Charles Hugh Smith – I have long maintained that the structural imbalances of debt and risk that triggered the Global Financial Meltdown of 2008-2009 have effectively been transferred to the foreign exchange (FX) markets.
This creates a problem for the central banks that have orchestrated the “recovery” by goosing asset bubbles in stocks, real estate and bonds: unlike these markets, the currency-FX market is too big for even the Federal Reserve to manipulate for long.
The FX market trades roughly the entire Fed balance sheet of $4.5 trillion every day or two.
Currencies are in the midst of multi-year revaluations that will destabilize the tottering towers of debt, leverage and risk that have propped up global growth since 2009.
Though the relative value of currencies is discovered in the global FX market, there are four fundamental factors that influence the value of any currency:
1. Capital flows into and out of the currency (and the nation issuing it).
2. Perceived risk, specifically, will this currency preserve my global purchasing power (i.e. capital) or erode it?
3. The yield or interest rate paid on bonds denominated in this currency.
4. The scarcity or over-abundance of the currency. Continue reading