Central bank liquidity moves last week are a clear signal that Europe is about to let Greece default…
Nov 23
But it might just create a chance to Buy Gold and other hard assets on the cheap…
WELL THIS should be interesting, writes Dan Denning in his Daily Reckoning Australia.
The EU/IMF bailout of Ireland is not going off without a hitch. The UK’s Telegraph reports that the Green party, which currently forms the junior half of Ireland’s coalition, might withdraw that support and call for new elections in January. This would call into doubt the ability of the current government not only to execute a deal with the EU and the IMF but also to pursue its four-year austerity program.
What a mess! We’ll get to how Ireland and Australia are similar in a moment. But first, please recall the words of the great philosopher of the New York Yankees, Yogi Berra. He once said, "When you come to a fork in the road, take it."
Today’s fork in the financial road leads down two different paths. One path is continued US Dollar devaluation and a strategic migration to emerging market assets (under the assumption that the BRIICS nations will eventually have to allow for currency appreciation…or face rampant food and fuel inflation). This trade favors Buying Gold, commodities, and tangible assets in general.
But remember what happened in 2008? The Global Financial Crisis actually led to a massive rally in the US Dollar. Emerging markets got hammered. The "risk" trades financed with cheap greenbacks were reversed and commodities took a shellacking as well.
Could that happen again? The boys at Knight Research think it’s going to happen again, but even bigger and badder this time around. In a recent research note, they wrote:
"We believe the structural and cyclical terms of global trade have finally reached their tipping point. This will catalyse a wholesale change in sentiment and a historic repositioning of risk assets. The emerging market global growth story is over."
This is the fork Murray has been preparing for in the Slipstream Trader for our subscribers It would mean falling indexes in Australia, which would of course mean falling components of those indexes. Knight Research elaborates on this fork:
"The game is over. Presently, we believe that the broad-based resurgence of investor confidence in the emerging market and secular bull market in commodities will end badly; proving that the rally which commenced in Q2 2009, was in fact an ‘echo bubble’ facilitated by massive-and unsustainable-stimuli from the Chinese government.
"We believe that the end of the Great Consumer Credit Cycle and the vast structural differences in the terms of trade between the United States, the EU, and China, have finally caught up with the secular bull thesis on emerging market and commodities.
"Quite ironically, the Fed’s aggressive policies will likely prove to be the catalyst which breaks China’s unbridled expansion of credit and non-economic growth, ushering in a wholesale rebalancing of risk assets."
This is not a lukewarm prediction. It would quite obviously be mega bearish for the Aussie Dollar and for commodities. And thus far, there’s not much evidence to support that giant reversal is afoot that is more bearish for emerging markets than it is for the US Dollar. It’s a fork in the road, though. So we have to take it and see where it leads.
There ARE a few factors supporting the "Game Over" theme. One is that Ireland’s woes are not the last o the Eurozone’s problems. There is Greece. There is Spain. And really, Ireland is not even done and dusted yet. To some extent, Euro weakness is dollar bullish and contributes to the "Game Over" theme.
But the bigger factor is Chinese tightening, or just your basic traditional popping massive credit bubble. There are early signs of that. Last week China raised reserve requirements on banks again. And Citigroup agrees with our assessment that rising food prices in China could be bearish for metals.
China’s State Council is talking a big game on controlling inflation. Does it mean China is quickly shifting away from a bias toward export growth toward an inflation fighting bias? That’s the big question. If it does mean that, you can expect lower commodity prices.
For example, three-month copper on the London Metals Exchange fell overnight. The news preceding the drop was that refined copper imports to China fell by a third last month. Comex December copper traded lower too, near $3.75/lb.
We’re going to have Dr. Alex what he thinks about this. But we can guess. He probably loves it. He just got back from another site visit in Africa to a copper project. If you’re a Diggers and Drillers reader don’t worry. You’ve already read about this company. It’s not a new recommendation.
Alex has done his homework on the companies he’s recommended. Weakness in the copper price invariably follows through to the shares. If you’re a secular metals bull, you believe this lowers your average purchase price on the shares most likely to benefit from rising prices.
If you’re a bear on copper, well…you’re a bear. Go dance. Alex, of course, has taken the other fork in the road. This fork is for those who’ve realized the end of the Dollar Standard in the global money system is likely to be bullish for real assets, despite your reflexive US Dollar rallies. Europe’s chronic and structural problems add an element of Dollar support. But the long term story on this fork is to favor "real assets" over paper money.
