Alex's Blog

Contrived currency devaluation

The value of investments and the income they produce can fall as well as rise.

I’ve mentioned ‘currency wars’ in a previous post which I will talk about in today’s blog. I think it important to outline what contrived currency depreciation means and why a country would want to do it and how it affects all of us.

Countries such as Japan that have a huge amount debt as a result of their inability to generate ‘real growth’ have resorted to Quantitative Easing (QE) on a massive scale to keep their economy in it’s ‘bubble’.

QE can take a number of forms but in essence it is the provision of liquidity by way of increasing the volume of a particular currency in circulation. The effect this has is to devalue that currency, as with any supply and demand relationship, if there is a flood of any one product onto the market, in this case a surplus of one currency, it’s value decreases and this is the same with currencies.


Devaluation of a country’s own currency can be advantageous for that country if it has borrowed a large amount of its own currency from different country. The implications of this are that the borrower pays back less of its debt. Good for the borrower, bad for the lender.

As you can imagine no lender wants this but every borrower wants to do it. Because our economy is globalized and because most countries borrow or lend to each other to a lesser or greater extent and also because of the huge amount of debt in world these days, there is a real fear that one country will enter into more aggressive QE program than another, which will upset the balance, leaving other countries and supranationals (lenders) out of pocket: ‘Currency wars’.

The key to managing this is to try to agree for one country to undertake the same amount of QE as the next .. a tricky balancing act.

The other key issue is that if Japan were to stop its aggressive QE program it’s economy would most likely go into free fall potentially causing a domino effect .. so does this mean that QE is now a necessity?

The answer is yes. For more info. refer to my first blog about the market and QE, the metaphor being, drug addict (market) and drug (QE).

Few financial advisors will talk about these issues, 1/ perhaps because they don’t understand them, 2/ if they do understand some of the issues we face then they don’t want to worry prospective clients by telling them as it might mean less business flow.

My philosophy is to try to inform and empower my clients so that we are in a position to react, ahead of the curve, should we need to. With our wealth manager hats on, our objective should be to grow money in ‘real terms’ (above the rate of inflation) and perhaps more importantly especially in this day and age, to protect client money.

To summarize, markets are likely to remain buoyant for so long as liquidity measures are being used thus giving confidence to the markets. This is clearly excellent for our pension funds and personal portfolios at the moment, but, understanding the longer term global backdrop is absolutely key to protecting our profits into retirement.

In future posts I will be focusing more on personal and business finance issues to help my readers with the everyday issues we all face. I hope you enjoyed the blog, if you have any questions feel free to get in touch.

A CContrived currency devaluation