Best of the Week
Most Popular
1.Are UK Savings Interest Rates Finally Starting to Rise? Best Cash ISA 2017 - Nadeem_Walayat
2.Inflation Tsunami - Supermarkets, Retail Sector Crisis 2017, EU Suicide and Burning Stocks - Nadeem_Walayat
3.Big Moves in the World Stock Markets - Big Bases - Rambus_Chartology
4.The Next Financial Implosion Is Not Going To Be About The Banks! - Gordon_T_Long
5.Why EU BrExit Single Market Access Hard line is European Union Committing Suicide - Nadeem_Walayat
6.Trump Ramps Up US Military Debt Spending In Preparations for China War - Nadeem_Walayat
7.Watch What Happens When Silver Price Hits $26...  - MoneyMetals
8.Stock Market Fake Risk, Fake Return? Market Crash? - 2nd Mar 17 - Axel_Merk
9.Global Inflation Surges, Central Banks Losing Control and Triggered the Wage Price Spiral? - Nadeem_Walayat
10.Why Gold Will Boom In 2017 - James Burgess
Last 7 days
Political Week Presurres US Stock Market - 25th Mar 17
London Terror Attack Red Herring, Real Issue is Age of Reason vs Religion - 25th Mar 17
Will Washington Risk WW3 to Block an Emerging EU-Russia Superstate - 25th Mar 17
Unaccountable Military Industrial Complex Is Destroying America and the Rest Of The World Too - 25th Mar 17
Silver Mining Stock Fundamentals - 24th Mar 17
A Walk Down the Dark Road of Bad Government - 24th Mar 17
Is Stock Market Flash Crash Postponed Until Monday? - 24th Mar 17
Stock Market Bubble and Gold - 24th Mar 17
Maps Of Past Empires That Can Tell Us About The Future - 24th Mar 17
SNP Independent Scotland's Destiny With Economic Catastrophe, the English Subsidy - IndyRef2 - 24th Mar 17
Stock Market VIX Cycles Set To Explode March/April 2017 – Part II - 23rd Mar 17
Is Now a Good Time to Invest in the US Housing Market? - 23rd Mar 17
The Stock Market Is a Present-Day Version of Pavlov’s Dog - 23rd Mar 17
US Budget - There’s Almost Nothing Left To Cut - 23rd Mar 17
Stock Market Upward Reversal Or Just Quick Rebound Before Another Leg Down? - 23rd Mar 17
Trends to Look Out For as a Modern-day Landlord - 23rd Mar 17
Here’s Why Interstate Health Insurance Won’t Fix Obamacare / Trumpcare - 23rd Mar 17
China’s Biggest Limitations Determine the Future of East Asia - 23rd Mar 17
This is About So Much More Than Trump and Brexit - 23rd Mar 17
Trump Stock Market Rally Over? 20% Bear Drop By Mid Summer? - 22nd Mar 17
Trump Added $3 Trillion in Wealth to Stock Market Participants - 22nd Mar 17
What's Next for the US Dollar, Gold and Stocks? - 22nd Mar 17
MSM Bond Market Full Nonsense Mode as ‘Trump Trades’ Unwind on Schedule - 22nd Mar 17
Peak Gold – Biggest Gold Story Not Being Reported - 22nd Mar 17
Return of Sovereign France, Europe’s Changing Landscape - 22nd Mar 17
Trump Stocks Bull Market Rolling Over? You Were Warned! - 22nd Mar 17
Stock Market Charts That Scream “This Is It” - Here’s What to Do - 22nd Mar 17
Raising the Minimum Wage Is a Jobs Killing Move - 22nd Mar 17
Potential Bottoming Patterns in Gold and Silver Precious Metals Stocks Complex... - 22nd Mar 17
UK Stagflation, Soaring Inflation CPI 2.3%, RPI 3.2%, Real 4.4% - 21st Mar 17
The Demise of the Gold and Silver Bull Run is Greatly Exaggerated - 21st Mar 17
USD Decline Continues, Pull SPX Down as well? - 21st Mar 17
Trump Watershed Budget - 21st Mar 17
How do Client Acquisition Offers Affect Businesses? - 21st Mar 17
Physical Metals Demand Plus Manipulation Suits Will Break Paper Market - 20th Mar 17
Stock Market Uncertainty Following Interest Rate Increase - Will Uptrend Continue? - 20th Mar 17
Precious Metals : Who’s in Charge ? - 20th Mar 17
Stock Market Correction Continues - 20th Mar 17
Why The Status Quo Is Under Increasing Attack By 'Populist People Power' - 20th Mar 17
Why the SNP WILL Destroy Scotland, Exit UK Single Market for EU - IndyRef2 - 19th Mar 17
Crypto Craziness: Bitcoin Plunges on Fork Concerns, Steem Skyrockets and Dash Surges Above $100 - 19th Mar 17
What ‘Ice-Nine’ Means for Your Money - 19th Mar 17
Stock Market 4 Year Cycle - 18th Mar 17

Market Oracle FREE Newsletter

Elliott Wave Trading

More Quantitative Easing Will Threaten the Dollar and Western Economies

Commodities / Gold and Silver 2010 Jul 30, 2010 - 12:34 PM GMT

By: Julian_DW_Phillips

Commodities

Best Financial Markets Analysis ArticleThe U.S. economy can, at best, be described as in an "L"-shaped recovery. It is anemic, faced with unyieldingly high unemployment and overburdened with debt, but worst of all, the average consumer that has little to no confidence in the economy or housing for the next couple of years.


