Sailing Without an Anchor!
– Up until the early 1970’s, our planet followed
the Bretton Woods agreement of international monetary management.
This system sought to secure the advantages of the gold standard
without its disadvantages. The US dollar was linked to gold
at the rate of $35 per ounce of gold and other nations pegged
their currencies to the US dollar. At this fixed rate of US$35
per ounce, foreign governments and central banks were able
to exchange dollars for gold. Bretton Woods established a
system of payments based on the dollar, in which all currencies
were defined in relation to the dollar, which was itself convertible
into gold. The U.S. currency was now effectively the world
currency, the standard to which every other currency was pegged.
As the world's key currency, most international transactions
were denominated in dollars.
During the 1960’s, the US accumulated
massive deficits and when the French demanded gold in exchange
for US dollars, the US refused to redeem its dollars in gold.
On 15 August 1971, US President Nixon shut the “gold
window”, thereby removing gold from the monetary system.
The result was inevitable – currencies started floating
against each other and without gold as the anchor, nations
gave up on their monetary discipline. A fabulous new era of
“endless prosperity” had arrived! Central banks
became obsessed with monetary inflation, world-trade benefited
and the world’s foreign exchange reserves exploded.
Figure 1 captures this development in all its glory. In 1971,
the non-gold reserves of all countries were worth US$100 billion
and today these have grown to roughly $4.3 trillion –
an alarming 43-fold increase in 35 years!
Figure 1: Explosion in global non-gold reserves!
As the amount of money within the financial
system increased due to the absence of gold, prices within
the economy started rising. Once currencies were no longer
linked to gold, the global economy became a ship without an
anchor, floating from one “boom and bust” cycle
to another! Rampant monetary inflation fuelled by the growth
of credit turned the capital markets into one giant casino
as punters worldwide (often loaded with credit) searched for
the next opportunity to make a fortune.
In the 1970’s, this excessive liquidity
churned out by the central banks found a home in commodities
as the price of raw materials went crazy. During the 1980’s,
investors piled into Japanese assets as stocks and real-estate
soared. And in the 1990’s, when we were ushering in
the new millennium, our world fell in love with the technology,
media and telecom sector. Each of these booms was accompanied
by rapid credit growth, heavy speculation based on unrealistic
expectations and unfortunately they all met their common fate
– the eventual bust!
Since the “tech wreck” in 2000,
this excessive capital floating around the system has found
a refuge in real-estate. Today, the public’s money is
predominantly in property and everyone is convinced that the
current boom will last forever. “What me worry? Nah,
real-estate always goes up!” seems to be the common
argument. Allow me to share a secret – no asset-class
goes up in a straight line and property investors may be in
for a rude shock if interest-rates continue to rise, which
in my view is inevitable.
History has shown that rising interest-rates
have always been bad news for stocks, bonds and highly-leveraged
properties. Will this time be different? I guess we’ll
THE FUTURE – I must admit
that I don’t have a crystal ball, but wait, neither
does anybody else. In the business of investing, we’re
always dealing with change and all we have in our arsenal
are probabilities based on the ongoing developments around
us. At present, I’m most certain about the following
mega-trends, which are likely to intensify over the coming
• Transfer of wealth from the West to
the emerging world
• Transfer of capital from financial to tangible assets
I base my above forecasts on the fact that due
to globalisation and the opening up of China and India, 2.3
billion people have now entered the workforce and these people
are hungry for success and a better quality of life. After
having lived in dismal poverty for decades, the middle-class
in these developing countries has now “tasted blood”
and it is determined to catch-up with the West.
To be perfectly honest, China is much more developed
and its infrastructure far superior than India’s. In
fact, I would argue that China probably has the best roads
in the world. I might as well add that the same can’t
be said of its drivers!
Last week, I traveled to Suzhou (2-hour drive
from Shanghai) for a meeting with an extremely successful
Chinese businessman. Mr. Wong is the new breed of entrepreneurs
and represents modern, capitalist China. He established his
manufacturing business 10-years ago and today his annual turnover
is US$240 million. Mr. Wong is in the process of building
another factory; he has just bought a luxurious Mercedes and
his children study in exclusive schools in England! Moreover,
I was amazed to learn that one of Mr. Wong’s friends
had just built a 5-star luxury hotel in Suzhou by paying US$30
million upfront in cash! Welcome to communist China!
Let’s face it, the 21st century will belong
to China. Shanghai is a phenomenal city with countless skyscrapers,
huge shopping malls, great restaurants and an energetic population.
Even a small town like Suzhou is home to massive factories,
modern buildings and its people have an incredible work ethic.
You really have to visit China to see what’s going on
in the world’s fastest growing economy! For sure, its
vast majority is still poor and the wealth divide is getting
bigger but I am very excited about China’s future. If
my assessment is correct, the world’s oldest civilization
has a bright future.
The above is an excerpt from Money Matters,
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Puru Saxena is the editor and publisher of Money
Matters, an economic and financial publication available at
An investment adviser based in Hong Kong, he is a regular
guest on CNN, BBC World, CNBC, Bloomberg TV & Radio, NDTV,
RTHK Radio 3 and writes for several newspapers and financial
Copyright © 2006 Puru Saxena
Limited. All rights reserved