From Credit to Money, Part II
By Adrian Ash
February 5, 2008
You can force people to dump cash, but you can't
force them into extending credit or buying stocks as a result...
WOULDN'T IT JUST be simpler if we did away with all the
different currencies of the world, and settled on one single form of money to
buy, sell, invest and light our cigars with?
Because as it is, the Babel we live in today where 143 different kinds of
government money change hands around the globe keeps finding itself in no
end of trouble.
"The Rupee rose on Friday," says 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," piped up a currency trader in the Asian state talking to Reuters
last week, "so I guess players are wary." And 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" the newswire reports elsewhere.
The central banks of the Philippines, Malaysia and Turkey are also rumored to
have stepped into the open market as the world's stock markets tumbled in
"Black January", 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.
The upshot, as Benn Steil of the Council of Foreign Relations said at a recent
meeting (or so the Washington Post reports), is that "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. It's still top dog after
all these years, so they "thus [peg themselves] to US monetary policy"
too.
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 and the cost of living to soar 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?
Yet 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. The Dollar's clear lesson
aside, one kind of money would beat 143 kinds 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 todays 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 last week 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
Daily Telegraph in London, "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 believe this isn't a problem? As in, a really big, ugly
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 know this all 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.
Put another way, you can force an investor out of cash...but you can't force him
into extending credit or buying common stocks as a result. Hoarding real
assets, limited in their supply, has proven mankind's knee-jerk reaction
throughout history when money loses its value. So why would the historic flight
out of cash that central bankers are now getting to work on lead to a flight
into one, single money instead?
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 if not
demented. 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 Buying Gold if
you're losing your faith in government money today.