Which brings us back to Ireland and Australia. Irelands bank’s went all in on the Irish property market. When the bubble burst, the banks were left holding the bag (a huge mortgage book). The bag was so heavy, in fact, it broke their back. So the government had to pick them up. And the bag was too big for the government to pick up too, especially given rising borrowing costs for countries at Europe’s periphery.
Could that ever happen in Australia? Could banks with massive over-exposure to domestic property be caught out by losses and unable to borrow from overseas except at much higher rates? And could the government be forced to step in and cover the bank at the cost of its own good credit?
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Nov 19
Contagion risk is everywhere rightnow…
THERE’S A fungus among us. But is itthe banks? Or is it a caterpillar fungus that boosts sex drive and issoaring in price as China imports Ben Bernanke’s inflation virus? asks Dan Denning in his Daily Reckoning Australia.
You didn’t have to know there wasmore trouble coming from Ireland. Just have a pint at any of the pubshere in St. Kilda and you’ll hear a veritable symphony of Irishaccents. Most of the girls are behind the bar serving drinks. Most ofthe boys are at the bar drinking drinks. All of them seem to behaving a pretty good time, even if they are a long way from home.
Meanwhile, back in Ireland, a Europeandrama is playing out. It’s putting pressure on the Euro and justlike back in may, that word “contagion” is being thrown aroundagain. The U.S. dollar is moving ahead while commodities cool off.
But what about the Irish? Thegovernment has a deficit equal to 32% of GDP which it’s rapidlytrying to bring down through spending cuts. And if interest rates onsovereign Irish debt weren’t rising (they are) the governmentdoesn’t appear to be in any kind of immediate funding crisis.
Down the track though, investors arelooking at the Irish banks and realising the Irish banks are stillstuffed with heaps of toxic assets. Irish banks have been borrowingfrom the European Central Bank in order to refinance theirobligations to other lenders. But ultimately, Ireland’s governmentis on the hook for bailing out the banks (again). And if Ireland’sgovernment doesn’t have the money to do it (it doesn’t) then thetask falls to the ECB.
Of course it’s possible the Irishgovernment finally stops the madness and says to its banks, getstuffed. Based on the number of punch ups we’ve seen at pubs in thelast year, we know the Irish aren’t afraid of a fight or a littlerebellion now and then. But the rest of Europe—especially Greece,Spain and Portugal—are keen for Ireland to agree to an ECB plan andhalt an investor run on the euro and on European sovereign debt.
Does any of this really matter toAustralia? Well, aside from expecting even more Irish to invade St.Kilda if the Irish banks fold, the weaker euro is leading to arelatively stronger dollar. That’s causing carry traders whoborrowed in cheap USD to take profits on their “risk” trades inhigher yielding assets like the Aussie dollar, which you can now buyfor ninety six US cents.
Ireland “matters” in the largersense that it’s also a test of popular tolerance for socialisingthe losses of the banks. No one knows what the consequence ofallowing major Irish (or any other) banks to fail. But we are told,mostly by the bankers, that it would be such a disaster for theeconomy that the government simply must assume those bad debts andthe central bank must print more money to recapitalise the banks.
The problem is really the same now asit was two years ago—way too much bad debt that cannot be cancelledout by issuing more debt. The “solution” offered by theauthorities doesn’t really seem like a solution. It just seems likea get out of jail free card for the bankers and endless more debt asfar as the eye can see.
There’s no doubt there’d be somereal havoc in financial markets and the economy with a real reckoningin the banking sector. But the situation we have right now is prettylousy too. Could allowing the banks to fail be much worse? At somepoint the debt is going to have to be liquidated or restructured.
Closer to home here in Australia is thenews that China is trying to choke down inflation by reducing loansto property developers. Bloomberg reports that China’s four biggestbanks–Industrial & Commercial Bank of China Ltd., ChinaConstruction Bank Corp, Bank of China Ltd. and Agricultural Bank ofChina Ltd.—have all met their lending targets this year and won’tbe making any more loans. China’s M2 measure of money supply rose19.3% over the last year, according to figures released last month.
That kind of lending boom leadsto 15-story hotels allegedly being built in six days. Italso leads to politically destabilising inflation in the goods peoplebuy every day. For instance prices in Shenzhen are now growing muchfaster than prices in Hong Kong, which is a reversal of thetraditional relationship. “Shoppers report that certain food andgrocery items can be to 40% cheaper in Hong Kong,” reports ColleenRyan in yesterday’s Australian Financial Review.
