What is happening in the Global Economy?
As we now live in a global economy national economic climates heavily impact the global scene and particularly the U.S. national scene. Look from outside in as a foreign investor that doesn’t have to invest there, what would you do? Well China is right there and this is what they’re doing:
- U.S. Treasury data show that China has cut its holdings of Treasury debt by roughly $100 billion over the past year to $844 billion. Discreetly, the main surplus countries, China, Japan, and the U.K. [Mid-East petro-dollars] have been slowing down in the last two years. In August they bought the least amount of U.S. debt this year.
- China is diversifying as it continues to hold down its currency, buying record amounts of Japanese, Korean, Thai, and no doubt Latin American bonds, in place of U.S. Treasuries. It is also ‘limit’ buying gold in quantity through the London bullion banks, buying scrap ores or buying direct from miners such as Coeur d'Alene in Alaska. Excessive Dollar holdings are also going to more hard assets such as strategic reserves of oil and coal, and probably industrial metals. State entities are buying up natural gas reserves in Africa and Central Asia, or oil sands in Canada, or timber in Guyana.
There are considerably more activities by countries and institutions that are Dollar diversifying that we don’t have enough room to describe here, but it all leads to an expectation of a falling Dollar. The trouble is that so many dependant currencies will try to fall with it to protect their trade relationship [watch the Yen] that the fall will not be easily apparent in exchange rates, but in the falling buying power of the Dollar. When we describe this we are not talking about a change in exchange rates but changes that will bring about structural changes in the current monetary system based on the U.S. Dollar.
Then what?
Don’t think for a moment that the U.S. will follow the path of Japan. Deflation is not an option for the consumer driven economy of the U.S. We believe that the path Mr. Bernanke has chosen for the U.S. has to be followed all the way. Today, he stated that he was ready to act to defeat deflation, should it arrive. Quantitative Easing will lead to inflation. Inflation is an acceptable alternative to deflation, because it is easier to cure inflation than deflation. But the government of the U.S. is likely to wait until deflation is biting before they act, then the stimuli will have to be heavy as will consequential inflation. This prospect is bringing tremendous doubts about the value of Dollar and other currencies.
U.S. monetary authorities will place U.S. interests well ahead of any others, so don’t expect a globally coordinated policy against deflation. It will be every nation for himself.
The surplus nations will, as they are doing now, follow the defensive measures described above. But it may take weeks before this is accepted. So now is the time to act.
And Gold?
The big picture for the long-term could not be better for gold, than it is now. Gold has proved capable of performing well in deflation, in uncertainty, in fear. Internationally it is liquid in all parts of the world. It is internationally acceptable cash. More than that, it is an effective counter to the devaluing of currencies through quantitative easing or currency devaluations.
What happens to Equities in a Deflating Economy and what should you do to protect your Wealth?
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