- Massive QE 2.0 is a foregone conclusion. The Illuminist banksters will stir inflation up to inflate away their debts to rescue their banks. Physical gold and silver are the protection from this currency debasement worldwide.
Gold is the final refuge against universal currency debasement
States accounting for two-thirds of the global economy are either holding down their exchange rates by direct intervention or steering currencies lower in an attempt to shift problems on to somebody else, each with their own plausible justification. Nothing like this has been seen since the 1930s.
“We live in an amazing world. Everybody has big budget deficits and big easy money but somehow the world as a whole cannot fully employ itself,” said former Fed chair Paul Volcker in Chris Whalen’s new book Inflated: How Money and Debt Built the American Dream. “It is a serious question. We are no longer talking about a single country having a big depression but the entire world.”
The US and Britain are debasing coinage to alleviate the pain of debt-busts, and to revive their export industries: China is debasing to off-load its manufacturing overcapacity on to the rest of the world, though it has a trade surplus with the US of $20bn (£12.6bn) a month.
Premier Wen Jiabao confesses that China’s ability to maintain social order depends on a suppressed currency. A 20pc revaluation would be unbearable. “I can’t imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs,” he said.
Plead he might, but tempers in Washington are rising. Congress will vote next week on the Currency Reform for Fair Trade Act, intended to make it much harder for the Commerce Department to avoid imposing “remedial tariffs” on Chinese goods deemed to be receiving “benefit” from an unduly weak currency.
Japan has intervened to stop the strong yen tipping the country into a deflation death spiral, though it too has a trade surplus. There is suspicion in Tokyo that Beijing’s record purchase of Japanese debt in June, July, and August was not entirely friendly, intended to secure yuan-yen advantage and perhaps to damage Japan’s industry at a time of escalating strategic tensions in the Pacific region.
Brazil dived into the markets on Friday to weaken the real. The Swiss have been doing it for months, accumulating reserves equal to 40pc of GDP in a forlorn attempt to stem capital flight from Euroland. Like the Chinese and Japanese, they too are battling to stop the rest of the world taking away their structural surplus.
The exception is Germany, which protects its surplus ($179bn, or 5.2pc of GDP) by means of an undervalued exchange rate within EMU. The global game of pass the unemployment parcel has to end somewhere. It ends in Greece, Portugal, Spain, Ireland, parts of Eastern Europe, and will end in France and Italy too, at least until their democracies object.
It is no mystery why so many states around the world are trying to steal a march on others by debasement, or to stop debasers stealing a march on them. The three pillars of global demand at the height of the credit bubble in 2007 were – by deficits – the US ($793bn), Spain ($126bn), UK ($87bn). These have shrunk to $431bn, $75bn, and $33bn respectively as we sinners tighten our belts in the aftermath of debt bubbles.. The Brazils and Indias of the world are replacing some of this half trillion lost juice, but not all.
East Asia’s surplus states seem structurally incapable of compensating for austerity in the West, whether because of the Confucian saving ethic, or the habits of mercantilist practice, or in China’s case by the lack of a welfare net. Their export models rely on the willingness of Anglo-PIGS to bankrupt themselves.
So we have an early 1930s world where surplus states are hoarding money, instead of recycling it. A solution of sorts in the Great Depression was for each deficit country to devalue, breaking out of the trap (then enforced by the Gold Standard). This turned the deflation tables on the surplus powers – France and the US from 1929-1931 – forcing them to reflate as well (the US in 1933) or collapse (France in 1936). Contrary to myth, beggar-thy-neighbour policy was the global cure.
A variant of this may now occur. If China continues to hold down its currency, the country will import excess US liquidity, overheat, and lose wage competitiveness. This is the default cure if all else fails, and I believe it is well under way.
The latest Fed minutes are remarkable. They add a new doctrine, that a fresh monetary blitz – or QE2 – will be used to stop inflation falling much below 1.5pc. Surely the Fed has not become so reckless that it really aims to use emergency measures to create inflation, rather preventing deflation? This must be a cover-story. Ben Bernanke’s real purpose – as he aired in his November 2002 speech on deflation – is to weaken the dollar.
If so, he has succeeded. The Swiss franc smashed through parity last week as investors digested the message. But the swissie is an over-rated refuge. The franc cannot go much further without destabilizing Switzerland itself.
Gold has no such limits. It hit $1300 an ounce last week, still well shy of the $2,200-2,400 range reached in the late Medieval era of the 14th and 15th Centuries. This is not to say that gold has any particular “intrinsic value”’. It is subject to supply and demand like everything else. It crashed after the gold discoveries of Spain’s Conquistadores in the New World, and slid further after finds in Australia and South Africa. It ultimately lost 90pc of its value – hitting rock-bottom a decade ago when central banks succumbed to fiat hubris and began to sell their bullion. Gold hit a millennium-low on the day that Gordon Brown auctioned the first tranche of Britain’s gold. It has risen five-fold since then.
We have a new world order where China and India are buying gold on every dip, where the West faces an ageing crisis, and where the sovereign states of the US, Japan, and most of Western Europe have public debt trajectories near or beyond the point of no return.