The Fed Chairman, Mr. Ben S. Bernanke tells us the future of the U.S. economy is "unusually uncertain", sapping confidence further. In such a climate a slight push to the negative will see the economy slip back into a recession. Like, 'depression', 'recession' has become an unacceptable word, because its use would drain confidence even more heavily. The housing market is already tipping into another negative slide with new house sales falling and mortgage rates at record lows. What can be done? We, like most other qualified commentators, free of political bias, see more quantitative easing as being unavoidable within three months, if the bad news continues. But this time, we have to ask, can it be managed without frightening side effects?

The U.S. Debt Crisis

Forty-eight U.S. states will be in deficit this year and the combined shortfall will probably exceed $300 billion. That puts Greece's expected 2010 budget shortfall of around $28 billion and the Eurozone crisis into perspective. Greece's shortfall is put at around 13.6% of G.D.P., whereas there are a good number of U.S. states anticipating deficits of more than 20% this year, including some, like California [that has already declared an emergency], New York, Florida and Illinois, with far bigger economies than Spain, Greece and Portugal lumped together. There are around a dozen U.S. states with bigger economies than Greece and most of these anticipate 2010 deficits at this kind of level! The result is going to have to be massive Federal Government bailouts in the midst of quantitative easing.

Deflation attacked by Inflation

The net effect is the threat of default and massive deflation. The word 'depression' will be heard if there is no, almost unlimited, quantitative easing. While such measures may stave off the worst economically, the impact on confidence will be remarkable, but not in a good way. We believe that the Fed and government will accept that inflation is the lesser of two evils and overall, will lessen the threat of deflation, recession and bad debts. When all else fails, and a crisis demands extreme measures, extreme measures and consequences will come. Look back at the early eighties after inflation had run towards 25%, Volker emasculated it with interest rates of 25% leading to the next 20+ years of boom times. Can't this be done again? [The author was working for Chase Manhatten at the time and pointed out that interest rates and inflation in terms of Technical forecasts pointed to this level a year before it happened. Senior management ridiculed the prospect at that time.]

Certainly, it will result in the devaluation of the U.S. Dollar both internally and externally. But the rescue of the U.S. economy will be the top priority of the Fed and the government, irrespective of external consequences.

Consequences

Inside the U.S. the current thriftiness of the consumer will turn to spending as he realizes that his savings are also being devalued, as is his debt. This will speed the velocity of money again as well as stimulate retail sales, inventory building, investment in capital goods and growth. Wonderful! Just what is wanted! Should inflation run amok, they always have the Volker solution. Such consequences will be seen as more than justifying the debilitation of the Dollar.

International Consequences

Outside the U.S. the scene will be different. Externally the Dollar will be devalued too.

Trade-dependent satellite nations will have to follow suit to keep exports at constant levels. Competitive devaluations of these currencies will become rampant. Even the Swiss Franc will devalue to keep in line with the Dollar [to keep international trade competitiveness], just as it did a couple of years ago, when it lowered interest rates for that reason.

Europe will be very unhappy to see the Euro hold value while the Dollar devalues and will attempt to follow suit. We do not believe any other currencies will be safe havens from U.S. Dollar devaluation. Indeed, we would not be surprised to see international cooperation to make currency devaluations act in synch.

But that's not the worst of it. Foreign surplus holders who form the backbone of U.S. Treasury Bills and Bond holders will be very unhappy with such devaluation after being castigated by the U.S. for holding their currencies down.

The Chinese have, in the past, sought reassurances that their holdings were safe from such devaluations. What recourse do they have? Very little, but they may simply not invest or acquire new Dollar holdings, thereafter. If that or part of that happens the Treasury markets will suffer badly. These nations will prefer to price their exports in other currencies. No matter what happens to exchange rates, the lowering of the demand for the Dollar from these sources will hit the U.S. very hard. After that rising interest rates alongside runaway inflation will be forced onto the U.S. public.

The real danger

But this is not where the real danger lies. It lies with the potential for runaway inflation and interest rates. The careful balancing act needed to manage such an environment may be too much for the Fed with its limited tools. If it acts too early to slow inflation, deflation resurges. If they act too late, inflation will be rocketing, so subsequent cooling of inflation will once again have a devastating effect on the economy, bringing much heavier deflation and an environment of mortally wounded confidence, back again. Letting these forces loose will catch the tiger by the tail and they may not be able to let go.

The consequences for gold in and outside the States
Subscribers only

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2009 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

© 2005-2016 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

Catching a Falling Financial Knife