Chocolate Bunnies
By Adrian Ash
March 5, 2008
Chocolate bunnies will vote for an Easter
heatwave before policy-makers vote to defend the value of money...
"...Those who oppose reform may get revolution..."
- John F. Kennedy, speaking of Latin America in 1962
THE EUROPEAN SINGLE CURRENCY has hit two fresh life-time highs
against the US Dollar already this month.
And we're only one trading day in!
So might US investors want to switch out of gold bullion ahead of
Easter this year and move into the single currency instead? After all, the Euro
still pays 4.0% interest per year – a feat that dumb gold could never promise
or achieve – and with Eurozone inflation holding at a record 3.2% year-on-year
in February, the European Central Bank (ECB) is clearly in no mood to start
slashing rates now.
"Inflation will not slow as markedly as supposed," warned
the ECB's Axel Weber last week. Colleague Juergen Stark added that he was
"highly dissatisfied" with the current surge in the cost of living.
Tight money to come then, right? Well, the Gold
Market doesn't buy it. Not at $1.52 to the Dollar – with European
manufacturing squeaking and Mediterranean house prices slipping.
The Gold
Price for French, German and Italian savers just keeps on rising, gaining
for six of the last seven months.
And yet luxury car-maker BMW says it can't bear a further
"sustained rise" in the Euro above $1.50 to the Dollar. Last week it
cut 5,600 jobs.
Dassault Aviation in France says it can't compete at this kind of
exchange-rate either. "The natural step is to shift to the Dollar zone
[incl. most of Asia, remember] or low-cost areas as they have done in the car
industry," said CEO and chairman Charles Edelstenne to Le Monde
last week.
"This could include parts of our factory plant and some
research tasks."
Put another way, Europe has got the worst of both worlds right now
– a high-value currency that's crimping exports, and yet surging inflation at
the very same time. So the European Central Bank needs to talk tough while doing
nothing, hoping the inflationary and currency pressures don't squash the economy
both at once.
Only this week, leading policy makers have said they are
"increasingly concerned [and] vigilant" on the impact the fast-sinking
US Dollar is having on Eurozone exports. So it's a good job the old economies
retain such political importance as well. Right?
"To have an increase in the [voting] quotas of emerging
countries – China, India, Brazil – is very difficult because the sum has to
add up to 100%," noted Dominique Strauss-Kahn, head of the International
Monetary Fund (IMF) in late February, "so some others must lose.
"The ones who are going to lose are mainly the European
countries and that is the reason why they may be reluctant [to vote for
change]."
The debate goes far beyond the IMF, however, that brave remnant of
post-war global planning. All top-level political groupings now face the problem
of too many powers, with too much at stake, all wanting to be members of the top
few spots in the "oh-so-crucial" club.
The G-7 group of industrialized nations, for instance, currently
invites three Eurozone nations to the party – Germany, France and Italy – as
well as Canada, Japan and the United States.
The United Kingdom gets to tag along too, not least because it's
still vying with China for the No.4 slot in world GDP behind the US, Japan and
Germany. It also prints the world's No.3 reserve currency, the British Pound.
And my, but how it prints it!
Growing by 12.9% in January from a year earlier, the broad supply
of Pounds Sterling has now been expanding at a two-decade record since March
2005.
No wonder the Gold
Price in British Pounds is surging alongside the UK's trade & government
deficits. But "when are we gonna get the real players, with the money, in
the middle of these [G-7] debates?" asks Jack Welch, former head of General
Electric. He was talking to Larry Summers, US Treasury secretary at the tail-end
of the last Clinton presidency, on CNBC last week.
"It seems like some of our government institutions are living
the last war, for example the G-7. Four European economies, Canada, Japan and
you guys [the US Treasury] all meet...but the money's somewhere else."
"Oh, you know how these things go, Jack," replied
Summers, former president of Harvard University and now a part-time hedge fund
consultant in New York. "It's much easier to get people in than it is to
get other people out...
"You want to have a reasonably small group. We worked with the
Canadians to set up the G-20 for exactly the reasons you give. And I think [US
Treasury] secretary Paulson is to be commended for the effort he has put into
having a regular financial dialogue with China on a bilateral basis.
"I think you're gonna see this kind of evolution. Look, if we
wanna address this issue of sovereign wealth funds – which I think is a
concern, though it's a concern that has to be kept in perspective – the way
we're gonna do it is by having dialogue with the countries that, just as you
say, the countries that have the money. Some of them are China, some of them are
in the Middle East, and I think we do need to recognize more than we probably
have before that the distribution of financial power and influence and capacity
is pretty different from the distribution of sort of political congeniality with
US interests across the board.
"That means we may need to have a somewhat different grouping
for the foreign ministers and the finance ministers."
Can political and financial power really be split into two
different groups...with the United States at the head of both, choosing its
allies here but inviting a different clique of friends there?
Perhaps with Europe gnashing its teeth about the high Euro, it's
actually time for the Dollar itself to bounce, rallying from new all-time record
lows on its trade-weighted index and forcing US Gold
Prices lower.
Sure – it might require higher interest rates from the Federal
Reserve, rather than the campaign of monetary destruction begun by Ben Bernanke
back in August. Or conversely, those new record lows in the world value of the
US Dollar might help stoke US export sales so fast, it revives the major Wall
Street stock indices and erases the last five months of losses.
No...?
Should the Dollar and Wall Street's collapse continue, meantime,
some kind of new monetary world order will only continue to look ever more
likely. Russia is preparing to price and sell crude oil in Roubles, for example,
rather than the Dollar. The Rouble might also be used as one means of payment on
a forthcoming Iranian oil exchange in Tehran, according to Iran's ambassador to
Moscow last month.
But whatever comes, and no matter what happens to the price of
Gold, don't expect the chocolate bunnies of today's monetary order to vote for
either Easter or a heatwave...let alone both at the same time.