SOME KEY FEATURES IN THE 
CHANGED GOLD-POSITIVE CLIMATE
Excerpts from GLOBAL WATCH: THE GOLD FORECASTER
by Julian D.W. Phillips
September 21, 2007

Liquidity relief coming from the U.S, the U.K and European Central Banks to the banking system, is still struggling to unfreeze the system, simply because it is cash and not an underwriting of dubious investments. Some read the drop in interest rates in the U.S. will bring instant relief to the driver of the U.S. economy, the besieged U.S. consumer, but no such thing will happen until rates are much lower still and confidence restored. Why?

The besieged U.S. Consumer - more pain to come.

The last boom [there are signs that it is ending] was, primarily, driven by the U.S. consumer. The average U.S. consumer has a relatively fixed wage or salary. A look at the burden he is carrying shows that he is unlikely to become a significant saver in the midst of today’s pressures. The pressures on this person are like this: -

• Nationally, half of all renters and more than one third of all mortgage holders spent at least 30% of  their gross income on housing costs.

• We guess-estimate that they are starting to spend up to 10% of their income on fuel [rising].

• Tax may well be around 20% [?]

• Other loan repayments will likely account for a further 20% or more?

• This leaves the necessities [food, clothes, medical, etc] around 20% left.

So he can’t handle more pressure from rising prices or high interest rates. He needs help now and must get it, if he’s to keep driving the economy. Most observers expect the Fed to keep cutting interest rates at the remaining meetings lined up until the end of the year. Even with this in mind, will he then keep spending to keep growth at healthy levels? The debate rages on about this, with most believing that a recession [two consecutive quarters of falling GDP] is likely in 2008. Others in the euphoria of running stock markets across the globe are convinced that the troubles from the housing market and credit crunch are over. Has confidence been restored? We think it’s going to take more than a half point drop in interest rates to do that.

But we do believe that Bernanke and the Administration will do all in their power to ensure that growth stays healthy if not rising, reinforcing a gold positive climate. They have to do this because the recent crises were not the sort that blow over quickly. They were systemic problems that, if not cured, could precipitate far worse than a recession, a probability that cannot be allowed to happen. 

Already the credit crunch and the Fed’s action are causing other systemic problems to appear. The $ is running towards a break in support and who knows how much more of a drop? Saudi Arabia the key oil producers is likely to cut its peg with the, which will be a system fracture all on its own. What next? 

The global economy, let alone the U.S. cannot afford these problems on top of the ones it has. The coming years will be dark and difficult unless these systemic fractures are fixed and not just their symptoms. The price of these years will outweigh any inflation damage that will inevitably come with systemic repairs, if they are made. Inflation will just have to be sucked up. 

But what if the problems on the capital flow and currency front balloon? Harsh, national, curative measures loom up in front of us. Could these include some form of Exchange Controls?

Capital and Exchange Controls?

The massive loss of liquidity from the world’s capital markets seen in the last month beat the authorities to it, in a way few foresaw. The inability to sell assets related to the sub-prime mortgage story led to many of them losing worth. They are dead in the water as investments, so the capital value they had before has ‘fled’ the market already. Hence, the ‘capital control’ the authorities exercised was seen in the form of filling the hole of the lost liquidity [not lost capital] caused by the crisis, by printing it, which is not a happy solution.

With the market still absorbing the frank and open statements from Ben Bernanke, that: -

• Foreigners would, at some point be sated, with U.S. $’ and $ investments,

• The Trade deficit is unsustainable

it is inevitable that the Fed will act to prevent the withdrawal of capital from the States, at some point in time. Foreign selling of U.S. Treasuries was very heavy lately giving rise to speculation that China is trying to drop some of its positions already, bringing Exchange Controls closer by the day. Saudi Arabia’s action on top of this and others still unreported, is causing the $ to drop to historically low levels, so maybe exchange controls are almost here? 

It is close to a forgone reality that the States will do something about foreigners withdrawing capital from the States en masse, unhappy with their $ investments. In our recent issues we have warned of Capital and Exchange Controls for some time now, [and described some possibilities in previous issues] so let’s prepare you a little better, because when they arrive, they’re suddenly a past event and you find yourself locked inside without a way out. [Of course any such warning from the authorities would defeat the purpose of the controls, namely to block funds from fleeing a bad situation] 

Such action would not only lock in the capital of foreigners inside the U.S., but that of all home based U.S. citizens, unless they had planned against it ahead of time?

In future issues, we will publish more on this subject. When the time is right we will look at the fundamentals of Exchange Control systems, so you know what to expect. 

Exchange Controls are usually imposed for a few years only, until the threat of a foreign capital exodus fades away. At least that’s the intention [In South Africa they have been on and off to a greater or lesser degree for 40 years now, but in England they were imposed for just over 5 years. It is always hoped that the underlying causes for the flight of capital can be solved, but usually the causes are more fundamental then Central Banks expect. 

The underlying principals governing exchange controls, such as seen in the historic Exchange Controls [seen in the U.K. in the early 1970’] and in countries like Belgium, South Africa, Zimbabwe, et al, separate Capital transactions from Commercial ones. 

© 2007 Julian D. W. Phillips
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