Tuesday, March 1, 2011
In the last few days a fairly new market perception has been creeping in. The expectation that Eurozone interest rates are going to start rising ahead of U.S. interest rates is taking hold. But while the original intention in Europe was to raise them as soon as it was seen that the recovery was really taking hold, it is becoming apparent that inflation may well beat them to it. As energy and food inflation are here to stay the reason rates will rise now is to tackle inflation.
We find that this will be tragic.
Although growth is taking hold in both the U.S. and the northern parts of the Eurozone it is too fragile to bear rising interest rates alongside food and energy inflation. Should rates rise then we are of the belief that growth will be either extinguished or wounded so badly that it will limp along at best. Only Asia can afford this not the developed world.
The U.S. is not immune to such inflation, but will delay raising interest rates so as to not burden the consumer at a time when he is sensitized to bad times and will save at a time when the government hopes he will spend. What will be the effect internationally on the dollar, other currencies and the global economy and precious metals?
THE U.S. DOLLAR
Stored up for future crises at the moment in the U.S. are:
- A ‘hung' government where President Obama's administration does not have enough power to legislate as it wants. The Republicans, while they have enough power to stop Obama's legislation, don't have enough power to get their own through. This is the last situation the U.S. wants right now. It will ensure that each crisis gets to the brink before action is taken. Even then we may tip over the brink. This will shake global confidence in the dollar and produce ratings agency downgrades for and in the U.S.
- A potential debt crisis from the federal government down through individual States such as California, Wisconsin and the rest. These are of a size that makes the Eurozone crises look tame.
- A governmental budget deficit that is not being addressed properly. We will see the first such game of brinkmanship when the time comes to legislate an increase in borrowing limits, soon.
- The U.S. Treasuries are over half owned by foreigners essentially subsidizing U.S. low interest rates.
- A loss of global power, as China's growth, not only will eclipse that of the U.S. [China's economy will be double the present day's by 2020] but will see manufacturing move to China from the U.S. a process well underway already.
- The future prospect that the dollar will lose its role as the sole global reserve currency to the Yuan and perhaps a basket of other hard currencies of which it will remain only a lesser part.
The results of these crises, as we see now is an economically weakened U.S. that will find it extremely difficult to bear up under the strain of rising interest rates in an inflationary environment. Once interest rates rise to try to contain inflation, we will see the bond markets turn to cash to avoid the dropping capital value of fixed interest rate securities. The equity markets will likewise fall in the face of rising yields on fixed interest rate rises and diminishing future prospects for the economy. Add to that the above confidence-sapping problems and we will see foreign investors unhappy to watch the steadily falling dollar exchange rate, as we see at the moment.
THE FALLING DOLLAR AND OTHER CURRENCIES
The dollar won't fall in isolation. Its trading partners cannot afford to allow their exports to suffer at the hands of a weak dollar. As we have seen all too clearly in the past few years, the trading partners of the U.S. intervene in the foreign exchanges to weaken their own currencies [in the face of a surplus on their Balance of Payments] to retain export competitiveness. We are of the opinion that central banks have and will be operating in the foreign exchanges to hold key exchange rates [such as the $: €] within a narrow trading band to give the false appearance of stability.
To date this has led to the export of inflation as the money created in QE has seeped into the emerging nations as ‘hot money' deposits. We believe that this will continue until interest rates start to rise in the U.S. Then like a reversing ripple of water that hot money will stream home to repay the original loan. This will create major capital flow problems as it exits its emerging nation home to the U.S.
The net result will be that the bulk of the world's foreign exchanges will look relatively stable as they all sink in value together. Hence all falls in the dollar will be temporary in the future.
How can this be measured? We expect that assets, in particular precious metals will rise against them all as they have been doing this century already. Even if the Yuan becomes a global reserve currency, we do not expect it to appreciate against the dollar. Global currencies will then cease to operate as measures of value but will be used simply as a means of exchange with constantly varying sets of values.
As we look at the performance of the dollar in the last couple of years, we think that much of this falling value has been absorbed in deflation and will only become apparent once inflation takes off [rapidly when it happens]. Overall the monetary system will prejudice the surplus nations like China. We expect them to take measures to protect themselves against this, which will see the dollar [and its following currencies] falling lower still. The net result will be a move towards gold along the lines suggested by the head of the World Bank, as a reference point of value.
Once it is in the interests of the main global trading blocs and or individual nations, Tariffs, Capital Controls and even in some cases Exchange Controls will be used to block imports of cheap goods, outflows of ‘hot money' and permit the rebuilding of manufacturing in nations where it has been lost. Just as sanctions produced an economic boom of note in Rhodesia, so will these sets of controls.
It will see globalization retreat as nations just will not cooperate on an international front at the expense of national interests now. International trade and capital movements will require money that is not influenced by national conditions and remains highly liquid. Gold and eventually silver can carry this role in extreme times [as collateral, not as a means of exchange].
GOLD AS PART OF THE GLOBAL MONETARY SYSTEM
Such an opportunistic set of principles underlying the global monetary system that we see now will savage the remaining confidence in it. Some anchor values will then have to be incorporated into the system to stop its complete decay.
