Best of the Week
Most Popular
1.SNP Offers Labour Deadly Death Embrace Alliance, Holding England to Ransom, Destroy UK From Within - Nadeem_Walayat
2.Gold And Silver – Most Widely Used Currency In Western World? Stupidity - Michael_Noonan
3.Election Forecast 2015 - Coalition Economic Recovery vs Labour Collapse - Nadeem_Walayat
4.Election Forecast 2015 - Debates Boost Labour Into Opinion Polls Seats Lead - Nadeem_Walayat
5.Why are Interest Rates So Low? Ben Bernanke, Confused as Ever, Starts His Own Blog to Prove It - Mike_Shedlock
6.Leaders Debate Election 2015 - Natalie Bennett Green Party Convincing Anti-Austerity More Debt Argument - Nadeem_Walayat
7.Labour Economic Collapse vs Coalition Recovery - UK Election Forecast 2015 - Video - Nadeem_Walayat
8.China’s Stock Market Mania; How High can Red-chips Fly? - Gary_Dorsch
9.Gold and Misery, Strange Bedfellows - 31st Mar 15 - Dan_Norcini
10.Ed Miliband Debate Election 2015 Analysis - Labour Spending, Debt and Economic Collapse - Nadeem_Walayat
Last 5 days
Sheffield School Places Election Crisis - Affluent Schools Demand Increase in Funding - 27th Apr 15
Labour Bribes Voters With Housing Market Stamp Duty Cut and Rent Controls - 27th Apr 15
Stock Market SPX Index at Resistance - 27th Apr 15
Society's Leaders Have Been Digging a Bottomless Economic Pit - 27th Apr 15
Impending Stock Market Top - Trend Forecast Summer 2015 - 26th Apr 15
Desperate Stock Market Bubble Thinking Takes Hold on Wall Street - 26th Apr 15
Stock Market Back into The Bear Suits - 26th Apr 15
One Stock Market Where You Haven't Missed the Bull Market Boom Yet - 26th Apr 15
Migrant Crisis - Europe Has Completely Lost It - 26th Apr 15
What Obama's First-Ever Energy Review Missed - 26th Apr 15
Sheffield Hallam Election Battle 2015, School Places Crisis, Can Nick Clegg Win? - 26th Apr 15
Stocks Bull Market Looks to Resume - 25th Apr 15
Gold And Silver - The U.S. Is A Corporation. Precious Metals Stand In The Way - 25th Apr 15
When the Nuclear Money Option Fails - 25th Apr 15
The War on Cash Special Report - 25th Apr 15
China Economic Slowdown Story - Why “Didi Dache” Is a Phrase You Need to Know - 25th Apr 15
The Trans-Pacific Partnership and the Death of the Republic - 25th Apr 15
Stock Splitting Caused the Stock Market Crash - 25th Apr 15
China Stock Market Parabolic Mania’s Global Risk - 24th Apr 15
What Will Happen to You When the U.S. Dollar Collapses? - 24th Apr 15
Why 2 of U.S. Dollar's Recent Bottoms Have 1 Thing In Common - 24th Apr 15
UK Economy Debt Timebomb Will Explode After Election - 24th Apr 15
Are Gold Stocks the Cheapest Ever? - 24th Apr 15
God, the Stock Market and Pascal's Wager - 24th Apr 15
Greedy Insurers Are in for a Nasty Surprise – Positioning You for Big Profits - 24th Apr 15
Four Things Missing From Obama’s First-Ever Energy Review - 24th Apr 15
How to Grow a Regenerative Medicine Industry - 23rd Apr 15
Stocks and Bonds Seven Year of Negative Returns; Fraudulent Promises - 23rd Apr 15
The Existential Danger To The Euro Is Elections - 23rd Apr 15
Stock Market No Clear Direction As Investors React To Quarterly Earnings Releases - 23rd Apr 15
Is China The Next United States? - 23rd Apr 15
U.S. Oil Glut: How High Can It Go? - 23rd Apr 15
Distorted Financial System Expect Deflation, Inflation And Hyperinflation - 23rd Apr 15
What McDonald’s Corporate Earnings Report Is Really Telling You - 23rd Apr 15
Gold Price Forecast to Become Priceless - 23rd Apr 15
FDIC Plots a Bank Heist Involving YOUR Accounts - 23rd Apr 15
$GOLD Price Year 2007 Again - 23rd Apr 15
Stocks Bubble - The Spread between Stock Prices and GDP is Blowing Out - 23rd Apr 15
Ukraine War - When Did We All Become Murderers? - 23rd Apr 15
Libya Crisis - EU Leaders Are Indicted for Nazi-Style Crimes against Humanity - 22nd Apr 15
Why Alternative Energy Isn’t Taking It on the Chin Despite Low Oil Prices - 22nd Apr 15
Bill Gross - German 10-Year Bunds Short of a Life Time - 22nd Apr 15
How to Profit from the Drop in the Oil Price - 22nd Apr 15
The U.S. Dollar's Move Is More Dangerous than You Think - 22nd Apr 15
Apple Watch Means Apple Will Become Worlds First $1 Trillion Stock - 22nd Apr 15
Half a Stocks Bubble Off Dead Center - 22nd Apr 15
They Said Go to College - Learning to become Debt Slaves - 22nd Apr 15
Best Cash ISA 2015/16, Instant and Fixed Savings Interest Rates, New Flexible Withdrawal / Deposit Rule - 22nd Apr 15
Unsound Banking: Why Most of the World's Banks Are Headed for Collapse - 21st Apr 15
Bitcoin Recent Low Price Volatility Might Be Deceptive - 21st Apr 15
Currency Wars Back As Russia Buys Gold - One Million Ounces in March Alone - 21st Apr 15
The Greece 'Grexit' Issue and the Problem of Free Trade - 21st Apr 15
Why Europe Lets People Drown - 21st Apr 15
Wealth Destruction for the 99.9 Percent - 21st Apr 15
SNP Publish England's Suicide Note as Pollsters Still Forecast Labour-SNP Election Disaster - 21st Apr 15
Characteristics of Extremely Over-Indebted Economies - 21st Apr 15
Trader Education Week -- a Free Event to Help You Learn to Spot Trading Opportunities - 21st Apr 15
Gold & Silver Alert: Silver Stocks’ Signal - 20th Apr 15
Now is the Time to Buy Resource Stocks, Especially Gold Equities - 20th Apr 15
DJ Transportation & Utility Averages Suggest Stocks Bull Market Is Over - 20th Apr 15
Crude Oil Price Bull Market Hope - 20th Apr 15
Stock Market Bears Get Slaughtered Despite Greece Counting Down to Grexit Financial Armageddon - 20th Apr 15
The Rise of the Paper Machines - 20th Apr 15
Gold and Silver Inflection Point - 20th Apr 15
SP500: A Butcher's Stock Market (Chop Chop Chop) - 20th Apr 15
Are Stock Market Bears Slowly Gaining Control? - 20th Apr 15
Sugar Commodity Price Bear Rally - 19th Apr 15
Avoid the Spread of the Stock Market "China Syndrome" - 19th Apr 15
Stock Market Going Nowhere Fast - 19th Apr 15
An Easy Way to Profit From the Two Biggest Trends in the Stock Market - 19th Apr 15
No Scripture Is Divine, Authentic and Beyond the Creation of the Human Brain - 19th Apr 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The War on Cash!

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

© 2005-2015 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

Free Report - Financial Markets 2014