"What we are talking
about is having these loans modified, so they continue for a longer period of
time at the starter rate," said John Reich, director of the Office of
Thrift Supervision, of the Hope Now initiative
earlier this week.
Will flat rates be enough
to keep the big guns pounding the enemy? After 25 years of ever-cheapening
credit, the bond market certainly wants rates to go down – not least
after bond yields reached a half-decade high at the start of this summer.
Piling into short-dated
bonds, in fact, Wall Street has priced in recession already. Three-month bond
yields have slumped by more than 200 basis points since mid-June, the fastest
rate of decline since May 2001.
Two-year bond yields have
slumped by 219 points inside six months – a 15-year record –going
from 5.10% to below 3.00% in short order.
2001 marked the shortest
and shallowest US
recession on record. At least 1992 got to dent housing and jobs, unwinding
debt and forcing households to save and not borrow.
It must never happen again!
"Uncertainty about the
effects of the credit crunch, together with rising oil and food prices, seems
to be affecting feelings about jobs and the future economic situation,"
said Fionnaula Earley,
chief economist at Nationwide – the UK's
biggest mortgage lender – on Wednesday this week.
"With that in mind, it
is natural that consumers would think about tightening their belts this
Christmas and this is reflected in the weaker spending index."
But this
"natural" response – cutting back spending after a record
decade of credit growth – can't be permitted. "At least two
cuts" to UK
interest rates were now needed, Earley told the
Telegraph "to take the "pressure off [household] finances."
The Bank of England
delivered one cut on Thursday, pretending that inflation will slow just
because consumer demand is receding. Put another way, and on the other side
of the Pond, "policymakers appear fully engaged in stanching the
financial turmoil and ensuring that the economy avoids recession," says
Mark Zandi of Economy.com for Moody's.
"The Federal Reserve
has aggressively lowered interest rates in recent weeks and Congress and the
administration are working to aid the hard-pressed mortgage market. More help
will be needed, but policymakers appear ready to provide whatever is
necessary."
Can whatever it takes keep
recession pinned down for ever and ever? There's only been one winner so far
in this war waged by debt – and Gold Prices look set to
keep winning as consumer debt push ahead as the economy slows.
The global boom in all
asset prices that now seems to be tipping over the top came thanks to one
major bear market – the bear market in the value of money.
Government-led and central
bank-sanctioned, it has cut the value of US Dollars by two-thirds versus a
Gold Bullion Investment. It's pushed the British Pound Sterling to new
all-time record lows, and cut even the Euro in half when measured in gold.
Call it liquidity if you
must, a flood now washing the ink out of central bank promises to pay. The
bubble also pushed oil, base metal and food prices sharply higher – but
even if they somehow slip back as the US
economy slows, the outlook for Gold Prices might still
hold good in 2008.
Dr. Copper – the
metal with a PhD in forecasting economic growth or recession – has
broken down even as Gold Prices have continued
to surge, notes the Bank Credit Analyst.
Comparing the two metals
over the last 17 years, "the Copper-Gold Ratio plunged when central
banks fell behind the deflation curve," the BCA says. The ratio then
surged "when rates were normalized or policymakers were struggling to
cool growth."
"The current breakdown
in the Copper-Gold Ratio suggests that more liquidity is needed to reflate the global financial system and keep the economic
expansion on track," the BCA adds. And more liquidity means more money,
of course.
So wheel out the big guns
of debt! Last time the US defeated recession, real interest rates dropped
below zero; the Gold Market doubled in the
following three years.
If the Fed cuts again down
to 3.5% (Bill Gross's forecast at Pimco) or right
down to 1% (the Greenspan Fed's answer to the 2001 dip), just how far might
gold go – even without rising inflation?
"Monetary policy in
the three main areas [the US, Europe and Japan]
should remain on hold," reckons Jorgen Elmeskov,
chief economist at the Organization for Economic Co-Operation and Development
(OECD). Indeed, if inflation picks up – and it just hit 3.0% in Europe, despite the surging Eurozone currency – he thinks it would be
"necessary to pay a price in terms of lower activity in the
short-term" to keep the cost of living in check.
The European Central Bank
broke ranks this week, doing just what the OECD said and keeping Eurozone rates on hold. But the Fed and Bank of England?
Neither are
charged with growing the economy. Both are supposed to avoid destroying their
currencies and letting inflation run wild. But as Clive Briault,
a managing director of the Financial Services Authority – the UK's
investment watchdog – said this week, "there is a very real
prospect that conditions will worsen further, raising some important risks
for consumers.
"If their financial
plans depend on cheap and abundant credit, the absence of those conditions is
likely to cause significant consumer stress."
Stress meaning a slowdown,
and slowdown might now mean recession. It cannot be allowed, whatever the
costs.
What might that cost be to
cash savers without gold?
By : Adrian Ash
Head of Research
Bullionvault.com
City
correspondent for The Daily Reckoning in London,
Adrian Ash
is head of research at www.BullionVault.com
– giving you direct access to investment gold, vaulted
in Zurich, on
$3 spreads and 0.8% dealing fees.
Current gold price, no delay | FAQ | Detailed outlook for 2007
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Note: This
article is to inform your thinking, not lead it. Only you can decide the best
place for your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.