Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
The Only Thing Systematic Is The Destruction Of America - 29th Sep 20
Fractional-Reserve Banking Is The Elephant In The Room - 29th Sep 20
Gold And Silver Follow Up & Future Predictions For 2020 & 2021 – Part I - 29th Sep 20
Stock Market Short-term Reversal - 29th Sep 20
How Trump co-opted the religious right and stacked the courts with conservatives - 29th Sep 20
Which RTX 3080 GPU to BUY and AVOID! Nvidia, Asus, MSI , Palit, Gigabyte, Zotac, MLCC vs POSCAPS - 29th Sep 20
Gold, Silver & HUI Stocks Big Pictures - 28th Sep 20
It’s Time to Dump Argentina’s Peso - 28th Sep 20
Gold Stocks Seasonal Plunge - 28th Sep 20
Why Did Precious Metals Get Clobbered Last Week? - 28th Sep 20
Is The Stock Market Dow Transportation Index Setting up a Topping Pattern? - 28th Sep 20
Gold Price Setting Up Just Like Before COVID-19 Breakdown – Get Ready! - 27th Sep 20
UK Coronavirus 2nd Wave SuperMarkets Panic Buying 2.0 Toilet Paper , Hand Sanitisers, Wipes... - 27th Sep 20
Gold, Dollar and Rates: A Correlated Story - 27th Sep 20
WARNING RTX 3080 AIB FLAWED Card's, Cheap Capacitor Arrays Prone to Failing Under Load! - 27th Sep 20
Boris Johnson Hits Coronavirus Panic Button Again, UK Accelerting Covid-19 Second Wave - 25th Sep 20
Precious Metals Trading Range Doing It’s Job to Confound Bulls and Bears Alike - 25th Sep 20
Gold and Silver Are Still Locked and Loaded… Don't be Out of Ammo - 25th Sep 20
Throwing the golden baby out with the covid bath water - Gold Wins - 25th Sep 20
A Look at the Perilous Psychology of Financial Market Bubbles - 25th Sep 20
Corona Strikes Back In Europe. Will It Boost Gold? - 25th Sep 20
How to Boost the Value of Your Home - 25th Sep 20
Key Time For Stock Markets: Bears Step Up or V-Shaped Bounce - 24th Sep 20
Five ways to recover the day after a good workout - 24th Sep 20
Global Stock Markets Break Hard To The Downside – Watch Support Levels - 23rd Sep 20
Beware of These Faulty “Inflation Protected” Investments - 23rd Sep 20
What’s Behind Dollar USDX Breakout? - 23rd Sep 20
Still More Room To Stock Market Downside In The Coming Weeks - 23rd Sep 20
Platinum And Palladium Set To Surge As Gold Breaks Higher - 23rd Sep 20
Key Gold Ratios to Other Markets - 23rd Sep 20
Watch Before Upgrading / Buying RTX 3000, RDNA2 - CPU vs GPU Bottlenecks - 23rd Sep 20
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

United States Exporting Inflation Worldwide - From Credit to Money, Part II

Economics / Money Supply Feb 01, 2008 - 02:32 PM GMT

By: Adrian_Ash

Economics

"Living in a credit era, we cannot go back to a currency era without massive upheavals..."- Robert L.Smitley, Popular Financial Delusions (1933)

WHY DON'T we just do away with all the different currencies of the world, and settle on one single money to buy, sell, invest and light our cigars with?


Because as it is, the Babel we live in – where 143 different kinds of currency either change hands or act as a way of measuring prices around the globe – keeps finding itself in no end of trouble.

"The Rupee rose on Friday," reports LiveMint, the Wall Street Journal 's Mumbai offering, "as investors bought the Indian unit for its higher yields after a hefty interest rate cut by the US Federal Reserve.

"But concerns weighed that the Indian central bank would intervene against the local unit, as it is widely suspected of doing in recent months."

"There was some suspected intervention against the Singapore Dollar at 1.4270," added a currency trader in the tiny Asian state to Reuters last week, "so I guess players are wary." Across the Pacific, the Argentine Peso has meantime lost more than 10% of its value against the US Dollar over the last four years thanks to "continued central bank intervention" says the newswire elsewhere.

And as the world's stock markets have tumbled this month, the central banks of the Philippines , Malaysia and Turkey are also rumored to have stepped into the open market, dumping their own currency and buying the US Dollar in a bid to support it and thus keep their export-economies cheap to foreign customers.

Put another way, as Benn Steil of the Council of Foreign Relations said at a recent meeting (or so the Washington Post reports), "the United States is exporting inflation worldwide" by forcing these sovereign nations to print up mountains of their own currency with which to buy the ailing greenback.

Countries like China and the Middle Eastern petro-kingdoms peg their currencies to the Dollar – the world's No.1 reserve currency, and still top dog after all these years. So they "thus [peg themselves] to US monetary policy" too.

And US monetary policy, quite clearly, is inflationary right now. That makes monetary policy inflationary everywhere from Abu Dhabi to Beijing . Even those of us lucky enough to sit outside the "Dollar Zone" can expect rates to slide in tandem.

Slashing almost a third off the cost of borrowing dollars inside eight days – and then offering to lend US banks $60 billion in 28-day loans every two weeks – makes for quite the game of "follow my leader", don't you think?

Ah, but over in the dozy spires of pan-global political day-dreams, abolishing sovereign currencies and anointing one, single money in their place would smooth the wheels of commerce and boost world GDP overnight. Apparently.

