Here is a rather interesting opinion piece from Paul Tustain from BullionVault. I am not surprised that he takes gloomy viewpoint on the global economy for 2008, after all he’s a hard-money man. I must confess that I have strong doubts that things will return to “business as usual” anytime soon. Anyways, enough of my talking, let’s hear what Mr. Tustain has to say.
“We learned yesterday that the British government’s guarantee to
bail out the creditors of Northern Rock Bank is worth a staggering
£100 billion. That’s £5,000 [$10,000] per British household.
This week the European Central Bank made $500 billion available
through money market operations. And only last week $110bn of
new money was created by central bank loans with artificially low
rates and reduced-quality security. This is money creation on an
Why is this happening now? Here’s my theory: 31 December is
a major day on the financial calendar. If you take a sample of
bonds you’ll find that a disproportionate number of them are due
for interest and/or redemption on 31st December. Redeeming bonds
is very cash intensive, and cash is not freely available in the
banking system right now.
So it seems likely that some frantic finance directors will be
working long hours to find the cash that will enable them to avoid
a default next week.
If that’s right the festive season could see the announcement of
some nasty shocks. June 30th won’t be much fun either, for the
same reasons. The credit crunch is deepening, and will go on doing
so until at least next summer.
For those of us who like to take responsibility for ourselves (it’s
called freedom by the way) it’s getting just a little tiresome
that money creation is diluting our savings, and making us pay –
again – for the excesses of the buy-now-think-later generation.
Some of us would prefer to see the government react with a shrug
and a sympathetic “bad luck” to the losers in the next financial
train wreck. But it’s not the mood of the nation. Politicians have
begun one of their competitive caring phases, and they’re rescuing
victims everywhere. Every clapped out bank, every busted pension
scheme, every industrial zombie, and absolutely every government
department will be nurtured in the warm embrace of the public purse.
This causes a natural backlash. Issuing new money reduces
depositors’ returns, prompting savers to switch to better stores
of wealth. This capital flight should be easy to spot, but
modern economic statistics can obscure it. You see, the main way
economists measure economic health is by counting the money spent in
the economy, and now that savers are dumping currency (and buying
better wealth stores) the effect is tough to distinguish from the
economist’s beloved GDP growth. Our healthy GDP figures are a
distortion, and the economy is not making a steady booming noise
but an ominous hissing – the noise of savers abandoning the currency.
You can see this at the key entry points to the real economy.
1. Oil is multiplying in price.
2. All the grains are multiplying in price.
3. All the base metals are multiplying in price.
4. Gold is multiplying in price.
5. Producer prices are through the roof.
In spite of this the monetary authorities are racing to issue more
money, and economists are clamouring for cuts in interest rates.
They’re caught ‘twixt the devil and the deep blue sea, because
although they could address these serious inflationary indicators,
doing so risks the revenge of a giant economic threat – a rout in
the housing market. And that would mean depression.
So it looks increasingly likely that low rates are staying, and
the hot global investment money, sucked in by Britain’s recent and
comparatively high interest rates, is about to quit Britain and
send the currency into a tailspin. This produces higher prices
for imported goods. At the same time our public finances are in
a serious mess, and the biggest contributor to our service-based
economy – the City – is the main victim of current turbulence.
And please don’t ask about the trade figures because they’re
It is becoming genuinely possible that people will refuse to hold
sterling for more than a fleeting moment. Inflation could turn so
severe that the ‘hyper’ prefix is justified.
I know – it’s too far-fetched to be believable. Or is it?
For 150 years the values of Western currencies have stayed way
above purchasing power parity levels with Asia. Being a developed
country is what drove this premium, as money flowed down a one way
street to our advanced economies. These were the only places where
sophisticated products could be built or bought.
Today things are different. You could measure circuit board
production in two factories in Indonesia and in Britain, and get
the output per worker priced in local currency. Multiply both by
their conversion rate into US dollars, and the British factory seems
to have produced 5 – 7 times more US dollar denominated output.
So our GDP looks good, but only through the distorting lens of a
western currency conversion. There’s another way to measure that
same output: simply count the circuit boards. Do that and you’ll
see there’s no material difference in productivity between a British
and an Indonesian worker. Perhaps the root cause of western currency
premium has evaporated, and the anomaly is now that sterling really
is 5 – 7 times overvalued against Asian money.
You could switch to euros. But looking at their policy they’re
creating as much money as the Bank of England. And the US Federal
Reserve is doing it too, while all of Asia is battling to hold
down their currencies so that their exports can continue apace.
It’s a bizarre race to the bottom for the world’s currencies.
It’s time to sidestep the financial consequences of this largesse.
What can we savers do?
If you’re as bothered as I am, then currency should be struck off
your Christmas list and replaced with something more reliably rare.
I think gold could soon look so highly priced in sterling that many
of us will be too frightened to buy it. But it isn’t there yet, so
perhaps buy just a little now, and if it makes you a small profit
it will be easier to buy a little more next month. If that makes
you a profit too, then allow yourself to build a proper stash.
I’m not sure we’ll ever again be able to buy it for much under
£400 an ounce.
I have just instructed my bank to transfer all my remaining cash
deposits to BullionVault, and I look forward to spending 2008 long
gold and completely sterling free.