“It is not just fresh fruit andvegetables. Even items like Dove soap, which is manufactured in Anhuiprovince in China, is 25% cheaper in Hong Kong…The increase hasbeen more than 300% for a small group of herbs. Caterpillar fungus,said to slow down the ageing process and boost sex drive, has beenone of the top performers.”
The other obvious inflation China is inthe share market. It’s turned down in the last two days, droppingover 4% Tuesday, with metals producers and property developers hitthe hardest. Note also that the Aussie market (the All Ords in thegold line) has pretty much tracked the Shanghai Stock Exchange. TheAussie Dollar looks pretty elevated compared to both.
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Sep 30
Currency wars over who’s got the most money to burn are fuelling the Gold Price rally…
AS THE Gold Price moves through yet another major milestone – $1300 per ounce – some heavy hitters in the marketplace are beginning to wonder if the yellow metal’s rally is getting a bit too frothy, or even worse, writes Gary Dorsch, editor of the Global Money Trends newsletter.
Is a speculative bubble brewing – and one which might ultimately deflate under its own weight, leading to a sharp correction? On Sept 15th, famed hedge fund trader George Soros said that Gold Prices might continue to rise, but warned that that gold is the "ultimate bubble"…
"Gold is the only actual bull market currently. It just made a new high yesterday. In the present circumstances that may continue. I call gold the ultimate bubble, which means it might go higher. But it’s certainly not safe and it’s not going to last forever."
Soros has been bullish on gold in a big way, and as of June 30th, the Soros fund held 5.24 million shares of the SPDR Gold Trust GLD, a stake worth about $650 million today.
Soros’s fund also held equity holdings in Gold Mining corporations, plus other minerals, worth almost $250 million.
Over the past two months, there’s been a global stampede into precious metals, with investors of many different stripes, and from many countries, scurrying to Buy Gold and silver in both the physical market and through exchange traded funds.
The World Gold Council reported that the demand for gold worldwide surged 36% in the second quarter of 2010, swelling to 1,050 tonnes. The Greek debt crisis, instability in Irish and Portuguese bonds, and expectations the Fed would unleash "Quantitative Easing" (aka QEII) – flooding the world with a new tidal wave of freshly printed US Dollars – has supported the historic bull run. Europe accounted for more than 35% of the retail purchases of Gold Coins during the second quarter.
The latest surge in gold and Silver Prices was sparked in July, following comments from Fed officials signaling that QEII could be around the corner. On July 22nd, Fed chief Ben "Bubbles" Bernanke reassured congressional lawmakers the central bank is prepared to print more Dollars if the US jobless rate continues to hover around 10%.
"We are ready and will act if the economy does not continue to improve, if we don’t see the kind of improvements in the labor market that we are hoping for and expecting. Unemployment is the most important problem that we have right now. What we can do is make financial conditions as supportive of growth as we can and we certainly are doing that…"
On August 19th, St Louis Fed chief James Bullard was more explicit, signaling his backing for further monetization of the US government’s debt.
"Should economic developments suggest increased disinflation risk, purchases of Treasury securities in excess of those required to keep the size of the balance sheet constant may be warranted. Any additional Treasury buying should be undertaken in a measured, deliberate manner, commensurate with the magnitude of the deflation threat."
The Fed’s propaganda artists are operating behind a veil of "smoke-and mirrors", trying to instill the fear of consumer-price deflation amongst bondholders in order to justify another big round of stealth monetization of the US government’s debt.
The Fed’s first go-around with QE, totaling $1.75 trillion, combined with the Bank of England’s £200bn QE-scheme and the Bank of Japan’s ¥21 trillion QE-scheme, fueled a powerful rally in key commodity markets in 2009, lifting the Dow Jones Commodity Index (DJCI) from deep in negative territory, and onto the positive side, thus warding off the threat of deflation in the global economy.
However, since the Fed completed its 12-month buying spree in Treasury bonds and mortgage-backed bonds in March 2010, the year-over-year rate of increase in both the DJCI and the US Producer Price Index have petered out. Last November, the DJCI was hanging around the 135-level, just a shade below the 138.40-level that prevails today. If the DJCI stays stagnant or turns lower in the months ahead, it could knock the US-PPI into negative territory by year’s end, signaling the onset of another bout of deflationary pressures, and triggering a second round of the Fed’s QE.
