Ask not what your country can do for you, but ask how you'll be forced to tackle your country's Balance of Payments problem...
ALL WAS WELL last week, as stated by no less a person than Hank Paulson, the US Treasury secretary, writes Julian Phillips of the GoldForecaster.com.
Paulson reassured us all that Fannie Mae and Freddie Mac are sufficiently capitalized. A plan was put into effect to ensure their survival, against the backdrop of the second-largest bank failure ever in the States, Indy Bank.
Unlike Paulson, many commentators now believe we will see up to 150 US banks go down in this worsening credit crunch. So Federal Reserve chairman Ben Bernanke and Treasury secretary Paulson are doing everything possible to restore calm to financial markets.
"We should consider how to most appropriately give the Federal Reserve the authority to access necessary information from complex financial institutions and the tools to intervene to mitigate systemic risk in advance of a crisis," said Paulson, stressing to US lawmakers that a longer-term regulatory overhaul was vital.
We cannot say with sufficient emphasis just how great a danger the series of events the US is going through vis-à-vis the entire world. This does not inspire confidence; it makes us expect a time of financial distress in global financial markets!
Immediately, it is causing the Dollar to sag below support in the foreign exchange markets, nearing $1.60 to the Euro once more. The United States is now hamstrung and dare not raise their interest rates to strengthen the Dollar. So with the US fighting the fires of collapsing institutions, major ones at that, the Dollar against the Euro looks like heading much lower.
The immediate answer from the Treasury and the Fed is to seek a greater degree of "regulation". This could lead to Capital and Exchange Controls such as (and worse than) those being put forward by Senator Lieberman to control speculation in commodities and foreign exchanges.
China may have $380 million invested in Fannie Mae and Freddie Mac, the two major US home-lending institutions now facing either collapse or a government rescue. But, at some point, the Chinese are not going to move their funds into the US Dollar unless they really need to. Except for those dollars they make from trading directly with the United States, it makes sense for them to accept the currencies of their non-US trading partners. However, this won't be done in a hurry for fear of damaging China's current Dollar holdings.
Please note that they hold just under $2 trillion in their reserves all told!
As one of their largest trading partners, we think that China will favor the Euro above other currencies and certainly above the US Dollar, as far as it is not going to disturb the foreign exchange markets. This will strengthen the Euro still more. Keep an eye on the foreign capital inflows to the States!
But will Europe and a stronger Euro escape the travails that are now striking the United States? A stronger Euro has not, so far, defended the Eurozone from a 16-year record inflation rate. But it is directly hurting its international trade, something it can't afford. Europe is still on track to raise interest rates further, and attracting the 'carry trade' to borrow in low interest rate currencies (such as the Yen and the Dollar) and invest them in stronger currencies such as the Euro, which takes the Euro higher still.
Yes, the Eurozone economy appears stronger at the moment, as the European Central Bank (ECB) has targeted inflation as public enemy No.1 irrespective of the harm that higher interest rates are doing to European growth. Yes, a stronger Euro should lessen the rising Dollar-price of oil and food, which are priced in the US currency. But at some point the damage to international trade will force the ECB to take actions to lower the Euro and import inflation and the problems of the United States.
These problems have already hit the Eurozone through the' credit crunch' now savaging the global financial markets. Banks all over Europe have taken blows to their credibility through bad investments in the States. We expect to see all nations from China through Europe feel the ripples from these crises.
In the early part of last century, exchange rates were fixed and capital flowed freely across borders and quality goods won foreign orders. Each nation then competed only on the basis of the quality of its products. Now with floating exchange rates, product quality is put in second place to price, giving nations incentives to devalue, competitively. But with similar costs in Europe to the United States, the scene is different.
Europe is being hurt by the fall in the Dollar and will take action to halt this pain at some stage. And that is where the real inflow – the inflow of maladies striking the USA – will come from.
Any stabilisation of the EUR/USD exchange rate will allow capital inflows and outflows to cascade in all directions, undermining economic stability still further on the banking front, the equity and fixed interest market front, as well as on the prices fronts, bringing about new regulations, controls and limited freedoms in markets such as has not been seen since the last world war.
We are rushing headlong into an era of governmental management of financial markets across the globe, with national interests overriding those of the individual, giving a new meaning to President J.F.Kennedy's words, "seek not to ask what your country can do for you, but ask what can you do for your country".
And your countries will ask for a lot, whether it be the Eurozone or any other nation with a rapidly decaying Balance of Payments.
The US is the fulrum of the global economy still, and the Dollar remains the global reserve currency with the world's economic system standing on it. So any financial malady in the States will badly hit all other national economies right across the globe, including Europe!
At no time more than now, investments in Gold and silver will give investors a protection for their wealth as never before. We do not expect to see gold in three figures for much longer and thereafter it will be a simple piece of history. Silver below $20 will likewise be something of the past!
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