Best of the Week
Most Popular
1.Spain Ignores Scotland Lesson as Catalan Independence Referendum Could Spark Civil War - Nadeem_Walayat
2.Used Car Buying From UK Dealer Top Tips, CarMotion.co.uk Real Customer Experience - N_Walayat
3.Spanish New Civil War Begins as Madrid Regime Storm Troopers Quell Catalan Independence Rebellion - Nadeem_Walayat
4.Virgin Media Broadband Down, Catastrophic UK Wide Failure! - Nadeem_Walayat
5.Are the US Markets setting up for an Early October Surprise? - Chris_Vermeulen
6.The Pension Storm Is Coming To Europe—It May Be The End Of Europe As We Know It -John_Mauldin
7.Stock Market Crash 2018; Will it Prove to be Another Buying Opportunity - Sol_Palha
8.The Profoundly Personal Impact Of The National Debt On Our Retirements - Dan_Amerman
9.Stock Market as Good as it Gets; Like 2000 With a Twist -Gary_Tanashian
10.1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - Nadeem_Walayat
Last 7 days
“Great Rotation” Ahead; Will it Be Inflationary or Deflationary? - 21st Oct 17
The Trigger for Volatility, Rates and the Next Crisis - 21st Oct 17
Perks to Consider an Agent for Auto Insurance - 21st Oct 17
Emerging Megatrends Hurting Consumers - 21st Oct 17
A Catalyst of the Stock Market Bubble Bust - 21st Oct 17
Silver Stocks Comatose - 21st Oct 17
Stock Investors Ignore What May Be The Biggest Policy Error In History - 20th Oct 17
Gold Up 74% Since Last Stock Market Peak 10 Years Ago - 20th Oct 17
Labour Sheffield City Council Employs Army of Spy's to Track Down Tree Campaigners / Felling's Watchers - 20th Oct 17
Stock Market Calm Before The Storm - 20th Oct 17
GOLD Price Creates Bullish Higher Low - 20th Oct 17
Here’s the US’s Biggest Vulnerability in NAFTA Negotiations - 20th Oct 17
The Greatest Investing Lesson Learned from the 1987 Stock Market Crash - 20th Oct 17
Stock Market Time to Go All-in. Short, That Is - 19th Oct 17
How Gold Bullion Protects From Conflict And War - 19th Oct 17
Stock Market Super Cycle Wave C May Have Started - 19th Oct 17
Negative Expectations, Will the Stock Market Correct? - 19th Oct 17
Knowing the Factors Affect your Car Insurance Premium - 19th Oct 17
Getting Your Feet Wet In Crypto Currencies - 19th Oct 17
10 Years Ago Today a Stocks Bear Market Started - 19th Oct 17
1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - 19th Oct 17
Virgin Media Broadband Down, Catastrophic UK Wide Failure! - 19th Oct 17
The Passive Investing Bubble May Trigger A Massive Exodus from Stocks - 18th Oct 17
Gold Is In A Dangerous Spot - 18th Oct 17
History Says Global Debt Levels Will Lead to Another Crisis - 18th Oct 17
Deflation Basics Series: The Quantity Theory of Money - 18th Oct 17
Attractive European Countries for Foreign Investors - 18th Oct 17
Financial Transcription Services – What investors should know about them - 18th Oct 17
Brexit UK Vulnerable As Gold Bar Exports Distort UK Trade Figures - 18th Oct 17
Surge in UK Race Hate Crimes, Micro-Racism, Sheffield, Millhouses Park, Black on Asian - 18th Oct 17
Comfortably Numb: Surviving the Assault on Silver - 17th Oct 17
Are Amey Street Tree Felling's Devaluing Sheffield House Prices? - 17th Oct 17
12 Real-Life Techniques That Will Make You a Better Trader Now - 17th Oct 17
Warren Buffett Predicting Dow One Million - Being Bold Or Overly Cautious? - 17th Oct 17
Globalization is Poverty - 17th Oct 17
Boomers Are Not Saving Enough for Retirement, Neither Is the Government - 16th Oct 17
Stock Market Trading Dow Theory - 16th Oct 17
Stocks Slightly Higher as They Set New Record Highs - 16th Oct 17
Why is Big Data is so Important for Casino Player Acquisition and Retention - 16th Oct 17
How Investors Can Play The Bitcoin Boom - 16th Oct 17
Who Will Be the Next Fed Chief - And Why It Matters  - 16th Oct 17
Stock Market Only Minor Top Ahead - 16th Oct 17
Precious Metals Sector is on Major Buy Signal - 16th Oct 17
Really Bad Ideas - The Fed Should Have And Defend An Inflation Target - 16th Oct 17
The Bullish Chartology for Gold - 15th Oct 17
Wikileaks Mocking US Government Over Bitcoin Shows Why There Is No Stopping Bitcoin - 15th Oct 17
How to Wipe Out Puerto Rico's Debt Without Hurting Bondholders - 15th Oct 17
Gold And Silver – Think Prices Are Manipulated? Look In The Mirror! - 15th Oct 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

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

© 2005-2017 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