Thus, on Sept 1st, Philadelphia Fed chief Charles Plosser said the Fed would embark upon further monetary easing if faced with a dangerous downward price spiral.
"If we do need to act, if fears of deflation were to become real, then we would need every ounce of credibility we can muster to convince markets we are not going to let deflation happen…
"I would certainly entertain the solution if I feared deflation, and if I feared that expectations were coming unglued in that direction – then we would have to take actions," he warned.
Interestingly enough, amid all this gloomy talk by Fed officials about the bogeyman of deflation, the demand for precious metals – traditional hedges against inflation and currency devaluations – is booming.
Why? Traders realize that the Fed’s magic elixir for fighting the scourge of deflation is more money printing – otherwise known as the nuclear QE-scheme. US bond dealers, who trade directly with the Fed, aren’t questioning whether QEII is on the table, but are rather taking bets on the size of the next tranche, with estimates ranging between $300 billion and $1 trillion.
Speculation that the Fed would unleash QEII soon has already spearheaded a new round of currency wars across the globe. Central bankers in Brazil, China, Chile, Japan, Russia, South Korea and Thailand have all stepped up their interventions, by injecting large sums of paper into the currency markets, while trying to prevent a precipitous decline in the value of the US Dollar versus their own currencies.
The amount of foreign currency reserves stashed away in the coffers of the Bank of Korea have climbed by $76 billion since April 2009, to a record high of $286 billion – and becoming the world’s sixth-largest after China, Japan, Russia, Taiwan and India. The BoK’s currency reserves are an indicator of the approximate size of its interventions in the foreign-exchange market, utilized to artificially hold down the value of the Korean Won vs. the US Dollar.
The value of the US Dollar is critical to Seoul, since Beijing pegs the Chinese Yuan to the US Dollar, and China is the biggest customer for Korean exporters. Thus, the BoK aims to protect its exporters in both the Chinese and US markets. However, the BoK hasn’t been able to turn the bearish tide against the US Dollar. It’s been overwhelmed by the ideas that the Fed would unleash nuclear QEII. Now the BoK can only try to stem the bleeding – engineering an orderly retreat for the greenback.
The Bank of Korea would of course be much wealthier if it had judged the Gold Price more correctly. The BoK holds only 14 tonnes of Gold Bullion, equivalent to just 0.03% of its total reserves. On Dec 9th, 2009, the BoK’s FX-chief, Lee Eung Baek argued:
"There’s an illusion in gold. Out of more than 200 nations, how many have bought Gold Bullion? Like other central banks, we have been increasing the types of currency reserves outside the Dollar. Gold offers little value, with no cash returns. Since India and Russia with large reserves bought gold, there’s speculation that Korea might buy it too. But we are not classified in the same category. There’s a slim chance that we will Buy Gold from the IMF…"
This was when the yellow metal was changing hands at $1226 an ounce, almost $100 below today’s price.
On Sept 16th, Tokyo’s financial warlords also intervened in world currency markets to drive down the exchange rate of the Yen.
The Bank of Japan sold an estimated ¥2 trillion ($23 billion) to buy up US Dollars. The first such intervention by Japan in more than six years, this was also the biggest ever one-day currency action, and breached a tacit agreement among the Group-of-Seven industrial powers (G7) to avoid unilateral currency interventions.
But Japan had threatened such action for more than six weeks, after the value of the US Dollar declined by 10% from May to a 15-year low of ¥83. The Japanese Yen also climbed sharply in relation to the Euro and the Chinese Yuan…meaning that Japan’s multinationals, listed on the Nikkei 225 index – and heavily dependent on exports – were suffering. The Dollar’s value had declined far below their average break-even point of ¥93, and threatens their ability to compete in selling goods abroad.
Japan’s foray into the currency markets triggered a short squeeze on over-zealous US Dollar bears, and lifted the Dollar as high as ¥86 in short order. However, the Dollar’s one-day rally quickly stalled, as speculators began to bet that the size of the Fed’s QEII would exceed the size of the Bank of Japan’s devaluation schemes. Earlier, the Bank of Japan boosted the size of excess Yen sitting in deposits held by Japanese banks to ¥30 trillion ($350 billion), in an effort to put a floor under the Dollar at ¥84.
