars, present, and the general make-up of global monitary systems and organizations. I think it is a road map of what to expect. I just completed a reading and will review certain sections again.

    Charles Nenner still has not given the nod to buy gold/silver, looking at what unfolds for another cycle low in April. He also has not given the nod to short stocks. I'm buying and shorting since he is a little conservative on his timing, but his long term charts show the big picture. I am going to buy TLT very, very soon. Look at the chart on it.

    I sent you all of them by Charles Nenner.

  3. PATRICK from belgium | February 25, 2013

    ….an explanation for 8years old ….. at last!

  4. Lee Cary | February 25, 2013

    Gross over-simplification.

  5. H. Craig Bradley | February 25, 2013

    CASH DOES NOT CRASH

    I've always believed CASH is always good to have. Cash does not Crash. Cash is there for you when you need it "like the State Farm Ins. Motto: Like a good neighbor". Cash is real- you don't have to sell anything to get some.

    Even better, you don't have to borrow any money from a U.S. BANK either. Everyone will accept it too ( Do they have a choice?). In fact, everyone is your friend when you have CASH. If you think you will need the funds within 3-5 years, then you should not invest them in the markets anyway.

  6. Carol | February 25, 2013

    As far as accumulating cash, when the administration decides it is time to kill the dollar, it will be worthless. See these interviews by Canada Free Press:

    The latest from “DHS Insider" (12/27/12)

    and part 2:

    DHS Insider: Obama’s cyber warriors & preparing for collapse (3/7/13)

  7. Dave | February 26, 2013

    you ignore a key point. China and others, require their exporters to convert to local currency via the govt, which creates new money to fund it. This is the origin of 'exporting inflation', as the money supply increases in the exporting nation.

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