The present position is that the US and the UK have started a policy of printing money (QE). Both governments claim that this is to counter deflationary pressures in their economies. I do not believe that there is any monetary deflation -- while prices are falling for a few things, overall, there is underlying inflation in the economies. It seems likely that the US and the UK are intent on inflating away their debt. If that is the plan, then the likely target is an 80% devaluation of the US Dollar and British Pound. The GBP/USD pair could remain fairly constant, of course. It does not seem likely that the EU can retain a strong Euro in this scenario and that will have to be devalued, also.
We are already seeing the USD decline on fears that this is the case (and gold has been rising on the same fears). Today, the Chinese have stated that China will continue to buy Treasuries despite the warnings given by the Premier Wen Jiaboa a fortnight ago. I presume that this is an attempt to stabilise the value of the USD. One assumes that there must be a tremendous dialogue taking place between Chinese and US officials constantly and the comments made public are simply the tip of a huge iceberg of discontent.
I don't see how this is going to change US or UK fiscal policy; the policy of QE, i.e. printing money to inflate away the debt, has not been halted. We would have been told, for certain, as nobody is very happy with that policy in any case.
For now, it is all happening behind the scenes but the really important issue facing us now is inflation. The recession is happening and it will get much deeper. House prices will continue to plummet. Firms will continue to go bankrupt, workers laid off (the motor manufacturers are in terrible trouble as are most banks), and tax revenues will continue to fall. This will make it impossible for either the US or UK governments to manage without 'printing' money.
I am only posting when I have something that either confirms or changes the overall outlook. I don't want this blog to become a micro-economic commentary -- there are plenty of those and many of them are excellent (and a few cranks, it must be said).
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2 comments:
what do you mean about an 80% devaluation? Do you mean the currency buys only a fifth of what it previously did?
If the UK pound, US Dollar and also the Euro devaluate - what is there substantial enough to devaluate against?
Can you explain>
Yes, Nigel, I mean about one-fifth. It could be lower than that. There is nothing to devalue against at present unless you value against gold. The Chinese are pushing for a new reserve currency based in Special Drawing Rights but the problem with that is that the USD, EUR and GBP are already big constituents in SDRs, so where does that get us? What it DOES do is to put the issue of a new reserve currency into the middle of the world arena, and that is a hugely significant development.
China has the power to bring the whole house down (not that she wants to, I hope) but she can certainly control Fed and Treasury policy to a great extent.
I shall be following the discussions with great interest...I don't believe that anything based on SDR will be taken seriously so where will they end up? A currency tied in some way to gold, is my best guess right now. Interesting times, eh?
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