Despite the massive size of the Bank of Japan’s injections of Yen into the local banking system, it hasn’t been able to turn the US Dollar’s bearish tide.
That’s because currency traders expect the Fed’s next round of QEII to trump the size of the Bank of Japan’s interventions. Also, US Treasury yields could resume falling further than comparable Japanese bond yields, thus narrowing the US Dollar’s interest-rate advantage over the Yen. In the current round of competitive currency devaluations, the Fed holds the trump card over the Bank of Japan.
Most interesting, Japanese 10-year bond yields are flirting with the psychological 1% level, despite the ballooning of the size of Japan’s public debt, now at ¥909 trillion ($10.5 trillion). Japan’s bond yields are falling, even though its debt-to-GDP ratio is about 180%, which on the surface is worse than 115% for Greece. Yet although public attention tends to focus on Japan’s gross debt, which has soared to ¥909 trillion, the government also owns about ¥700 trillion in assets.
That ¥700 trillion in assets includes roughly ¥180 trillion in real assets, such as public office buildings, and ¥520 trillion in financial assets, including stakes in special corporations. The government can sell these assets and use the proceeds to pay down debt. Thus, Japan’s net debt is about ¥200 trillion, or about 40% of its nominal GDP, which is over ¥500 trillion per year. Perhaps, this is why Beijing hasn’t been afraid to buy ¥1.7 trillion of Japanese government bonds in the first seven months of 2010.
Still, at yields of 1% or less for 10-year Japanese bonds, the only buyers would be short-term gamblers, or those who are convinced that Japan’s economy would be snared in the deflation trap for year’s to come.
Buying JGB’s at yields of 1% or less could lead to large losses over the longer-term. Thus, the more sensible investment for Japanese investors is to Buy Gold against the Japanese Yen. Priced in Tokyo’s money, gold has more than doubled over the past five years, and served as a good hedge against the Bank of Japan’s printing schemes.
Already, the Bank of Japan is monetizing half of Tokyo’s annual budget deficit of ¥44 trillion this fiscal year, and there’s pressure on the central bank to buy more government bonds to weaken the Yen. Although some traders might view the Bank of Japan’s bond-buying operations as a buy signal for JGBs, investors in Tokyo gold have profited more handsomely. Tokyo gold has been tracking the size of Japan’s outstanding debt, since Tokyo’s ruling elite prefer to pressure the central bank to monetize its debts, rather than sell-off state owned assets to finance budget shortfalls.
Gold’s not just tracking Tokyo’s monetary problems, either…
Bank Rossii, Russia’s central bank, manages the Ruble against a basket of Dollars and Euros to limit currency swings that may hurt it exporters. In August, Bank Rossii bought $1.1 billion and €136 million, trying to keep the Ruble within a floating range against the Euro-Dollar’s basket.
This summer’s agricultural drought, the worst in decades, has already shrunk Russia’s trade surplus to $8.3 billion in August, or 29% less than a year ago, and has slowed its economy’s growth rate to 2.4%, with 60% of the fall attributed to the agricultural sector. Thus, Bank Rossi is liable to start increasing the supply of Rubles in the money markets to limit further damage from adverse exchange rates moves to its economy.
The Kremlin earns most of its foreign currency from the sale of Urals blend crude oil, natural gas, and other natural resources, such as timber, platinum, and nickel. Along with rebounding energy and metals markets, Russia’s FX reserves have been replenished to around $478 billion today, from as low as $380 billion in March 2009. Moscow is keen to diversify some of its FX stash into gold, and last May, added 1.1 million ounces equaling 16% of monthly global mining output.
Overall, the Russian central bank bought gold at an average rate of 250,000 ounces per month for the past three years, and now holds an estimated 23.6 million ounces. As of the first quarter of 2010, Saudi Arabia said it had more than doubled its gold holdings from 143 tonnes in Q1 2008 to 323 tonnes this spring, for an average increase of 241,000 ounces a month, or about the same as Russia’s purchases.
Thus, gold traders will keep a close eye on the FX reserves of these two key oil producers.
Brazil has also ramped-up its intervention efforts in the foreign currency markets, buying US Dollars twice each day in order to prevent the greenback from falling below its latest defense line at 1.70 Reals.
Largely due to its super strong currency, Brazil’s trade surplus fell 44% to $7.9 billion in the first half of 2010, down from $13.9 billion a year ago, as imports grew nearly twice as fast as its exports. Four years ago, the Bank of Brazil (BoB) tried to prevent the US Dollar from falling below 2.10 Reals, but failed in its $100 billion intervention effort.
