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In the last few days a fairly
new market perception has been creeping in. The expectation that Eurozone
interest rates are going to start rising ahead of U.S. interest rates is
taking hold. But while the original intention in Europe was to raise them as
soon as it was seen that the recovery was really taking hold, it is becoming
apparent that inflation may well beat them to it. As energy and food
inflation are here to stay the reason rates will rise now is to tackle
inflation. We find that this will be tragic. Although growth is taking hold
in both the U.S. and the northern parts of the Eurozone it is too fragile to
bear rising interest rates alongside food and energy inflation. Should rates
rise then we are of the belief that growth will be either extinguished or
wounded so badly that it will limp along at best. Only Asia can afford this
not the developed world. The U.S. is not immune to such inflation, but will
delay raising interest rates so as to not burden the consumer at a time when
he is sensitized to bad times and will save at a time when the government
hopes he will spend. What will be the effect internationally on the dollar,
other currencies and the global economy and precious metals?
The U.S. dollar
Stored up for future crises at the moment in the U.S. are:
- A
'hung' government where President Obama's administration does not have
enough power to legislate as they want. The Republicans, while they have
enough power to stop Obama's legislation, don't have enough power to get
their own through. This is the last situation the U.S. wants right now.
It will ensure that each crisis gets to the brink before action is
taken. Even then we may tip over the brink. This will shake global
confidence in the dollar and produce ratings agency downgrades for and
in the U.S.
- A
potential debt crisis from the federal government down through
individual States such as California, Wisconsin and the rest. These are
of a size that makes the Eurozone crises look tame.
- A
governmental budget deficit that is not being addressed properly. We
will see the first such game of brinkmanship when the time comes to
legislate an increase in borrowing limits, soon.
- The
U.S. Treasuries are over half owned by foreigners essentially
subsidizing U.S. low interest rates.
- A
loss of global power, as China's growth, not only will eclipse that of
the U.S. [China's economy will be double the present day's by 2020] but
will see manufacturing move to China from the U.S. a process well
underway already.
- The
future prospect that the dollar will lose its role as the sole global
reserve currency to the Yuan and perhaps a basket of other hard
currencies of which it will remain only a lesser part.
The results of these crises, as we see now is an
economically weakened U.S. that will find it extremely difficult to bear up
under the strain of rising interest rates in an inflationary environment.
Once interest rates rise to try to contain inflation, we will see the bond
markets turn to cash to avoid the dropping capital value of fixed interest
rate securities. The equity markets will likewise fall in the face of rising
yields on fixed interest rate rises and diminishing future prospects for the
economy. Add to that the above confidence-sapping problems and we will see
foreign investors unhappy to watch the steadily falling dollar exchange rate,
as we see at the moment.
The falling dollar and other currencies
The dollar won't fall in isolation. Its trading partners
cannot afford to allow their exports to suffer at the hands of a weak dollar.
As we have seen all too clearly in the last few years, the trading partners
of the U.S. intervene in the foreign exchanges to weaken their own currencies
[in the face of a surplus on their Balance of Payments] to retain export
competitiveness. We are of the opinion that central banks have and will be
operating in the foreign exchanges to hold key exchange rates [such as the $:
€] within a narrow trading band to give the false appearance of
stability. To date this has led to the export of inflation as the money
created in QE has seeped into the emerging nations as 'hot money' deposits.
We believe that this will continue until interest rates start to rise in the
U.S. Then like a reversing ripple of water that hot money will stream home to
repay the original loan. This will create major capital flow problems as it
exits its emerging nation home to the U.S.
The net result will be that the bulk of the world's
foreign exchanges will look relatively stable as they all sink in value
together. Hence all falls in the dollar will be temporary in the future. How
can this be measured? We expect that assets, in particular precious metals
will rise against them all as they have been doing this century already. Even
if the Yuan becomes a global reserve currency, we do not expect it to
appreciate against the dollar. Global currencies will then cease to operate
as measures of value but will be used simply as a means of exchange with
constantly varying sets of values.
As we look at the performance of the dollar in the last
couple of years, we think that much of this falling value has been absorbed
in deflation and will only become apparent once inflation takes off [rapidly
when it happens]. Overall the monetary system will prejudice the surplus
nations like China. We expect them to take measures to protect themselves
against this, which will see the dollar [and its following currencies]
falling lower still. The net result will be a move towards gold along the
lines suggested by the head of the World Bank, as a reference point of value.
Eventual Protectionism
Once it is in the interests of the main global trading
blocs and or individual nations, Tariffs, Capital Controls and even in some
cases Exchange Controls will be used to block imports of cheap goods,
outflows of 'hot money' and permit the rebuilding of manufacturing in nations
where it has been lost. Just as sanctions produced an economic boom of note
in Rhodesia, so will these sets of controls.
It will see globalization retreat as nations just will not
cooperate on an international front at the expense of national interests now.
International trade and capital movements will require money that is not
influenced by national conditions and remains highly liquid. Gold and
eventually silver can carry this role in extreme times [as collateral, not as
a means of exchange].
Gold as part of the global monetary system
Such an opportunistic set of principles underlying the
global monetary system that we see now will savage the remaining confidence
in it. Some anchor values will then have to be incorporated into the system
to stop its complete decay.
While gold has been moving back into the system tacitly,
through the cessation of gold sales, by the developed world and the buying of
gold by the emerging world, there is no public recognition of gold in the
system. We do believe it is there already. For instance the 'gold - currency
swaps' executed with the Bank for International Settlements was used last
year by debt-distressed central banks to secure foreign currencies to assist
in their [sovereign debt] market defense. These guaranteed repayment by the
debtor nation of their 'rescue funds'. It was by these golden guarantees that
the loans to the nations were secured. They had nothing else of independent
value with which to do it. This method neatly avoided using gold publicly and
to the shame of the debtor nation. If they fail to repay the retention of
that gold by the B.I.S. will nail the coffin closed on that country's
creditworthiness.
Should this involve one of the major world powers in the
future the global economy will then have two sides, the emerging Asian
nations and the declining developed world. We have no doubt that Asia will
then be the main reforming force in the reformation of the global monetary
system.
Julian
D. W. Phillips
Gold/Silver Forecaster
– Global Watch
GoldForecaster.com
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