Here's the Surprising Winner of the Currency Wars

It's war by other means. With the Bank of Japan now buying government bonds and targeting an inflation rate of 2%, a global race to the bottom is on again.

Along with the Fed's commitment to "quantitative easing" and the ECB's promise to buy dodgy Mediterranean economies' bonds, Japan's latest move has sparked new fears of a currency war.

Like any other war, this one won't end well, either.

In fact, this same scenario played out in the 1930s, and the chances of another nasty outcome are quite high.

However, the mathematical reality is that the world's major currencies can't all be catastrophically weak against each other. It's impossible.

But the winner may surprise you. Because as this skirmish unfolds, it is the U.S. Dollar that will likely maintain its value against desperate contenders like the yen, the euro and the pound.

At the moment, those are the currencies that look distinctly unlikely to hold their own against the greater realities.

Here's why, starting with the yen.

Breaking Down the Currency Wars

The truth is Japan's stated goal of reaching inflation of 2% doesn't look all that ambitious until you realize that the Bank of Japan's forecast for inflation to March 2013 is only 0.4%, and its forecast to March 2014 is only 0.9%.

That's why the Bank of Japan has committed to a massive bond purchase scheme of about $1.2 trillion by January 2014, plus another $150 billion per month after that.

Believe it or not, that's nearly twice the size of Ben Bernanke's stimulus program for the United States, and Japan's economy is only one-third the size of the U.S. economy.

Add in a spending "stimulus" program of more than $100 billion to Japan's already ludicrous levels of debt, and it becomes obvious that trashing the yen is a likely result of these policies.

Like the Charge of the Light Brigade immortalized by Tennyson, these policies will look glorious initially but will eventually produce disaster, as they come up against the Russian guns at the end of the Valley of Death.

Admittedly, the Tokyo market is already up more than 10% since the election last month, and has further to go. But I wouldn't make any long-term bets on that market, or the yen.

Like the Bank of Japan, the Bank of England is also committed to monetary stimulus. The current Bank of Canada governor Mark Carney joins the Bank of England in July, but he has already indicated that he likes the stimulus program and would consider expanding it.

And like Japan, in relation to the size of the economy and the government deficit, Britain's stimulus bond-buying program is also bigger than the Fed's.

Compared to the other players, the European Central Bank is the most prudent; it has representatives of the German Bundesbank at various key points in its hierarchy, and its President Mario Draghi is himself monetarily cautious.

However, several of its member countries need the ECB to buy their bonds in order to avoid running out of money altogether. Moreover, one of its big players, France, has installed a crazed tax scheme for high earners that is causing a mass exodus, and is bound to bring economic trouble in coming months.

Draghi has promised to buy bonds of dodgy Eurozone governments when needed, and it seems certain that it will be needed at several points in the next year.

Then of course there's the risk the euro might break up altogether. You can guess what that would do the value of the euro.

The U.S. follies you already know about. The most worrisome feature is the $1 trillion budget deficit and the $500 billion balance of payments deficit, neither of which will be sustainable for much longer.

But compared with the rest of the world, the dollar actually doesn't look too bad. That's why the dollar looks likely to hold its own against the other major currencies. It's the best of a bad lot.

Other Currency War Winners

Of course, all of this printed money can only go in three directions. It can push up prices worldwide in a repeat of the 1970s, where by the end of the decade no country was safe from inflation. Or it could go into gold, which is still a strong buy even at current levels.

The third possible destination for all of this funny money is into currencies of smaller developed markets and emerging markets.

I'm not talking about the BRICs, all of whom have had too much hot money pour into them and have made many of the same mistakes as the big boys.

These include several Asian currencies, notably the Singapore and Taiwan dollars, and the Korean won, which have been carefully managed. In fact, the Korean currency dropped so far against the dollar in 2008-09 that it is still by no means overvalued.

In Latin America, Chile and Colombia have established funds to hold down their currencies, which have zoomed up in the past year. Australia and Canada have both been carefully run as well compared with their larger brethren, and so their currencies should be generally strong.

And in Europe, the Swiss are desperately trying to hold the Swiss Franc down to 1.20 against the euro, while the Swedish and Norwegian crowns and the Polish zloty also have shown signs of outperforming the majors.

Even still, given how it matches up against the major currencies of the world, the U.S. dollar has what it takes to end up on top.

But the truth is if you're wise, you'll avoid the lot and go for gold and emerging markets.

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