A long and deep recession, possibly a depression is being forecast across a broad front. But the real picture is different. Governments and central banks are not only committed to doing all in their power to resurrect growth and give their different economies ‘traction’ but have begun the vigorous implementation of reflation. They will do “whatever it takes” to get growth and confidence re-established globally. In essence, the crisis appeared quickly and devastatingly out of greedy lending by banks loaning to uncreditworthy individuals on a broad front. It has to be rectified just as quickly because banks control the lifeblood of liquidity in the economy and they will place their financial health well before that of the broad economy and their customers. They have been saved by central banks to date, but it is resumption of growth and confidence, not healthy banks, that must be achieved first. In the major economic blocs of the world actions are underway, to differing degrees, to force the banks to lend or be bypassed, so that the damage they can inflict on growth, through congealed debt and their instruments, is neutralized. The banks have made it opaquely clear, that they will not lend in such a way as to rectify the underlying crises of a dropping housing market and its ‘ripple’ effects on consumer spending. Governments do see banks as an obstacle to the resuscitation of growth and confidence, so their powerful influence over the state of the economy has to be reduced considerably before this can be done. And it has to be done before any semblance of recovery can be achieved again. The longer the process takes the more difficult and lengthy the solution will be.
Just take a look at the world’s three main economic bloc’s efforts at stimulating growth again:-
- China said it would spend an estimated $586 billion over the next two years, roughly 7% of its gross domestic product each year, to construct new railways, subways and airports and to rebuild communities devastated by the May 2008 earthquake in the southwest. Their reasoning is as follows, “Over the past two months, the global financial crisis has been intensifying daily,” the State Council said. “In expanding investment, we must be fast and heavy-handed.” But in China, much of the capital for infrastructure improvements comes not from central and local governments, but from state banks and state-owned companies that are told to expand more rapidly. China maintains far more control over investment trends than the U.S. does, so they can unleash investments to counter a sharp downturn. The Chinese government said the stimulus would cover 10 areas, including low-income housing, electricity, water, rural infrastructure and projects aimed at environmental protection and technological innovation, all of which could incite consumer spending and bolster the economy. The State Council said the new spending would begin immediately, with $18 billion scheduled for the last quarter of this year. In addition, China has already announced a drastic increase of the minimum purchasing price for wheat from next year, by as much as 15.3%. There is also going to be a substantial increase of the purchasing prices for rice, said the National Development and Reform Commission. In the meantime, they also announced plans to stabilize prices for fertilizers and other agricultural means of production, to ensure that the grain price increase will not be eaten away by input making the price increases real income gains for farmers. This will shore up domestic demand and head off any social unrest in the rapidly growing economy. The government there sees its task to harness all sides of the economy to produce growth while they pull their 1.4 billion people out of poverty. Their recent history confirms their ability to succeed!
- In Europe, with a more Socialist environment than the U.S.A., [meaning greater central government control over the economy], we believe that after bailing out so many European banks, a very heavy pressure will be put on banks to vigorously lend down to street level again. President Sarkozy’s threat to seize banks that don’t lend gives meat to this forecast. In Britain, nationalization lies ahead of suffering banks and the end of senior executive careers, if they don’t lend freely. Despite the lack of the same effective management [ignoring politics and commerce and other capitalist principles] of the economy in Europe as in China, governments will act in the same way as the Chinese are, eventually, to make growth and confidence happen again. They are committed to this, at last. So 2009 will be the year of reflation in the face of deflation.
- In the U.S.A., such synthesis of national institutions in fighting deflation is unlikely as the cooperation of banking, commerce, etc to focus on the underlying economic crisis would barge into so many valued principles fought for, over time. However, we have no doubt that the intransigence of such principles in the face of a decaying economy will produce overwhelming pressures on the system to revitalize the consumer and restore his spending. The government has now seen the banks follow the “profit and prudence” principles after their bailouts and their holding back on lending to safeguard themselves, first. Secretary Paulson has now faced off with them and redirected efforts to make government provided financial relief go direct to the consumer. But he is only at the beginning of this process, which must be across the entire spectrum of consumers, not simply a portion of clients of the largest mortgage providers, Fannie Mae and Freddie Mac. Indeed, the slow nature of this solution as it wends its way through political and financial obstacles, could produce a near revolutionary climate, until sufficient action is taken to re-finance the economy from consumer upwards. After all, day-by-day, solid U.S. citizens are being impoverished by the financial sector problems, not their own. As slow as the pace of support becomes, the more degenerative impact it will have on uncertainty and confidence. We have no doubt that 2009 will be remembered as the year of reflation in the face of deflation. Already, house-owning households are likely to receive direct financial aid, if their mortgages are more than 38% of income. If this is applied to all U.S. households in this position we fully expect to see hope lead to confidence, then spending, then growth. These and the suggested support of the consumer on car finance and credit cards will re-kindle spending and the economy. Such moves must convince the U.S. consumer and stop him thinking like a victim. [In the Depression of the early thirties the U.S. used, as part of its battery of tactics, paying people to dig holes and fill them in again, just to get money flowing from ground level up]. This can be implemented in the next few months and impact on the broad economy by the end of the first half of 2009, if applied properly, as government implies it wants to. If it is, then the first 100 days of President Obama will indeed be a honeymoon.
The Importance of Growth
Mr. Ben Bernanke and the governments of the U.S., the Eurozone and China have recognized in no uncertain way that confidence must be regained before growth gains traction and becomes self-sustaining. It appears that they have got the message now and will do whatever it takes to ensure the credit crisis is replaced by confidence in credit. That the banks should suffer for their indiscreet past behavior is just, for a lender should carry the same risk as a borrower.
Inflation and Gold and Silver Prices
- Reflation is vigorously being implemented across the globe, but inevitably it will come with inflation. It is impossible to say just how much money needs to be printed to counter deflation, but for sure it will be more than needed and will keep flowing until the financial sun is shining again. 2009 will probably not see inflation rise to dangerous levels, because of its absorption by deflation. But as the money fills deflationary holes, it will spread far and wide and eat into the value of debt, so bringing relief to troubled debtors in addition to direct governmental support. This will be found to be politically acceptable and will delay, if not remove, the pernicious impact of bad debt that we are seeing now. Growth and confidence are considerably more important problems than inflation. Banks have been given debt relief already and so will the consumer, because that is the only solution to the credit crunch. It will be accompanied by the cheapening of money, leading to far higher gold and silver prices than we are even contemplating now. As this is slowly realized by an ever-widening audience across the globe, gold will re-enter the mainstream of investments as an anchor to monetary values if only at individual levels. Thereafter institutions and perhaps central banks, will appreciate it fully?
- Governments have to act very fast to stop the confidence-eating impact of deflation from becoming a way of life, just as borrowing was, over the last thirty years. Consequently expect global stimulation to be put in place before the end of the first quarter of 2009. In that time we fully expect forced selling of all assets to slow to a trickle. Thereafter a positive tone will benefit gold and silver in the long-term, as well as short-term.
Let’s be clear though, there is no historic precedent to what we are about to see.
We expect gold to thrive in an atmosphere of hope, against a threatening backdrop, with the gold price realistically discounting the diminishing buying power of paper currencies.
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