Currently, the BoB is trying to draw a red-line in the sand for the US Dollar at 1.70 Reals, but Brazil’s high short term interest rates, offered at 10.75%, are simply too irresistible to yield hungry investors from around the globe. Foreign inflows of cash into Brazil in the first ten-days of September alone was $2.14 billion. As a result of its relentless intervention efforts, trade surpluses, and foreign direct investment, Brazil’s FX stash has grown to $250 billion, and it’s the fifth largest lender to the US Treasury.
On Sept 15th, Brazil’s Finance chief Guido Mantega vowed to defend the country’s exporters, joining other governments worldwide that seek to weaken their currencies as a way of speeding up an economic recovery.
"We will not sit on the sidelines watching the game, while other countries weaken their currencies at the expense of Brazil. We’re going to take appropriate measures to stop the real from appreciating," he declared in Rio de Janeiro.
Under conditions of slowing growth in the US economy, there’s been an eruption of currency wars worldwide, with an increasing number of governments seeking to secure their share of export markets through outright intervention in the currency markets.
At the heart of the problem, US Senate Banking Committee chairman Christopher Dodd declared China a currency manipulator last week, and said its "economic and trade policies present roadblocks to our recovery." He accused Beijing of stealing intellectual property, violating international trade agreements and dumping goods. Since then, the US Dollar tumbled 1.2% to 6.7035 Yuan.
US Treasury chief Tim Geithner suggested that China should raise the Yuan’s exchange rate by at least 20% and issued a thinly veiled threat, noting that "China has a very substantial economic stake in access to the US market." Meaning, the biggest beneficiary of the growing currency trade wars is the precious metals – silver and Gold Investment – now basking in the growing supply of freshly printed paper currency worldwide.
The prospect of QEII by the Fed is prompting other central bankers to counter with currency devaluations of their own. Yes, some central banks such as Banco de Chile, the Bank of Australia, and the Bank of India are going the opposite way – lifting their interest rates, and their currencies have become magnets for foreign capital. But the Fed has concluded that the only expedient weapon in its arsenal to speed-up the US economy is to inject another tidal wave of US Dollars into the banking system, while aiming to artificially inflate the US stock market higher, and thus, create the illusion of greater wealth and better times ahead.
However, when seen through the lens of gold, or in "hard money" terms, the Dow-to-Gold ratio is still trapped near its lows of Q2 2009, highlighting the notion that the US-economic recovery has been mostly limited to Wall Street and US multinationals. Meanwhile, the divide between rich and poor in the US is getting wider. The Dow Industrials’ 3,800-point rally from the low of March 2009 was a monetary illusion, and Gold Bullion is still best way to preserve wealth.
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Aug 22
Europe seems bound for austerity.
Success will not distract Germany from its austerity program…
IT’S NOW BEEN 65 years since Europe’s last major war, writes Bill Bonner in his Daily Reckoning from Ouzilly, France.
Still, when Germany gets up off its knees, the continent trembles. And last week, the Berlin government announced the best results since the wall fell in ’89. From the first quarter to the second one the republic’s GDP rose 2.2%.
At that rate – about 9% a year if it continues – Germany is running neck and neck with China. Compared to France and the US, Germany is flying nearly 4 times as fast. Greece meanwhile is backing up. Its economy shrank 1.5% last quarter.
Histocially, the Teuton tribes were an aggressive lot. The Usipetes, Tenchteri, Batavi, Cherusci, Chatti, Vandals, Goths, Franks, Alans, Suebians – all jostled each other for centuries. They must have gotten a taste for competition. And when Rome wheezed her last gasps they fell on her like French tax collectors on a widow’s estate. The Vandals pushed all the way across Gaul and Iberia, crossed to North Africa, and from their new base in Carthage, continued to tickle the old Empire until it rolled over on them.
Everybody has his elbows out. But competition takes many forms. Better to build Audis and Mercedes than Tigers and Messerschmitts. Better to race for market share than for the Champs Élysée. Whatever form it takes, competition isn’t likely to stop. Happily, most of the time, it is a boon to everyone – even to the losers. That’s why Germany’s current success is only a threat to the economists and commentarists who’ve been giving her advice. The rest of us hold our breath and hope for more.