The managers of all four reserve currencies are playing fast and loose: the Fed is clipping the dollar; the Bank of England is clipping sterling; the European Central Bank is buying the bonds of EMU debtors to stave off insolvency, something it vowed never to do just months ago; and the Bank of Japan has just carried out two trillion yen of “unsterilized” intervention.
Of course, gold can go higher.
- Is the world heading towards recovery or another calamity? In my opinion, a global monetary crisis is brewing and may be about to break out. Gold is money for over 5000+ years. Fiat currencies are just legalized fraud perpetrated by privately owned central banks.
The Currency Crisis of 2010-2011
Financial markets in the last two years have been absolutely nuts. Huge moves in currencies, bonds, stocks, commodities – every market went crazy as the world nearly fell into a dark age. Yes, it was very close to “guns, ammo and water” time, much closer than any of the CNBC pundits would let on.
The financial markets seem a bit calmer over the past few months. Even with people flooding into U.S. government bonds because of safety concerns, the markets aren’t making the huge moves they made in 2008 and 2009. Yes, investors are avoiding the stock market, but it isn’t like there is panic in the streets, like there was until May of this year. The markets have calmed a bit.
Now for some bad news: These calm times aren’t going to last. Soon, people are going to be talking about the currency crisis of 2010-2011 – as we live through it, blow by blow. But the biggest part of it will be due to the titanic clash of wrongheaded economics clashing with real-world facts. When the financial markets realize this, there is going to be huge, unprecedented moves that rock all markets – and the calm times will be over. We need a way to understand what might happen in the next year and profit from it.
Competitive Devaluations of Currencies
The currency crisis of 2010-2011 will be about two big ideas: recognizing losses from the housing market and a double-dip recession. But profiting from the currency crisis will be about one huge idea: competitive devaluation of currencies. During 2010 and 2011, the biggest topic will be how countries are competing to make their currencies less valuable, not more valuable.
The reason for this is simple – according to standard economic theory, the only way for an economy to grow is to make stuff for rich people and sell it to them. Nearly every economy in the world is export-driven except the United States. A weak currency is great for exports.
So during the next year, as the world economy falls off a cliff, countries will be fighting for the crumbs from an ever-smaller pie. There is really only one choice here – the way to economic growth in this situation is to be the cheapest supplier of goods.
In these lean times, companies are already running with the minimum staff possible. An easy way to make your goods cheaper is to make your currency less valuable than it was.
We’ve seen this already – countries are bickering about weakening their currencies. China is holding its currency artificially weak against the U.S. dollar and has for years. Japan just had a meeting on how they are going to intervene and make their currency weaker. But Germany is in the best situation of all.
You’ve heard about the problems with the euro – the euro currency is down nearly 25% from its highs because people are worried that some countries in the eurozone could default on their debt. But for German exporters, this low euro is great news. It is like a 25%-off sale, but they magically get the same number of euros to pay their workers. And they don’t have to spend a euro to make their currency weaker.
Germany recorded 2.1% growth in one quarter – that’s nearly 9% growth over a year – largely because the euro is so undervalued right now. The only problem is that this growth is coming at the expense of another country’s growth.
It’s actually a long list of other countries that want this growth. You can bet that Japan, China, Australia, the U.K, and the rest of the world took notice of that smoking-hot quarter. I bet they are all wishing they had a currency crisis too right now – 9% growth transforms a weak currency into a strong domestic economy.
But one country’s growth is another country’s lost growth. The competition to weaken currencies will be fierce, and governments will spend hundreds of billions to support their domestic economies. The next few years are going to be defined by currency interventions and plots to manipulate the currency market. Most of these interventions will be unsuccessful, but some will succeed. China has been extremely successful in pegging its currency for several years, so a country with enough money can make it happen. But in any case, when countries intervene, Forex markets get hot.
Recovery for the Global Economy?
The global economy never recovered from the shadow banking crisis of 2008. While today people are talking about government spending, the reason the world blew up in 2008-2009 didn’t have anything to do with governments. The crisis was due to investment banks blowing up – because they lost hundreds of billions of dollars. People forget this, but it was excessive speculation that started the crisis.
Then governments around the world made a huge, huge mistake. The U.S. government decided to save the banking system, thinking that it was lending that drove the real world economy. Really, it’s the other way around – our real world economy is what drives real economic growth and the creation of wealth.
Of course, our government spent several trillion dollars on this stupid idea of supporting banks – at the expense of throwing real people and businesses off the bridge. You can see the shoddy results: 9.5% unemployment, trillions of dollars of new debt, horrible consumer sentiment, low economic growth – a grand slam of bad outcomes. And it has all been caused by a failure of an economic paradigm that doesn’t recognize how money is actually created.
Now we are stuck with a situation where governments have absorbed much of the private sector losses in the crisis through a variety of programs. But the problem is that although those losses might have changed hands, they didn’t go away.
Now, there are really only two ways for losses of this magnitude to go away. One, they can be written off and recognized by the banks, companies, and people who made the bad business decisions. That isn’t happening at all – these banks have done everything possible to push the losses off on U.S. citizens, or pretend they don’t exist. Two, they can be inflated away. That isn’t happening either. Inflation is the lowest it has been in my lifetime. And inflation expectations over the next 10 years are very, very low.