Moneyization: The global financial phenomenon of individuals and businesses moving their funds to monies in which they have the highest confidence, or money which has a higher store of faith.
Or, Mr. Shaw Might Have Loved the Federal Reserve
George Bernard Shaw might have loved the Federal Reserve. A source of good material is highly valued by writers and philosophers. Perhaps only the Pentagon could be better, but they manage to keep most of what they do to themselves. If the Pentagon assured the public the sun would rise tomorrow, a wise person would buy a candle. If the Federal Reserve released a study assuring all that the sun would rise each day, stock in a candle company would be a sure bet.
Probably no Chairman of the Federal Reserve has been criticized as much by the Metal Mob as Chairman Greenspan. Some of us will certainly miss him. During almost the last six years of his reign, Gold has run from $250 to $450. We almost wish he had another six years. With the same success, Chairman Greenspan could easily push Gold to over $800 during a short number of years.
Before we weep, Chairman Greenspan's chair may be filled with perhaps an equally misdirected economist. According to Barron's, 11 April 2005, the next chairman could be Ben S. Bernanke, a current Governor of the Federal Reserve System. He has also been recently nominated to be the next Chairman of the Council of Economic Advisors, the group dedicated to economic wisdom at the White House. No jokes about his first two initials are permitted!
The inspiration for this message is a speech recently given, 10 March 2005 and updated on 14 April 2005, by Governor Bernanke, "The Global Savings Glut and the U.S. Current Account Deficit." Both are available on the Federal Reserve's web site, www.federalreserve.gov. Such events are valuable to investors for they provide insights into the thinking of the individual. As not yet Chairman, Bernanke still has some semblance of verbal freedom.
Around the world individuals enjoy the freedom to choose in which national money to denominate their wealth. Markets and technology have freed consumers from the Westphalian shackles of national monies. In recent years, consumers have flocked to the new Euro. At the same time they have shunned the U.S. dollar. Moneyization has been unleashed, and will not be put back into the bottle.
Your goal as an investor is to determine which national money, or international money such as Gold, to use for your wealth. Which national money will have a higher wealth value in the future is an important question. Which national monies will prosper? Which national monies will survive? Which national monies will disappear? Some will fall in each category, as not all national monies will exist ten or even five years from now.
To make those decisions we turn to the economic policies of the nation. The thinking of those that will formulate and implement those policies for the individual nations may help in making these decisions. For that reason, what Governor Bernanke has to say is worth reviewing. And some good news can be found in that speech. Chairman Bernanke, should he rise to that office, will be good for your Gold!
The current Chairman of the Federal Reserve has been in office so long that we have become accustomed to the Federal Reserve failing to accept the blame for its policy errors. Perhaps that is the way the world is the supposed to be. The Federal Reserve could be the fourth monkey, with its head.... Perhaps the hope that the next Chairman might be forthright is more than should be expected. Hope and Federal Reserve excuses, both spring eternal.
That title for Governor Bernanke's speech implies his thinking. In short, the U.S. current account deficit is not the consequence of policy errors in the U.S. Rather, that deficit flows directly from policy errors originating in other countries. Foreign nations and peoples are saving too much money. What is bothersome about such a conclusion is that it absolves U.S. monetary and fiscal policy from being in error.
If only foreign nations would embark on a debt financed consumption binge like that of the U.S., the U.S. would not have a current account deficit. Technically that is true. Though to argue that other nations should also act irresponsibly seems hardly to be a good foundation for policy. Yet this argument is coming from an individual giving advice to the U.S. government, and possibly the next to lead the Federal Reserve. Misguided thinking has been good for Gold thus far, and looks likely to continue.
Quite simply, this view is a rationalization of the monetary and fiscal policies of the U.S. Rather than start with analysis leading to conclusion, this view starts with a position and attempts to justify it backwards. In short, this analysis sounds as if it is coming from someone drumming up support for his candidacy for the Chairmanship of the Federal Reserve. This view though has a populist ring to it that may make it fashionable, such as the silly idea of blaming the value of the Chinese yuan for the U.S. trade deficit.
A global savings glut, according to Bernanke, is causing the U.S. current account deficit. How? For one, many countries around the world have aging populations. They are saving money to pay for those retirement years. Were that true, the money would be in pension plans not in the currency reserve accounts of the central banks.
Another reason for the global savings glut is that many nations that were buffeted by the currency crises of the 1990s, and now are more cautious. These nations are building a protective buffer. Presumably the Koreans, for example, are just not buying U.S. goods in order to have a currency reserve. That position assumes the U.S. produces something the Koreans want, rather than the other way around. If only the Koreans would buy GM cars and eat more soybeans. Now we have been enlightened, those Korean consumers saving too much money are creating the U.S. current account deficit. Utter nonsense!