It was only a month ago that Martin Wolf led a “great debate” on how governments should react to the financial crisis. Of all the ideas to come out of financial crisis of ’07, Wolf proposed one of the most remarkable. He illustrated it with the fable of the ant and the grasshopper. He saw two types of economies. There were those that produced and those that consumed. The trouble, according to Wolf, was that the two didn’t compete at all. Instead, they lived in a kind of symbiotic parasitism. The grasshoppers lived off the labors of the ants. Not only did the grasshoppers make the things that the ants used, the ants took the grasshoppers’ money and lent it back to them, so they could buy more. The grasshoppers were ruining themselves. But the ants were making a mistake too. They were building up capital, but what could they do with it? There was no point in expanding output capacity; arguably, they already produced too much. And what could they buy? The grasshoppers had nothing to sell.
That was not the worst of it. When the grasshoppers had spent too much, said Wolf, both bugs were trapped. If the grasshoppers in Spain and Greece were forced to spend less, the ants in Düsseldorf were condemned to sell less. Their economies were doomed to go down together, like galley slaves chained to a sinking ship.
In any case, it looked like the sort of thing the fixers could fix. Germany is all make. Greece is all take. The system was out of whack. Trade flows must balance out to zero, so Wolf et al concluded that the problem could be corrected on either side. Germany could stop working so hard and exporting so much stuff it didn’t want. Or, Greece could stop spending so much money it didn’t have. Since any slowdown in spending threatens the “recovery,” it would be better for Germans to do more spending themselves. They should raise wages and encourage their own people to buy more Audis…more ouzo…and more pointy shoes with curled up toes. This was no time for austerity.
They misunderstood the problem. Imagine two men marooned on an island. They barely survive. One works hard, hunting, gathering, and planting. The other dances on the beach like Zorba, depending on the kindness of his companion for his daily rations. The problem is not the lack of balance. The problem is the slacker. You could redress the balance between them by getting the productive one to slack off too. But then, they’d both starve.
The Euro was seen as part of the problem, too. It was either too low for Germany or too high for Greece, said analysts. In the good old days, Greece could have pulled a fast one, devaluing its currency to make its citizens poorer, and their labor and exports cheaper. But now, there is no cheap and easy solution.
Which set us to a-wondering about how the world possibly got to where it is. For the hundred years from the end of the Napoleonic Wars to the beginning of WWII, Europe was rarely happier, more prosperous…or more at peace. Yet during that time, money was even more inflexible than the Euro. Governments did not commit premeditated murder of their own currencies. Instead, the value of paper money was protected by gold. People competed by working harder, saving more, and figuring out how to produce more with less – just as the Germans are doing now.
This week, the Merkel team followed up. “The lady’s not for turning,” Ms. Merkel might have said, taking a line from Margaret Thatcher’s Brighton conference speech of 30 years ago. With the pressure off its budget, the commentators thought the Germans might be tempted to ease up on their austerity program. Instead, the German government will continue to pursue cuts to military and social spending, she said.
Success will not distract Germany from its austerity program. Whether failure will send it off the rails is a question to be answered later.
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May 06
The current problems Greece is facing is having a huge impact on both currency and stock markets. The Euro is suffering along with European bank stocks. This is a time where the value of having Gold as part of your portfolio becomes really apparent.
If the crisis in Greece spreads to other European countries Gold will become an extremely valuable asset to have in your personal portfolio. It’s scary to think about it, but the Eurozone is currently in very bad shape. After Greece other countries such as Spain, Portugal and Ireland have the distinct potential to put enormous pressure on the currency.
Gold is a counterweight that you can use to safeguard your personal wealth against this scenario. It may be floating around all time highs right now but if European sovereign debt fears prove true it may go a lot higher. This particularly rings true for people in the Eurozone.
Feb 11
Gold climbed alongside the dollar after a deal was struck to help Greece. Also, the same concerns on Greece. Spain and Portugal which has seen the dollar increase against the euro by 5.1% this year are driving the gold price up. Read more in Business Week.
Feb 11
Gold futures are up as a result of growing concerns regarding the Eurozone and in particular Greece. In recent trading, April gold was up $16.40, or 1.5%, at $1,092.70 an ounce on the Comex division of the New York Mercantile Exchange. The contract reached as high as $1,095.90.
The USD is also gaining which indicates that Gold’s rise could be down to Euro concerns. The Wall Street Journal goes into more detail.
