Rising Global Currency Instability

The threat of the global currency war that is looming in 2011 is linked to our faith in central bankers and government interference in macro-economic management.

The implict trust of most citizens in the wisdom of government policy makers and central bankers who have sustained the fiat money system is based on our faith that politicians and financiers are basically wise people who know best what is good for their countries.

Unfortunately, the Great Credit Crisis of 2008/2009 has shown otherwise. And following a tepid rebound in global economic activities driven by inventory restocking and cash transfers from the government in the first half of 2010, the global economy started to falter once again. Fears of a double dip caused U.S. Treasury bond yields to fall to the 2.5% level in August.

Following Fed chairman's Ben Bernanke's decision to embark on Quantitative Easing 2 in the fourth quarter of the year, stock markets rallied and bond yields backed up to the 3.3% level.

The irony of the rebound in stock prices is that it only gained momentum in December when U.S. economic data showed some strength. In fact, QE2's aim of lowering interest rates was mitigated by the rise in yields as bond investors priced in higher inflation coupled with stronger economic growth in 2011.

One indicator that shows the increasing lack of confidence in central bank policies is the rise in the gold price, which rose by 27% in 2011.