To be fair to the Governor, higher oil prices are mentioned as part of the U.S. current account deficit. That position has merit. Other points are made that have merit, including the all-important one of the massive investment in housing which is a nonproductive use of capital. However, that Federal Reserve policies have been responsible for this nonproductive use of capital, the greatest in history.
That role is ignored by Bernanke, and by most other Federal Reserve officials. Again, the speech is recommended reading. However, the general theme of pointing the finger at someone else is bothersome, but supportive of the future price of Gold.
That the low savings rate in the U.S. might be due to Federal Reserve policies is, however, given limited attention. Federal Reserve policies, acting as a perceived guarantor of equity prices, allowed the U.S. saving rate to plummet as the stock market soared. A little crash subsequently developed. In recent years the low interest rate policies have acted again as a "guarantor" of higher housing prices. The U.S. savings rate has again plummeted as consumers have now really found the road to wealth, owning as many houses as possible with as much leverage as can be obtained. Thanks again to encouragement from the Federal Reserve.
What Governor Bernanke fails to do is follow the money. Following the money, as is repeatedly the case in the movies and currently in Canadian politics, can get us to the root cause. From where did the central banks of the world and investors get the money that is causing this "savings glut?" That money came from the excessive consumption by the U.S. due to the politically motivated low interest rates that exist. No mention of the role of the Federal Reserve in fostering the excessive consumption that has lead to the current account deficit and this imaginary "savings glut."
In short, we have an individual stumping for the chairmanship of the Federal Reserve. From this speech we can deduce that this individual will do nothing but continue the policies of the Federal Reserve, while blaming all on someone else. The continuing collapse of the U.S. dollar will not be the consequence of internal policies, but will be blamed on the policy mistakes of foreign governments. In particular, we can surely expect a study out of the Federal Reserve that the collapsing U.S. dollar is due to foolishness of foreign consumers not borrowing money to spend. Sounds like the Federal Reserve will continue in a way that assures higher Gold prices in the future.
This imaginary "savings glut" has helped maintain the low interest rate environment in the U.S., as has been written so much before. However, this imaginary "savings glut" may be starting to lose its appetite for investing in U.S. debt securities. In the first graph is portrayed the year-to-year change in the ownership of U.S. government debt by official foreign institutions that is held at the Federal Reserve. That data is reported each week in the Federal Reserve reports.
Each bar on the graph shows how much the ownership of U.S. debt by foreign official institutions has changed. Clearly the year-to-year change is declining. The size of their holdings is still rising, but at a much slower rate. The reason for focusing at this time on this series is the scale. The year-to-year change is just slightly over $200 billion, and investors tend to focus on round numbers. When this series breaks below the $200 billion level, that foreign investors are losing interest in U.S. government debt will be obvious even to mouse clicking stock traders at hedge funds.
The second chart looks at this data in another way. Portrayed is the percentage of the last 50 weeks in which the holdings of U.S. government debt have declined. Recent the reading hit 26%, though fell in the latest week. In 24% of the past fifty weeks, foreign official institutions reduced their holdings of U.S. government debt. That level of selling is, as apparent in the graph, just one tick below the highest recorded in over a year.
In short, the process of foreign investors moving away from buying U.S. debt has started. Many are waiting for that proverbial bell to ring, marking the moment when liquidation begins. That, to some, will be the signal to sell the dollar and buy Gold. The ringing of the bell will be too late. Markets discount the future well in advance of the event. Did the bell ring at 5000 on the NASDAQ Composite? Investors need to own their Gold and Silver before the bell rings.
As shown in the last chart, the Gold market provides periodic opportunities for timely purchases. Investors should use these periods of price weakness, created when the deluded believe the dollar is going up, for establishing positions or adding to positions. With the liquidation of the U.S. debt by foreign investors still in the early stages, investors have time to create positions in Gold prior to it taking out the last high. When $Gold moves through $450 on the way to $500, investors will not be as able to create Gold positions at attractive prices.
On the contrary, the rough times for the U.S. dollar lie ahead. Liquidation of U.S. debt has only started, and is not anywhere near an end. And despite Governor Bernanke misguided views, the current account deficit of the U.S. is due to Federal Reserve policies. Unfortunately, those misguided policies have existed for so long that the U.S. current account deficit is now structural. Modest slippage in the dollar, as has been experienced, does not alter a structural problem.
And as written in the April letter, floating the Chinese yuan will not help. Floating the Chinese yuan will likely only lead to the selling of U.S. debt by those Asian nations which have a trade surplus with China. No easy solutions exist. As Mr. Shaw said, I believe, "To every complex problem there is a simple solution, that is wrong." However, Mr. Shaw never saw a current account deficit as large as that of the U.S. Gold is the simple answer today that is right, as $1,300 Gold appears almost to be a policy goal of the Federal Reserve.