The Central Banking Prisoner’s Dilemma: Fed Freezes, BoJ Stammers, Dollar Drops 2% Overnight

In today’s communist-style, centrally planned world, when big central bankers meet and make decisions, no matter how small, markets quake and currencies shake. And that’s what just happened.

Bankers at both the Federal Reserve and the Bank of Japan met in the last 12 hours to decide where they would take monetary policy next. But when they sat down to make decisions, they were faced with a classic prisoner’s dilemma: Options were precluded. There was a lot they wanted to do but little they could do.

Both the Fed and the Bank of Japan (BoJ) and the European Central Bank (ECB) as well, want to debase their respective currencies. But each wants the other to take the plunge first.

The Fed has been the least reluctant to announce easing in the past. And even Wednesday, after moving toward a tightening stance, the Fed remains vocal about potential loosening. The ECB and BoJ are more circumspect.

BoJ governor Haruhiko Kuroda’s is standing pat – thus betting a stronger yen won’t damage business momentum. He’s obviously hoping a recovering US economy will generate a tighter US monetary policy and reduce the strength of the yen.

But Kuroda’s decision moved the yen up hard against the dollar – by some two percent overnight. Japanese equities sold off as well as investors were disappointed about the lack of near-term stimulus on the part of the BoJ.

The prisoner’s dilemma: Kuroda is reluctant to debase too obviously. Same with Mario Draghi at the ECB.  It’s bizarre to watch them prostrate and wiggle… like a really bad poker game played by awkward teenage girls hoping the other folds first.  It’s no surprise for us, however.

What just happened to international currency and equity markets – specifically the dollar and yen – is predictable if you understand the forces at work throughout the West and in Asia too. In fact, I have been saying since 2009 that the Fed would never raise rates significantly again (0.25% is not significant).  After seven years, Yellen finally raised rates a whopping 0.25% last December and I said that was probably the extent of it.  And so far, again, I’ve been right.

Basically, the plan is to continue to pound the dollar. And as the dollar debases, that gives other central banks wiggle room to debase their currencies as well.

This Jubilee year especially, it’s all downhill for paper currency. Less and less value. And that’s why I wrote that Yellen wasn’t going to raise rates. And, yes, as you know, the Fed has just announced it is too scared to increase rates by another 0.25% or it may implode the entire financial and monetary system.

TDV’s Senior Analyst, Ed Bugos, has made a number of accurate predictions of his own. He wrote an alert to subscribers earlier this week that the BoJ would not ease further. Bingo.  That just happened… and surprised a lot of people.  Not us though.  As a result, Ed’s recently purchased Yen currency options are way up overnight while the dollar is crashing.  More big gains for TDV subscribers (subscribe to TDV Premium here for all of Ed’s picks)… this is actually starting to get ridiculous how much we are profiting from this whole stupid system.

The US dollar is at the beginning of a new bear market. The foreign central banks don’t want to see it because that will mean they will have to inflate more in order to stay competitive with exports.

The ECB and BoJ are happy to talk up monetary inflation while not really initiating it. This makes their currencies undervalued.  The upshot is that the ECB and the BoJ are going to stand pat in the near term, as they have before. Thus the undervalued yen and euro will climb while the US dollar gets a double whammy. The Fed is not tightening and other central banks aren’t loosening. It’s a dead man’s standoff.  And, that inevitably weakens the dollar.

Once the US dollar breaks even further lower, you can look for other central banks to begin to ease. Each bankster wants the other’s currency to go first for political and professional reasons. But they’re all going down sooner or later. And metals are going up.

Who else, of all the analysts out there, has been saying gold, silver, mining stocks and bitcoin were headed higher for the last six months?  Ahem.

Bitcoin has doubled.  Gold mining stocks have skyrocketed.  Gold had its best quarter in seven years last quarter.  And silver is now breaking out.

But, this is just the beginning.  By the time this is all over no one will believe they didn’t see it coming.

“You mean to tell me, grandpa, that when you were younger the world was ruled by a secretive cabal, people thought money was paper and the only thing investors thought was important was what some people in a secret boardroom decided?”

“Yes, kiddo.  We couldn’t believe it either.  But that’s why we are so rich now.  Here’s 0.1 bitcoin and an ounce of gold, go buy yourself an NFL franchise.”

Am I fantasizing just a tad?  Yes, maybe.

But while I’m at it, let’s hope that this current prisoner’s dilemma of the central bankers ends up with them all behind bars.

Originally Appeared At The Dollar Vigilante