Bombing Your Money with Money

Nobody wins this war
of attrition, however much money they print up and shell into the market...

DURING the Second
World War, Nazi Germany hatched a plot to flood Britain with fake bank notes, writes Adrian Ash at BullionVault.

Working first at the Sachsenhausen concentration camp just
north of Berlin, some 140 Jewish printers and forgers made perhaps £132 million
in high-quality fakes (some US$650m at the wartime exchange rate, but nearer $6bn
today), equal to around 15% of Great Britain's then paper-money supply.

Named after the SS engineer who ran the operation, Operation
Bernhard only saw a handful of its counterfeit fivers and tenners reach
England. (The Bank of England apparently burnt what it found, along with its
records.) Because, "by 1943, the Luftwaffe was almost kaput," writes
historian Lawrence
Malkin
, and so "instead of pursuing their original goal of dropping
the counterfeits on England to cast suspicion on real Pound notes, the SS used
the fakes to finance its own espionage service."

The Nazis' slave-fake money thus flooded the black markets
of Central Europe and North Africa, driving down the street value of Sterling
(and spooking the hell out of the Bank of England, which couldn't detect those
forgeries
which found their way to London). Eventually, through a bizarre
twist of fate (and the canny money-launderers of the Jewish underground), it
helped fund the post-war flight to Palestine of Holocaust survivors.

Whereas today? Economic warfare no longer seeks to drive down
the enemy's currency. In late 2010, in contrast, it's through buying your foe's
money – bidding it higher – that you hurt him most.

"[Last] Friday's Wall
Street Journal
had an article on Japanese anger at Chinese purchases of
Yen," notes Peking finance professor Michael
Pettis
, "which according to Japanese government data released
Wednesday, showed that China's Yen purchases this year equal $27 billion, more
than six times China's combined Yen buying in the previous five years."

The scoundrels! Josef Goebbels, Hitler's minister for
propaganda, thought Operation Bernhard a "grotesque plan", fearing
that it might rebound on the Nazis if the US or Britain replied in kind. But what
would the jack-booted villain have made of today's dastardly attack on Japan by
Beijing?

"Everyone is playing the same game," says Pettis –
"trying to force the brunt of the adjustment abroad...and here we have
China and Japan squabbling over Chinese attempts to recycle its trade surplus
into Japan rather than into the US or Europe."

China buys the Yen, thus hurting Japanese exports...and so
Japan buys up Dollars...which are already devalued by the US Fed's zero-rate
policy, and are now pulling ahead of the Yen in the race to the bottom. Over in
Europe, the Swiss National Bank sold its own Francs for Euros in the spring of
this year, while the Bank of England's photon forgery team finished flooding
the City of London with Pounds, creating enough money to fund an entire year of
government borrowing and pushing consumer-price inflation above its own
"upper tolerance" in 19 of the last 36 months with its own near-zero
rates.

"The intervention is positive for the [US] Treasuries
market, especially short-dated issues which Japan will likely focus on," Reuters quotes
one market strategist today. Which sounds a sweet deal for the Fed's campaign
to destroy Dollar savers. But nobody wins this war of attrition, however much
money they print up and spend.

Rumor says Tokyo threw ¥500bn or perhaps ¥1 trillion at the
Dollar on Wednesday. At that rate, it's got another 34 days to go before
matching the 2003-2004 campaign, when Japan tried to defend the Dollar above
¥100. It's since slipped a further ¥17 regardless, and ¥80 has become the "line
in the sand" according to currency traders.

There's money to be made here, of course, either fighting
the Fed or supporting the rear-guard action in Tokyo. But in the absence of
strong consumer demand at home, central-bank policy the world over is dead set
on weakening the local currency – wherever you live – in a bid to win
market-share in exports, no matter the cost.

Investors and savers wanting a flak jacket just pushed gold to new Dollar highs, with silver hitting its best level in
almost three decades. No, they're not guaranteed to keep rising, but it's hard
to see them falling too far when policy worldwide turns to actively denting the
value of cash. At least no one can create precious metals at will – unlike the
Yen, Dollar or Swissie – simply to shell them into the market in a war everyone
loses.

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Adrian Ash runs the research desk at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern and FT Deutschland; Italy's Il Sole 24 Ore, and many other respected finance publications.

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