While gold has been moving back into the system tacitly, through the cessation of gold sales, by the developed world and the buying of gold by the emerging world, there is no public recognition of gold in the system. We do believe it is there already. For instance the ‘gold-currency swaps' executed with the Bank for International Settlements was used last year by debt-distressed central banks to secure foreign currencies to assist in their [sovereign debt] market defense. These guaranteed repayment by the debtor nation of their ‘rescue funds'. It was by these golden guarantees that the loans to the nations were secured. They had nothing else of independent value with which to do it. This method neatly avoided using gold publicly and to the shame of the debtor nation. If they fail to repay the retention of that gold by the B.I.S. will nail the coffin closed on that country's creditworthiness.
Should this involve one of the major world powers in the future the global economy will then have two sides, the emerging Asian nations and the declining developed world. We have no doubt that Asia will then be the main reforming force in the reformation of the global monetary system.
Julian Phillips is a long term analyst of the global gold and silver markets and is the founder and principal contributor for Global Watch - Gold Forecaster - www.goldforecaster.com and Silver Forecaster - www.silverforecaster.com
Australia maintained its number two ranking in gold output behind China in 2010 with production of 266 tonnes, as miners dug deeper to cash in on high bullion prices, a survey by sector researcher Surbiton Associates showed.
The increase marked a 17-percent, or 38-tonne, rise on Australia's 2009 total and is the highest annual output since 2003, according to Melbourne-based Surbiton.
China was number one with reported production of 341 tonnes and the United States is likely to come in as number three with an output of around 240 tonnes, according to Melbourne-based Surbiton Associates.
The combined 2010 production of all three countries in 2010 paled against output from South Africa in its heyday as the largest gold mining country.
South Africa produced more than 1,000 tonnes of gold in 1970 and for decades was the world's largest producer.
But for 2010, South Africa is expected to record output of only about 200 tonnes, Surbiton said.
The truth is that the global economy is bad for America. The following are 23 facts which prove that globalism is pushing the standard of living of the middle class down to third world levels....
#1 From December 2000 to December 2010, the U.S. ran a total trade deficit of 6.1 trillion dollars.
#2 The U.S. trade deficit was about 33 percent larger in 2010 than it was in 2009.
#3 The U.S. trade deficit with China in 2010 was 27 times larger than it was back in 1990.
#4 The U.S. economy is rapidly trading high wage jobs for low wage jobs. According to a new report from the National Employment Law Project, higher wage industries accounted for 40 percent of the job losses over the past 12 months but only 14 percent of the job growth. Lower wage industries accounted for just 23 percent of the job losses over the past 12 months and a whopping 49 percent of the job growth.
#5 Between December 2000 and December 2010, 38 percent of the manufacturing jobs in Ohio were lost, 42 percent of the manufacturing jobs in North Carolina were lost and 48 percent of the manufacturing jobs in Michigan were lost.
#6 In Germany, exports account for approximately 40 percent of GDP. In China, exports account for approximately 30 percent of GDP. In the United States, exports account for approximately 13 percent of GDP.
#7 Do you remember when the United States was the dominant manufacturer of automobiles and trucks on the globe? Well, in 2010 the U.S. ran a trade deficit in automobiles, trucks and parts of $110 billion.
#8 In 2010, South Korea exported 12 times as many automobiles, trucks and parts to us as we exported to them.
#9 The U.S. economy now has 10 percent fewer "middle class jobs" than it did just ten years ago.
#10 The United States currently has 7.7 million fewer payroll jobs than it did back in December 2007.
#11 Back in 1970, 25 percent of all jobs in the United States were manufacturing jobs. Today, only 9 percent of the jobs in the United States are manufacturing jobs.
#12 In 2002, the United States had a trade deficit in "advanced technology products" of $16 billion with the rest of the world. In 2010, that number skyrocketed to $82 billion.
#13 The United States now spends more than 4 dollars on goods and services from China for every one dollar that China spends on goods and services from the United States.
#14 In China, working conditions are so bad that large numbers of "employees" regularly try to commit suicide. One major employer, Foxconn, has even gone so far as to install "anti-suicide nets" in an attempt to keep their employees from jumping off of their buildings.
#15 Wages for workers in China are incredibly low. For example, one facility in the city of Longhua that makes iPods employs approximately 200,000 workers. These workers put in endless 15-hour days but they only make about $50 per month.
#16 In Bangladesh, manufacturing workers toil in absolutely horrific conditions and make an average of about $38 per month.
#17 In Vietnam, teenage workers often work seven days a week for as little as 6 cents an hour making promotional Disney toys for McDonald's.
#18 Since 2001, over 42,000 manufacturing facilities in the United States have been closed.
#19 Half of all American workers now earn $505 or less per week.
#20 In the United States today, 6.2 million Americans have been out of work for 6 months of longer.
#21 8.4 million Americans are currently working part-time jobs for "economic reasons". These jobs are mostly very low paying service jobs.
#22 When you adjust wages for inflation, middle class workers in the United States make less money today than they did back in 1971.
#23 According to Willem Buiter, the chief economist at Citigroup, China will be the largest economy in the world by the year 2020, and India will surpass China by the year 2050.
Those that promote "free trade" can never explain how the U.S. middle class is going to continue to have plenty of jobs in the new global economy.
By merging our labor pool with the rest of the world, we have also merged our standard of living with the rest of the world. High unemployment is rapidly becoming "the new normal" in America, and wages are going to continue to decline in many, many industries.