G20 -- Obama and Brown marginalised

Obama and Brown are being increasingly marginalised by the rest of the world in pushing for further fiscal easing. The Chinese premier, the EU and King, Brown's own head of the UK central bank are all against further stimulus. Last night Brown seemed to be pulling back. This is from this morning's FT...

He [Brown] appeared to respond to pressure from Alistair Darling, his chancellor, and Mervyn King, Bank of England governor, in conceding on Wednesday there was little room for Britain to announce a second wave of tax cuts or spending increases.

Speaking in New York, he sought to shift the political focus from a fiscal stimulus to other mechanisms intended to kickstart the economy, amid forecasts that the UK deficit could rise to 11 per cent or 12 per cent of gross domestic product next year.

Asked at a Wall Street event about Mr King’s warning against a big new fiscal stimulus, Mr Brown said: “If you put that question to Mervyn King, he will say ... that we've got to be ready to take the action that is necessary to restore [economic] growth.”

Beware, this isn't quite the U turn you thought. This does NOT rule out further Quantitative Easing, in fact it almost rules it in. What happened is that yesterday's gilt auction (these are new 40 year Government bonds being auctioned off) failed to find enough buyers. This is very unusual and is a signal from the world's financial community that British debt isn't as safe as it could be. Since the only way that Brown can finance his proposed tax cuts and public spending rises is by borrowing, that's why he appeared to be pulling back last night but be clear, this does not rule out QE. QE is the most dangerous of the stimulus methods being used and has the risk of causing inflation. There have been many press reports in recent days that strongly suggest we are in an inflationary phase already with consumer prices rising, auto manufacturers putting up their prices significantly, and distributors announcing that once present stocks have been sold, prices will rise due to a fall in the value of the Pound.

What worries the world right now is that the US (and the UK) will inflate (devalue) away their debt. But maybe that's the only option open to them? That's why there will be considerable interest in some new reserve currency. It has to happen, and happen fairly soon. I think that it will probably be based on some kind of gold standard because there is no other way that isn't too contentious -- at least, not until the Dollar crisis plays out and the world's next obvious choice as a reserve currency emerges (the Yuan?).

I leave you with this thought. Large heavily-populated towns and cities in the USA would become literally uninhabitable without air conditioning and cars to carry people around. Imagine the consequences. They need oil in very large quantities. If Obama is going to inflate away US debt by devaluing the Dollar then clearly imported oil is going to be very much more expensive - by a factor of five times or more, taking it to truly unaffordable levels, for air conditioning. It is unthinkable that the administration hasn't already figured this out, so what are their plans?