It used to be so simple, if your country had a problem with keeping its house in order you could let your currency devalue.  This would mean that everyone in the country would get poorer as they could buy less with their currency with holidays and imports becoming more expensive.  But getting poorer was going to happen any way, just in slightly more visible ways.

What devaluation would allow, however, were for your exports to become a lot cheaper and so your exports would rise, and this economic up swing would buy some time to raise taxes and cut spending in an orderly way.  Of course some countries around the Mediterranean and in Latin America never really got the concept of buying some time and would keep devaluing.  However this was a temporary issue for most of the strong economies that would come roaring back while another country devalued and started the painful business of spending cuts and tax rises.

Of course Europe has messed this up somewhat by taking away the ability to devalue, but that is really a local difficulty – if a rather large local difficulty with knock on effects.

The problem we face at the moment is that most countries are in this mess.  Most countries have borrowed too much, have spent too much and are going to have to get out of this mess.  Devaluation was never a permanent cure, but it was a useful option to buy some time.  Now this is gone.

So what will countries do?  Devalue of course.  It may be a stupid thing to do all at the same time, but being the strongest currency is going to hurt.  It may be good in the long term, but voters don’t see that.

So this will mean some inflation and uncertainty, and where do you go when there’s that combination?  Inflation rules out bonds, the haven when there’s uncertainty, and uncertainty rules out the stock market, which is where you bolt when there’s inflation.

Gold may be worth a bet, but it’s very, very high at the moment.

So we’ll give you one piece of investment advice.  Invest in stop losses.

Last Updated: May 31st, 2010