One of the great mysteries of financial markets is the intrinsic value of the yen. Of course this mystery is applicable now, after the outbreak of QE has become “epidemic”, to the value of virtually all of the relevant fiat currencies. For similar reasons, the value of the US dollar is increasingly becoming suspect. The euro is hardly a currency, and up to now it has been a costly experiment for all involved, except the core.
We will comment on the EURUSD in future posts. But let me say for now, that political commitment (and the political capital already invested) can delay the result for the euro, but sound economics always generates the road map. A currency is really a claim on an economy, “vía” the balance sheet of a central bank. As a medium of value and exchange it cannot be delinked from the underlying economy. There cannot be one claim on multiple economies, unless the currency is used in a way that some of them subordinate to others. Can subordination to German policy be sustained in the long run? Without major adjustments, the Euro is not a viable currency. For Europe it´s either full integration, or disintegration, or splitting the currency in at least two.
Back to Fiat currencies and the Yen. The end of Bretton Woods, was “the end” of solid currencies, and the beginning of a truly fiat currency regime. The minute that central banks were independent, and could dimension their balance sheet at will, the value of the currency in their books became, to say the least, unclear. With the gold standard gone, the value of the currency became correlated only with the quantity and quality of the assets in the books of the central bank, and more indirectly, but finally, with the value of the underlying economy. Continue reading