Thursday, January 22, 2009

A "Safe Haven"

Is there a safe haven? Somewhere where to transfer our surplus (for the lucky ones who have a surplus) or for the ones who Would like to make a surplus for rainy days?
“There is no surer source of commercial distress, than the creation and extension of fictitious capital; and of an appearance of prosperous trade without the reality, which is the inevitable consequence of a paper currency.”
"By reducing interest rates far below zero in real terms, by doubling the monetary base and by blowing up the Fed’s balance sheet to three times its normal size, the capital is even more fictitious – and the United States will shortly reap the appropriate reward in an uncontrollable upsurge in inflation."
"The effects of combined monetary and fiscal profligacy will be manifest in the bond market. If inflation is rising towards double digits and government financing needs are $1.5 trillion annually, it seems impossible to imagine that investors will be willing to accept less than perhaps an 8% yield on U.S. "
Even the People’s Bank of China will cease to regard as a safe haven an investment that loses half of its principal in less than 2 years.
The safe haven is certainly not Spain or Italy.
Russia looked attractive for a few years, but can hardly now be regarded as a haven of any kind. Brazil is a lot safer than it used to be, but you don’t get to be a safe haven with a BBB credit rating. Australia lost its superior management a year ago and now appears to be in the usual Anglosphere trouble.
Germany. Fiscally very sound – budget deficit of only 2% of GDP in 2009, even in a deep recession and after a modest stimulus plan.
Germany’s total public debt is $2.2 trillion, so the market is more or less big enough to absorb a substantial percentage of even the largest central bank’s investment. Finally, the country did not have a housing boom in the 2000s; house prices recently were lower than a decade ago.
Germany after 2000 solved its economic problems, whereas the United States went on a spending spree.
The safe haven is about to move, and American taxpayers and savers will pay the price of that move in higher borrowing costs and lower equity prices for decades to come.

Liberally taken by Martin Hutchinson

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