The mainstream says there has been NO inflation or inflation hardly poses as a risk.
Unfortunately this view ignores the relative and uneven effects of inflation on the markets and the economies.
Usually, the initial manifestations are seen in the asset markets.
And at present, the currency markets looks like a key absorber of inflationism (aside from US treasuries).
According to the Wall Street Journal,
``The $4 trillion mark represents a 20% gain from $3.3 trillion in 2007, the last time the global foreign-exchange markets were surveyed, according to the Bank for International Settlements. While the survey found continued growth in currency trading, it did reflect a slowdown in the market's growth from the prior survey, when trading volumes had soared 69% from $1.9 trillion in 2004.”
So money printing worldwide seems to be getting a new outlet as more and more people trade a wider dimension of currencies.
Again from the WSJ (bold emphasis mine)
The survey showed how investors are seeking out faster-growing economies and big commodity producers. Trading volume between the U.S. dollar and the Australian dollar rose 35% from 2007, and volume with the Canadian dollar was up 44%. Trading also jumped in the Indian rupee, Chinese yuan and Brazilian real. In contrast, trading in the U.S. dollar against the British pound, a mainstay of the currency markets, fell 6%. Trading in the euro against the dollar rose 23%.
It’s not just globalization of trade, but globalization of asset inflation.
Of course, the US dollar remains as the de facto currency pair of most currency trades.
Again the WSJ (bold highlights mine)
Overall, the U.S. dollar remained the dominant global currency. It accounted for 84.9% of transactions, down from 85.6% in 2007. The euro's share rose to 39.1% from 37%. The share count data add up to 200%, to reflect the fact that there are two currencies in each transaction.
One should note that the trading the currency market means exposing oneself to highly leveraged positions.
The WSJ,
Currently, investors can borrow $100 for every dollar they invest. The Commodity Futures Trading Commission, which regulates foreign-exchange trading in the U.S., tried to cut that amount to $10.
And that again they are mostly used by financial institutions, the WSJ... (bold emphasis added)
The foreign-exchange market is actually a network of bank dealers and electronic-trading systems. At its core are investors or corporations needing to convert one currency into another, either as they buy or sell a stock or bond from another country or bring home profits earned abroad. For example, any time a U.S. investor buys a Japanese stock or a German company buys parts from a Korean supplier, a foreign-exchange trade occurs.
Banks are also heavy users of the currency markets to convert cash they borrow from foreign investors. Mutual-fund managers overseeing portfolios of foreign stocks may use currency derivatives to offset the impact of exchange-rate swings on those investments. And finally, there are speculators, such as hedge funds and mutual funds, who place bets on whether individual currencies will rise or fall.
Derivatives, carry trade and all those sophisticated and complex arbitrages which played a major role in the last bubble bust seems to be a significant contributor to the explosion of the volume trades in the currency markets.
For a broader perspective, the WSJ provides us with a comparison of the currency markets with other financial markets...
The currency market is by far the world's largest financial market. It dwarfs U.S. stock trading, which in April averaged about $134 billion a day, down from a daily average of $148 billion in 2007, according to data compiled by the Securities Industry and Financial Markets Association. Even trading in U.S. Treasurys, among the biggest markets in the world, averaged $456 billion a day in April, down from an average of $570 billion for all of 2007.
Now small investors are increasing their foreign-currency exposure. They are piling into mutual funds which make bets on currencies as a core part of their strategy. More broadly, U.S. stock mutual funds that invest overseas have taken in $42 billion over the past year, according to Morningstar Inc.
So the ingredients of a bubble seem all in place: high leverage, massive interventions, complex instruments and irrational behavior.
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