As economic data deteriorates and markets decline, governments and multinational agencies are facing an immediate dilemma. They can either do nothing and risk a global depression—or they can intervene with more monetary and fiscal stimulus to postpone dealing with the problem a few months into the future. The choice of which direction we are headed has already been decided.
A tidal wave of inflation of the global money supply is on its way—soon. It will be on a massive scale never before seen.
First, here are some of the announcements pointing out why we are facing a tsunami of quantitative easing.
At a G-7 meeting in Marseille, France on September 10, International Monetary Fund (IMF) head Christine Lagarde urged governments to “act now, and act boldly, to steer their economies through this dangerous new phase of recovery.”
A September 22 announcement from the G-20 Group of Nations included the statements that they are committed “to taking all necessary actions to preserve the stability of banking systems and financial markets” and that they are also “committed to a strong and coordinated international response to address the renewed challenges facing the global economy, notably heightened downside risks from sovereign stresses, financial system fragility, market turbulence, weak economic growth, and unacceptably high unemployment.”
At the annual joint meeting of the IMF and the World Bank on September 24, US Treasury Secretary Tim Geithner warned that a failure to manage Greece’s financial problems could lead to “cascading default, bank runs, and catastrophic risk.” On top of that the British Chancellor of the Exchequer, George Osborne, stated, “there is recognition here that the global crisis has entered a dangerous phase.” He further said, “the countries of the Eurozone understand that they need to take decisive action… We’ve got weeks not months” to sort out the financial problems of the nations using the Euro.
Federal Reserve Chair Ben Bernanke had studied the Great Depression in depth. His greatest fear is the specter of deflation. He stated in the past, “By increasing the number of US dollars in circulation, the US government can reduce the value of the dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper money system, a determined government can always generate higher spending and hence positive inflation.”
Consequently, don’t expect the Fed to do nothing. John Williams, a respected analyst of economic statistics stated, “The Fed and the U.S. government still will provide whatever guarantees are needed, whatever money has to be created, spent, or loaned out, in order to prevent systemic failure. This includes any sovereign or non-U.S. bank bailouts required to prevent systemic collapse. The costs of such actions remain inflation or U.S. dollar debasement. They can continue only so long as the global markets allow them, until the U.S. dollar comes under massive, sustained selling pressure.”
Over this past weekend, Dexia Bank Belgium was nationalized by the Belgian government. In July, the results of the latest round of stress tests conducted by the European Bank Authority were reported. Of the 91 banks tested, Dexia had been considered to have the second strongest financial position of all of them. Since July, a significant percentage of these 91 banks have had their credit ratings reduced. The reason for the dire problems is that large quantities of European sovereign debt owned by the banks have not been written down to their fair market values. Dow Jones recently cited a research report prepared for Congress stating that US banks hold $641 billion in toxic European debt.
On October 9, British Prime Minister David Cameron said in a Financial Times interview, “Time is short, the situation is precarious.” He proposed an aggressive five point program that he wants implemented in its entirety. Although Cameron did not specifically say so, his recommended increase in the Eurozone bailout fund seems to accept that the Greek government will inevitably default on its debt.
Second, here are the nuts and bolts of specific quantitative easing programs that are in the works.
There are already plans to increase the size of the Eurozone bailout fund and the European Financial Stability Facility by as much as $2 trillion.
Last week the British government announced a new stimulus program in excess of $115 billion.
The Federal Reserve may inflate the US money supply by another $2 trillion within the next year to help President Obama’s prospects for re-election next November.
Japan and China are also likely to announce new rounds of inflation of their money supplies in order to artificially stimulate both of their economies.
In total, the increase in the world’s money supply over the next year may be as much as $6 trillion, about 10% of worldwide Gross Domestic Product. Inflation on such a scale would cripple the value of currencies just about everywhere.
Beware of false impressions. On Monday, French President Nicolas Sarkozy and German Chancellor Angela Merkel met and made a joint announcement. They claim that by the end of October they will reach an agreement on a comprehensive package of measures to stabilize the Eurozone, which would include any needed recapitalization of European banks. Their goal is to stabilize the value of the Euro. The US stock market rose almost 3% on Monday on this news.
Don’t believe one word of this announcement!
The Germans and the French are far apart on their approaches to managing the crisis. The French claim that their insolvent major banks do not need recapitalization and are advocating a course of action that will allow the French government to maintain its AAA credit rating. In order to accomplish this goal, Greek government debt must be bailed out with only governments taking losses on Greek debt, and then only equal to 21% of the face amount of the debt.
The Germans are prepared to let Greece default on its debt, advocating that all Greek government bondholders accept a 60% loss, including all of the European and US banks holding this debt. Generally, the plan would pretty much write off losses on sovereign debt from Greece, Ireland, and Portugal, while trying to prevent the contagion from spreading to other nations.
Another major difference between the two governments is the decision on how European banks’ capital needs will be met.
There is a good reason that Sarkozy and Merkel did not go into any details of the agreement they claim they will announce within three weeks—and that is that there is no agreement! They can’t even seriously try to seek an agreement until officials from the IMF, the European commission, and European Central Bank successfully conclude their meetings with Greek government officials.
I’m going to stick my neck out and predict that there will be no genuine resolution of the Greek government’s problems, despite any forthcoming “official proclamations” trying to pretend otherwise. Therefore, Merkel and Sarkozy will not be able to submit comprehensive proposals at the summit meeting of European Union governments on October 17-18. Sure, they will throw out some bits and pieces, but I don’t expect to see all problems addressed. As a result, the two European leaders will not be able to make their promised final complete announcement just before the November 3 meeting of the G-20 Group of Nations.
Instead, expect that any agreements will at best cover just a few of the crises. They will not solve everything. However, I expect there to be a pretense that more has been accomplished than will be true. There will probably be statements that some of the details need to be worked out, which will be a deliberate disguise of the fact that there is disagreement on entire programs. So, the end of October deadline will not be met.
The crises could hit a peak as early as the European meeting next Monday and Tuesday. Or a major collapse could hold off until November 3. Whatever happens, the value of paper currencies and bonds will fall. Expect stock, commodity, and precious metals prices to rise as people abandon currencies and bonds.
At the most optimistic, the tidal wave of inflation might be postponed for a few months. But, there could literally be only days left to acquire gold and silver at current price levels.
Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” a monthly newsletter covering rare coins and precious metals. Past issues can be found online athttp://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online athttp://numismaster.com/ under “News & Articles”. His bimonthly columns on collectibles can also be read athttp://www.lansingbusinessmonthly.com under “Articles” and “Department Columns.”His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.