Money authorities around the world will not stop stimulating economies, printing money and doing whatever it takes until growth and confidence are restored to the bright days prior to July 2009. And this will be done even if the cost is high inflation, for better inflation than savage deflation!
Economic bedrock - The consumer.
The last log economic global boom relied on the average [U.S.] consumer. A brief look at him tells us he needs to know that he can pay off his house and that it is a reliable asset, that he can repay his debts from the income he receives, pay his taxes, educate his children, hospitalize them, if needs be and provide for his family and home without the threat of losing home, income and savings. The last 18 months has shown him that threat. More than that the very values he depended on; the benefits of hard work, the certainty of savings, the support of credit have been threatened or worse. The U.S. economy and by extension the global economy has for many years now relied on him for economic growth and encouraged him to borrow as much as he wants, while the value of his home and assets just grew. Then it all fell apart. And now, the only way the global economy can be resuscitated is if this consumer keeps on doing what he's been doing in the past. On this Thanksgiving weekend, both you and this consumer sits with his family and looks ahead to a dark 2009 and beyond fearful as he sits in the firing line of financial insecurity. With his 401k and other investments decimated by falling asset values, many are even postponing retirement.
The leaders of the richest countries in the world agree that deflation is a pernicious economic condition, one far worse than inflation they are making hurriedly making every effort to combat it as the real and present threat that it is. As Brown of Britain put it...."the slower we are to act, the deeper the downturn will be and the longer it will take to correct". The very blood of all economies, liquidity, must be made to freely flow again and then the rest of the body revitalized. The bailout of the banks was the first step, but with them still loath to lend more is needed. Now the government is trying to get easily available, cheap money back into the hands of the consumer directly in the hope that confidence is sustainable. But the consumer, the very backbone of the economy needs to see his house price rise again, because its rising value got him spending last time. Expect 2009 to be the year of reflation!
Over $7 trillion of freshly issued, U.S. dollars is now involved in saving the global financial system. Another $800 billion aimed at saving consumers mortgages, making it attractive to buy cars again and to spend through that neat little plastic card again, was 'printed' last week. What what's another $ trillion or two? Are governments succeeding? Not yet, but they keep and will keep doing more and more until all is well again.
The 'repayment of debt' psychosis must be stopped from taking too strong a hold, or else, expect a major depression of the kind seen last century. No, governments must make the consumer feel financially safe enough to spend again. Without this change of attitude, there will be no recovery for a long, long time! These central bank and government actions are desperate measures and not part of a vast, global, carefully laid plan, but simply a reaction to a major disaster. Governments are focused on immediate solutions, which then may need yet another immediate solution, to fix things. These moves are frighteningly inflationary with the hope that rising deflation will soften any inflation that is spawned. Any inflation left over can then be fought once confidence is re-established. But right now most fear a very bleak future!
Inflation, user friendly.
But, you may well say, that means more mountains of easily destabilized debt? That's right, but so what? There's nothing like a surge in inflation to take away debt's sting. In the times to come, you can be sure that repayments will become easier as money loses value. All governments must do is to make inflation 'manageable' as it rides alongside growth, eroding money value as time goes by. We fully expect inflation to be treated as 'consumer friendly' and a counter to deflation, in the days ahead. Is inflation such a dark beast? In the seventies / eighties Fed Chairman Volker tamed inflation with interest rates in the U.S. at 26%, so there are the means to do it again! But whatever happens, central bankers must keep growth on track. What of "price stability" in which growth flourishes? The purpose of price stability is to keep growth alive, but the emphasis must be on growth, not price stability itself.
Foreign Exchange Markets.
We live in a global economy, call it a global village even. One of the most dangerous consequences of the disaster of 2008 will soon be seen in the global foreign exchange market. $ profligacy, alongside the shift of wealth and economic power from the West to the East cannot be avoided. The world's money system is already stressing under this burden. Now add the lost markets, falling prices, dropping growth and unforecastable Balance of Payments of the different nations in this global market and we have to expect more systemic financial disasters. Few will believe that the $, its buying power or its exchange rate can be held up long-term. While there is no alternative to the $, expect a broad cheapening of the value of all the world's paper money, over time, accompanied by repeated turmoil in foreign exchanges from time to time. A recent look at falling exchange rates in countries with weakening currencies has shown that investors in those countries, who held gold, have done well.
From so many angles, in this financial climate, in 2009 and beyond, gold will rise against most currencies. As the credit crunch rolls on through the world with its collateral damage, one becomes keenly aware of the potential cost to the social and financial systems both local and global?
The social and systemic damage to make gold shine.
Society is based on the family. Financial systems rely on solid family values that lead to solid society values and norms. A solid society leads to a solid financial system. Price stability was one of these. Taking credit and repaying debt another. Savings and the accumulation of wealth another. Mess with these and you make society unstable and bring out its worst facets. Make the financial system deviate from these basic norms and you will have major social as well as financial consequences. This is what August 2007 onwards has been about. We have already seen many middle and upper class elements of U.S. society see their wealth savaged or destroyed, after much of a lifetime of hard endeavor. And this through no fault of their own! Anger against banks is high at the moment and is likely to remain so. No public relations campaign will change this either.
Trust in financial security has been badly eroded, with investors blaming the institutions guiding them. The foundations of both society and finance have been shaken and now exude an air of desperation as we look ahead to 2009. Banker's greed and loss of confidence in government's handling of financial failure have soiled the rosy future that seemed to lie ahead in July 2009. More will be required than simply putting matters right to restore that confidence. Until the future looks bright again, gold will be a bright light in the investment world, taking it on a new leg of a strongly rising, long-term uptrend. It is a sad reality that gold prospers when money systems don't!
Attitudes to financial security will change and dramatically so with 2009 seeing government desperate to shore up confidence, but unless financial values and institutions are structurally changed to repair these classes, there will be severe social consequences. Until that time, you will see a widening and a deepening of markets that do not rely on human endeavor for future financial security. Among those will be silver and gold, which carry no promise, nor nationality, but are at their best when the world is at its darkest.
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