Will Europe Escape the Maladies of the U.S.?
Last week all was well, as no less a person as Paulson, the Treasury Secretary reassured us all that Fannie Mae and Freddie Mac were sufficiently capitalized. Last weekend a plan was put into effect to ensure their survival. The second largest bank failure ever in the States Indy Bank went bust. Many believe that we will see up to 150 U.S. banks go down in this worsening credit crunch.
Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson and their respective institutions are doing everything possible to restore calm to financial markets, but stressed to lawmakers that a longer-term regulatory overhaul was vital to avert future crises. "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”, Paulson said.
We cannot say with sufficient emphasis just how great a danger the series of events the U.S. 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 $ to sag below support in the foreign exchange markets, below $1.60: €1. The U.S. is now hamstrung and dare not raise their interest rates to strengthen the $! With the U.S. fighting the fires of collapsing institutions, major ones at that, the $ against the € 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 contol speculation in commodities and foreign exchanges.
China has $380 million invested in these two major U.S. institutions. So, at some point the Chinese are just not going to move their funds into the U.S.$ except for those they make from trading directly with the U.S. And it makes sense for them to accept the currencies of their trading partners rather than accept the U.S.$ from these non-$ currency nations. However, this won’t be done in a hurry for fear of damaging current $ holdings.
Please note that they hold just under $2 trillion in their reserves! As one of their largest trading partners we think that they will favor the € above other currencies and certainly above the U.S.$, as far as it is not going to disturb the foreign exchange markets. This will strengthen the € still more. Keep an eye on the foreign capital inflows to the States!
But will Europe and a stronger € escape the ails that are now striking the U.S.? A stronger € will not protect the Eurozone but will directly hurt its international trade; something it can’t afford. Europe is still on track to raise interest rates still further and attracting the ‘carry trade’ to borrow in low interest rate currencies [such as the Yen and the $] and invest them in stronger currencies such as the €, which takes the € higher still even though it lowers European inflation and prices with that strength.
Yes, the Eurozone economy appears stronger at the moment, as the European Central Bank has targeted inflation as public enemy number one irrespectve of the harm that higher interest rates are doing to European growth. Yes, a stronger € lessens the rising $ price of oil and food, which are priced in the $, but at some point the damage to international trade of the € will force the E.C.B. to take actions to lower the € and import inflation and the problems of the U.S.A.
These problems have already hit the Eurozone through the’ credit crunch’ now savaging the U.S. financial markets. Banks all over Europe have seen the blows to their credibility through investments into 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 U.S.A. the scene is different. Europe is being hurt by the fall in the $ and will take action to halt this pain at some stage. And that is where the real inflow [of the maladies srtickening the U.S.A.] will come from.
Any stabilisation of the $: € 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 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 intersts 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 U.S.A. is the fulrum of the global economy still and the $ remains the global reserve currency with the global 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!
The storm has arrived. Is your wealth effectively structured to avoid the pernicious effects of Capital and Exchange Controls? Please contact us for any help regarding these issues.
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