Friday, November 12, 2010

An Excellent FT Lex Column about the G20 Circus and Real Problems


“Policymakers gathered in Seoul for this week’s G20 meeting may have been empathising with the circus entertainers who perform the delicate balancing act of simultaneously spinning many plates on top of long sticks. There is much that is up in the air: the next Eurozone crisis may be imminent as speculators increase their bets on a default by Ireland, the shockwaves of the US’ $600bn QE salvo in the ongoing currency war are reverberating around the world and the latest data from China has shown unequivocal evidence of vast and persistent imbalances. The president of the World Bank hinted that a return to the gold standard or a currency peg based on gold may be the answer, but besides being politically impossible, such a move would be viciously deflationary. Meanwhile investors are pouring the unnaturally cheap financing available in the US into emerging markets as the positive underlying rebalancing between rich and poor continues apace.”

I agree: China’s “Bretton Woods 2” type of exchange rate policy (a quasi fixed parity of the Yuan vis-à-vis the dollar) pushes the US Federal Reserve towards more monetary easing (i.e. money creation) in order to depreciate the dollar and stimulate the economy, also stimulating the carry trade (borrowing cheap liquidity in the US to invest in emerging economies. The US financial system earns fat profits recycling the Chinese savings towards other emerging markets. Meanwhile, the next step of the euro’s crisis could come from Ireland, even before the widely anticipated second act of the Grece’s crisis. And overall, European governments and ECB continue to advocate self-defeating deflationary austerity while preparing to borrow more in order to bail out Ireland.

That’s why so many investors currently see gold as the ultimate refuge, but an attempt to revive the defunct gold standard would bring about the ultimate disaster.

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