War is a lose-lose situation. And as if there are not enough wars going on in the world today, there is one more war that everyone will be directly and indirectly impacted, whether they like it or not; the war that even someone who called himself an “investor” isn't fully aware of the existence and implications: The currency war.
The currency war is a war in which countries take part by using their currencies as “weapons of mass destruction.” Although the term is often hyped by the media, the impact is indeed devastating.
Here's how it works: The currency war happens when a country think that it needs a boost in the economy, usually due to bad growth rapport. How is it done? It releases “packages” of policies to boost its competitiveness in the global market, which most likely to be reducing the value of their currency – just like what China and other Asian countries did in the past few months.
Currency devaluation is not new, though: The United States also engaged in such “war” back in 2008, when The Fed dropped the interest rate to zero. Eurozone did that in early 2015.
How lowering the value of a currency can boost economic growth? It's basic economy: When a country's currency is lower, then theoretically its products is cheaper overseas; on the other hand, products from other countries is more expensive. In other words, exports increases, while import decreases in the countries that devalue their currencies.
This causes the market disruption: Suppose country A is the one that devalue its currency; its products in country B are more appealing due to the lower prices. As the implication, country B's local products are negatively impacted by the cheaper, quality imports. If this happens for some moment, the local economic growth could slow down.
What would country B do? What feared is that country B will follow suit, lowering its currency so that it's becoming competitive again.
Sound fictional? Maybe, but that's what happen when Vietnam and other countries react to China's Yuan devaluation: They devalue their currencies, creating worse trade imbalance.
We can say that the currency war is a race to the bottom, which can only mean one thing for an average person: He/she'll feel the impact fo the race, lose more buying power in the process, “thanks” to the a potential rise in inflation.
How to survive?
As mentioned above, when a country devalues its currency, imports are becoming more costly for the importers, thus potentially rising prices. Moreover, rising demand for exports could add more pressure the local market. Those contribute to the rate of inflation of a country.
On a personal level, there are some ways to survive the currency war:
Rising imported goods' prices mean that you should shop local to put less pressure on your personal finance – while supporting your local businesses.
Invest in precious metals to protect your buying power. Today, gold and silver are in a unique position, valued low during an economic downturn. Make use of the window of opportunity to hedge against the currency war.
Better yet, protect your wealth in an offshore bank that offers accounts that are denominated with gold and silver (yes, such thing does exist!).
In an inflationary economy, savers are losers. Stop saving all of your money, and look for better alternatives (read: more returns) - e.g. Stock investing.
Most people would take this option, simply because they aren't sure what's their next step. Moreover, they are typically trusting the Government, hoping that they will be well-taken-care of. Sadly, in reality, when an economic downturn happens, every man is for himself. Just ask the Greeks.
The choices are yours. Choose wisely.
Apart from the rather dramatic term of “currency war”, the impact is indeed potentially war-like. When people are downsized, going bankrupt, or everything else in between, things can go wrong.
Take preventive measure – adjust your spendings, secure your wealth and plan for the possible worst case.
As always, before you make any decisions, please consult with trusted personal financial planners. If you want to learn more about offshore company formation and offshore banking as a ways to protect your wealth, consult with us.