Front-Running a Plunging Currency

30 Jan

Front-Running a Plunging Currency

Financial analyst John Rubino has uttered a real truth for our time.  “Once people start front-running a plunging currency,” he said, “you get the Austrian school of economics’ crack-up boom, which is basically a total loss of faith in the currency.”

“Then it’s game over!”

Let’s define two terms here.  First, front-running.

Investopedia defines front-running as trading stock or any other financial asset by a broker who has inside knowledge of a future transaction that is about to affect its price substantially.

Suppose, for example, a broker knows his client is going to buy a gazillion shares of XYZ Corp.  If he puts an order in ahead of his client, knowing that he will profit when the price rockets higher, he is front-running.  His client is the victim because the client’s price will be higher due to the broker executing an order ahead of the client.

This is obviously unethical.  All you have to do is ask yourself if you would want a broker who acts that way with your account.  You do not.

Investopedia’s definition of front-running goes on to describe a broker using insider knowledge that their firm is about to issue a buy or sell recommendation to clients, one that will almost certainly affect the price of an asset.  In that case, the broker’s firm is the victim.  The firm intended to benefit all of its clients with its buy or sell recommendation, but the broker placed his order beforehand, limiting the clients’ opportunities.  

In the case of the plunging currency, Rubino is describing people who know perfectly well what is going to happen to the US dollar.  It is the same thing that happens to all unbacked, fiat currencies.  It is going to tank.

So there is nothing unethical about being one of the first people out the door on the expectation that the dollar is going to tank.  Some will act on that knowledge earlier and some will act on it later.  But foreknowledge is available to anyone who seeks it out.

Your choice.

Let us give you a real-life example.  At the recent World Economic Forum in Davos, Saudi Finance Minister Mohammed al-Jadaan, said that Saudi Arabia “will consider trading in currencies other than the US dollar.”

This will materially affect the international role and value of the US dollar since OPEC oil is traditionally priced in dollars.  You would be wise to add to your gold portfolio by trading dollars for gold, knowing that this development is inevitable.  In doing so, you are not doing anything unethical.  There is no specific victim.  Every dollar holder is being fleeced by the monetary authorities, but not because someone else beat them to the dollar exit.  

Rubino’s point is sound.  As more and more people begin to realize that the dollar is plunging, their dollar selling will cause the dollar plunge to accelerate.  Which will lead to more selling.

That is where we are today.  Individuals, not to mention foreign central banks, and any others moving out of dollars could be said to be front-running.

Now, the Crack-Up Boom.

We have described this many times.  The Crack-Up Boom is the evocative name offered by the late economist Ludwig von Mises for a moment when the breakdown of a currency becomes clear to everyone: 

If once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size. For under these circumstances the regular costs incurred by holding cash are increased by the losses caused by the progressive fall in purchasing power. The advantages of holding cash must be paid for by sacrifices which are deemed unreasonably burdensome. This phenomenon was, in the great European inflations of the ‘twenties, called flight into real goods or crack-up boom.

You don’t want to be holding dollars when the Crack-Up Boom hits.  You want to own gold and silver.  

Don’t wait for the Crack-Up Boom.  You can front-run the dollar breakdown without blame.  See us today at Republic Monetary Exchange.