EDITOR NOTE: As the global economy came to a near halt while entering lockdown, central banks around the world began setting interest rates to near zero (a few going negative). The risk of stimulus generally tends to be currency debasement via inflation. This article separates the two, arguing that we should be more concerned about “DEBASEMENT,” as it occurs in relation to other foreign currencies, than INFLATION, something which may remain steady. The only currency whose value will remain unaffected by this debasement is the world’s “legacy” reserve currency: not the dollar, but gold.
(Bloomberg) -- The unprecedented monetary and fiscal measures unleashed around the world may lead to weaker long-term growth and currency debasement, supporting gold prices, according to JPMorgan Chase & Co.
The risk of currency debasement may heighten next year, John Normand and Federico Manicardi wrote in the report, and will show in the value of Japanese yen or gold rather than the dollar. The risk of a surge in inflation will remain trivial in 2020 and stay subdued over the next two years, they said.
The reductions in interest rates across Group-of-10 countries in response to the pandemic-induced halt to their economies left most currencies yielding close to zero on a nominal basis, though real interest-rate gaps were higher in Japan, the euro zone and Switzerland, according to the analysis.
If the U.S. continues to suck in capital and fiscal deficits overstate the risks to external financing, the payback via G-10 currencies will be concentrated in those with above average real-rate advantages to the U.S., such as the yen and Swiss franc, the strategists wrote.
The strategists concluded it is probably too early to hedge against a rise inflation and higher bond yields as well as wider spreads from sovereign ratings downgrades. The focus now should be directed at currency debasement, which they say had a “high likelihood,” given the huge financing burdening carried by the U.S.
“Those who see in the major currencies just different shades of the same long-term liabilities should simply remain long the world’s legacy reserve currency – gold,” they wrote.
Originally posted on Yahoo! Finance