"Annual transaction costs of $400 billion [would] be eliminated," reckons Morrison Bonpasse, editor of The Single Global Currency (2007 edition) published by Munich University . "Global currency imbalances will [also] be eliminated," he adds, along with "all Balance of Payments problems...currency crises...currency speculation...and the need for foreign exchange reserves (with a current annual opportunity cost of approximately $470 billion)."

Indeed, "worldwide interest rates will be lower than the current average due to the elimination of currency risk" – and you've just got to love cheaper money!

So what's not to like? "National currencies and global markets simply do not mix," wrote Ben Steil in the policy-wonk's favorite glossy, Foreign Affairs , last May.

"Together they make a deadly brew of currency crises and geopolitical tension and create ready pretexts for damaging protectionism. In order to globalize safely, countries should abandon monetary nationalism and abolish unwanted currencies, the source of much of today's instability."

Instability being a bad thing – the kind of thing that knocks the S&P lower by 7% inside one month, for instance – it should be abolished, right? The beautiful stability of Western Europe 's economies just goes to prove how remarkable a single currency could prove.

"Spanish and Italian manufacturers are clearly struggling in the headwinds of weaker global growth, the strong Euro, high oil prices and eroding demand in domestic markets," said Jacques Cailloux, economist at Royal Bank of Scotland in London, to Dow Jones newswires today after the Eurozone's Purchasing Managers Index for January showed a slight rise overall.

"Against this, French and German manufacturers continue to do well, at least for the time being, but German producers have failed to fully make up the pace lost last autumn."

Why the disparity? According to most Spanish, Italian, Portuguese and Greek politicians, the cost of borrowing Euros is too high. According to the latest inflation data for the 14-nation currency zone, however, it's still way too low.

"Annual inflation in the Eurozone jumped to a new high of 3.2% in January, the European Union's statistics bureau Eurostat estimated on Friday," reports the China Daily.

"The figure, including new Eurozone members Malta and Cyprus for the first time, was the highest since the single currency was introduced to world markets as an accounting currency in 1999. It rose from 3.1% in the previous two months and stayed well above the two percent ceiling preferred by the European Central Bank (ECB) for the fifth consecutive month."

Spain's minister of finance, Pedro Solbes, said last week that "there's significant debate" inside the European Central Bank about whether or not to cut interest rates as the global slowdown looms over Europe. But then, he faces re-election in March – and no one seemed to mind too much about interest-rates being too low during the Spanish real estate bubble that began bursting last year.

Property prices nearly tripled in Spain between 1997 and 2007, thanks to a wave of British ex-pats in search of a perma-tan and the sudden collapse in borrowing costs that preceded the birth of the Euro in 2000. Mortgage rates went from 11% in 1995 to below 6% and then 5% as the single currency delivered the hope of German-style monetary policy and German-style interest rates.

Across the sea in Ireland , house prices trebled in just seven short years after the introduction of the Euro. But not even a peak of just 4.0% in the Eurozone's cost of money could keep the bubble inflating forever.

Now "Spanish banks are issuing mortgage securities and asset-backed bonds on a massive scale to park at the European Central Bank," reports the London Telegraph , "using them as collateral to raise money at favorable rates from the official credit window in Frankfurt .

"The rating agency Moody's said lenders had issued a record €53 billion [$77bn] of mortgage- and asset-backed bonds in the fourth quarter of 2007, yet almost none of the securities have actually been placed on the open market. Most have been sent directly to the ECB for use in 'repo' operations."

So for all its tough talk on inflation, the European Central Bank is still feeding the growth of credit and money supplies in Europe . Any wonder the broad M3 money supply is swelling at a three-decade record rate? Any surprise that consumer-price inflation is surging beyond the ECB's grasp...?

And does anyone really imagine this isn't a problem?

"Living in a credit era," wrote Robert L.Smitley in his 1933 classic, Popular Financial Delusions , "we cannot go back to a currency era without massive upheavals. The cause of the great boom was credit expansion to an abnormal degree – the same cause as that for all booms under a credit system."

The world's central bankers all know this too well. Few of them, if any, believe a return to cash-only possible, let alone desirable. So if the world's consumers and investors choose to shut down the credit markets – both as borrowers and lenders – and pile into cash instead, then the world's central banks will just have to destroy cash in the hope of forcing a flight back into credit.

How else, we wonder here at BullionVault , would you characterize a cut of 125 basis points in the rewards paid on Dollars inside eight days...?

The panic starting last August – a panic that closed the West's mortgage markets almost entirely – can be beaten by central banks buying mortgage-backed bonds themselves if need be. The stock-market panic of January – a panic that knocked almost one-tenth off the value of equities worldwide – can be reversed by historic cuts to interest rates and a fresh flood of short-term loans to the banks.

Or so the central banks think. But the panic they're then causing as a direct result – a panic revealed by the surging Gold Price since August – might prove worse than the flight into cash that they're fighting:

A complete loss of faith in all official currency.

Might that lead to the one, single money that day-dreaming economists think can cure the world's evils? Whatever comes when the dust settles, you can be sure the world won't turn to using gold coins again.

Yes, Ben Bernanke's depression theories might be disputed – and yes, his current credit-inflation panic looks absurd. But history would seem to make clear that during the 1930s deflation, those nations which abandoned the Gold Standard soonest turned the corner the fastest and began to recover.

The "barbarous relic" of tying the supply of money to a real quantity of Gold Bullion can't make a comeback for as long as "deflation" and "depression" are still blamed on gold hoarders.

But that doesn't mean you can't hoard a little real wealth in the meantime. You might want to consider it if you're losing your faith in government money.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and 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.

(c) BullionVault 2008

Please 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.

Adrian Ash Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules