From QE2 To Economic Titanic, The Global Asset Inflation SurgeEconomics / Inflation Nov 05, 2010 - 01:08 PM GMT
Ben Bernanke has cranked the U.S. Fed's printing presses one more time, with a new injection of US$ 600 billion. Market operators have responded with the only tune they know: bid up all hard asset real resource prices in the Commodities space and, for a while, also talk up their paper cousins in the Equities space, while the US dollar wilts by the hour. Not so far forward, however, this creation of virtual value will hit the iceberg of runaway asset inflation, then vast deflation, as QE2 turns to Titanic.
Examples abound. The nuclear energy asset bubble is launched and powering forward, as reactor building costs are inflated at perhaps 25 percent a year, and uranium prices have risen 26 percent in the 3 months since end-July. Oil and coal prices - if not natural gas prices which are still held back by the unsure menace of shale and frac gas resource development - are also powering forward, but with strong competition from the asset inflation now operating in nearly all and any food and soft commodities. Rubber prices, for example, are at a 30-year high. While the pretence can be maintained that commodities inflation is good news for equities, they also can be talked up, but only for a while.
With splendid and general amnesia on what this process generates, and a generous amnesty for wrongdoers who print money while pretending this is the no choice solution for an economy which wont (or can't) grow, political and economic deciders have thrown caution to the winds. Real solutions are so slow to operate, so difficult to communicate to voters and consumers, they are the collateral dead in what will be a classic inflation surge.
For a while, debt servicing with debased currency will ease the heroic task of managing OECD country debt, which has grown by as much as 33 percent for some countries, since 2007. Figures for exports, but also imports will effortlessly rise as the US dollar is devalued, along with the euro and Yen and all other moneys, relative to hard asset real resources. But losers will soon be identified and subjected to especially tough treatment on sovereign debt and bond markets, triggering the renewed appearance of the IMF as lender of last resort with a special role: printing SDRs as shaky guarantees for loans of other printed moneys. To be sure, gold prices can only spiral with this buy signal, already strong in today's context.
The traditional no choice solution - hiking interest rates - can itself be wheeled on stage quite soon, if inflation is strong enough to shrink and reduce the real impact of higher rates to nothing.
At that stage, as in the 1979-1981 crisis period, interest rates and inflation can soar together, as the real economy, far below, crashes into the Titanic mass of depleted real asset values. Unlike that period however, the fat to trim and to burn inside the OECD economy is now vastly smaller, making it unsure how long the process can run, before heroic measures are needed.
Debt remains the biggest problem, so diluting it, displacing it in time and across frontiers, and finally dishonouring it are the no choice solutions for as long as economic growth refuses to come back. Here again the IMF has solutions, ranging from the eccentric to the unworkable, but produced and communicated with aplomb. Following the total failure of its directors' initiative to create a US$ 100 billion fund for green energy spending in low income Emerging economies (that is Africa - poor but growing), this fund itself being part of a supposed project for a Carbon reserve currency, the climate crisis illusion has almost completely dropped out of IMF talk. Today, as oil prices rise even if that is only in debased dollars, the IMF, teamed with other entities like the World Bank, IAEA, the OECD's NEA, the USA's Ex-Im Bank, and the OECD's Development Aid Committee can home in on energy transition to the atom as a new gambit. Unlike the green energy fund, to finance the sale of overpriced green energy vanity tech in Africa, the nuclear fund can target vastly bigger numbers: perhaps US$ 500 billion as starters.
While CO2 emissions limits and tradable chits to emit hot air lacked credibility as the bases for a new and single world money, this might be different with the atom: we can hope. National debt will be shoehorned into a range of special near-money instruments, for example uranium bonds and purchasing rights. OECD debt can exchanged for the sovereign debt of the 15 or more Emerging countries (outside China and India) who want the atom, thus exporting OECD debt and importing a slice of their growing wealth. When or if major oil exporter countries decided to play along, these energy related instruments could be extended to oil drawing or buying rights, as the program to phase out the world's current fiat moneys moves, or lurches forward.
THE PACE QUICKENS
Feats of money printing, like those of the US Fed, ECB, BOJ and all other players are called "Keynesian" but only in two senses - they do not restore economic growth and they do raise government debt. But the original version of Keynesian World Money, called Bancor, was rather close to what is de facto happening to and with world hard asset commodities. Value shifts from paper to food, energy, minerals, infrastructures and other real resources, after a dangerous and damaging flirt with the second-best of housing and realty, giving us the subprime rout. Packaging and ordering the embodied value in hard assets and then using it to replace existing paper moneys is the challenge.
To be sure, environment and energy remain high ground interests for deciders and their public opinions, but food, water and other basics as well as healthcare, education and social security also command their attention. Creating a money which captures this value is both the goal and the only way forward for deciders who for the moment are unable to decide, due to the pitiless size of the debt and deficit crises.
Unfortunately however, time presses and accumulated wrongdoing has a heavy price. Events may therefore dictate both the pace of change, and the result, which will not at all certainly deliver the optimum choice. Ben Bernanke, more than a year ago at the 2009 Woods Hole meeting set out what he thinks (or thought) is the shibboleth, one-price-only commodity danger signal for the US economy and the US dollar: oil at $ 90 a barrel. Beyon that glass ceiling, Bernanke let it be known, he would have to think about raising interest rates. Today, Bernanke can ask Nymex, ICE or Tocom operators, or try the CFTC for ideas not on if, but when his Rubicon price could be crossed. In fact we are back to the 2007-2008 sequence, where there is no limit for hard asset price growth as long as economic growth stays strong in the East, and does not die on stage in full public view, in the West. Curiously, demand for dollars to pay for oil, rubber and rare earth elements will be so strong that it may itself slow the depreciation of the greenback, we can hope for Bernanke.
Announcing the new world reserve currency, and how it is linked to hard assets could therefore be the Black Swan surprise that everybody said would come anytime except soon which is coded language for "never". Taking the presently depreciated but Cinderella stalwart worry of trade deficits, for example, the glow of satisfaction at seeing US export numbers grow but only in direct proportion to US dollar devaluation, will rapidly pale as the J-curve and higher oil prices run riot with import numbers, and the deficit grows, and grows. Despite the grotesquely overvalued euro, this will also happen in Europe except perhaps in Germany.
With oil prices at let us say $100-plus and the other commodities at related price levels, the push for a new world money can grow very strong, very fast. We can therefore look for telltale signs in G-20 and OECD secretariat announcements, IMF directors' statements, and the other traditional sources. When it comes, however, this new money will have a real resource handle and its impact on the global economy may be combination of Heaven and Hell, delivered simultaneously. The
Brave New World may not be so very far away !
By Andrew McKillop
Project Director, GSO Consulting Associates
Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights
Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.
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