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June 18, 2008

G-8 Fails to Sound the Charge
by John Browne

With market watchers the world over feeling increasingly alarmed by spreading economic problems, much hope and attention was focused on Japan last weekend as finance ministers and central bankers of the G-8 (Group of Eight) nations gathered to apparently map out a coordinated global response. In particular, all hoped that the delegates would conjure a plan to save the dollar from the dustbin and stop the price of oil and food from pushing the world into crisis.

The G-8 includes Britain, Canada, France, Germany, Italy, Japan, Russia and the United States. With the exception of Russia, the members represent the "Old West," that has dominated the free-market world economy for almost half a century. As very little of promise or substance emerged, I can only hope, against all evidence to the contrary, that much was accomplished behind closed doors.

What the ministers and bankers did not explicitly acknowledge, but must have been evident to them all, is that the source of the falling dollar, and global economic instability, is the United States itself.

Starting in the 1970's, the United States began moving away from its heritage as a "producer" nation to one in which consumers account for 72 percent of GDP. As a result, American wealth has been massively depleted by a combination of inflation, unsustainable debt issuance and long-term depletion of the U.S. dollar. Although Americans have in fact lost their wealth, they have yet to ratchet down their lifestyles accordingly. This disconnect is the source of global economic instability.

The best way to put America's standard of living back in line with its wealth, and to relieve the world of its economic imbalances, is through an American recession and the continued fall of the dollar. In fact, the downsizing of the American airline industry and the fall of the housing market are symptoms of this trend. But recession carries unpleasant political repercussions. As a result, politicians would always prefer to see one boom replaced by another.

Clearly, America, which would largely bear the costs of recession, prefers serial bubble blowing and dollar devaluation as the best policy going forward. The question is whether she can hoodwink, bully, or otherwise convince the rest of the G-8 to go along. The problem is that that the economic stagnation which is evident in the United States is nowhere to be seen in the rest of the world.

This puts the G-8 delegates into a difficult quandary. If they follow America's lead to lower interest rates to avoid recession, they risk unleashing inflation, which is already a major problem the world over. If they indicate increased rates, to curb inflation, they risk driving America into a severe recession. Similarly, to engage in a program of currency intervention to support the dollar (which the United States lacks the means or desire to do unilaterally) involves the prospect for even greater accumulation of dollar reserves, which has already proven to be a huge drain on national balance sheets.

So what did the G-8 do? They talked and did little. Admittedly, they discussed some laudable issues like world poverty and green alternative energy (which will most likely be the next government financed asset boom). But there was no indication of likely action.

Instead, the G-8 policy statement that emerged at the meeting's end included no mention of lax lending in the United States or of irresponsible central bank liquidity injections, or even of America's freeze of on-shore oil drilling. Instead, the G-8 took sideswipes at non-G-8 members, including unbridled criticism of the oil producing countries. U.S. Secretary of State Hank Paulson had the temerity to maintain that higher oil prices were due not just to changes in supply and demand, but also to a failure by oil-rich nations to build enough wells and refineries. Talk about the pot calling the kettle black!

All-in-all, it was deeply concerning to witness the G-8's inability to decide upon real initiatives but, instead, to seek to blame others. It pointed to the fact that the severe problems currently faced by holders of U.S. dollars are likely to continue into the future.

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John Browne, Senior Market Strategist
Euro Pacific Capital, Inc.

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with." A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military, John has a significant background, spanning some 37 years, in finance and business. After graduating from the Harvard Business School, John joined the New York firm of Morgan Stanley & Co as an investment banker. He has also worked with such firms as Barclays Bank and Citigroup. During his career he has served on the boards of numerous banks and international corporations, with a special interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co. and the former editor of NewsMax Media's Financial Intelligence Report and Moneynews.com. He holds FINRA series 7 & 63 licenses.

Copyright © 2008 Euro Pacific Capital, Inc.

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