Kleinwort Benson: The first whiff of policymaker panic?
|
|
RECENT weeks have seen several countries take a clear step towards an easing of economic policies. Japan was first; following a party leadership challenge to the current prime minister (which was defeated), the prime minister immediately reversed his economic policy of not intervening in the foreign exchange market and ordered a massive $20bn operation to sell yen and buy dollars in an effort to push down the value of the yen – such a policy has always been actively discouraged by the Bank of Japan, but the government had indicated that it will do more in an effort to boost the Japanese economy. Then the Federal Reserve at its recent meeting indicated by a change of language in its press statement that it too was moving closer to further quantitative easing – in particular it cited its desire to push up the rate of inflation, which it feels is dangerously low. In Europe the European Financial Stability Facility is now in a position to bail out heavily indebted countries that can no longer raise debt in the financial markets at a sustainable interest rate – it will do so by itself raising debt finance in order to provide loans to these struggling sovereigns. In the UK, the tone of the minutes of the Monetary Policy Committee continues to suggest that it too stands ready to ease policy further if the economic picture deteriorates. Even in China, where growth is still very strong, although slowing from levels which were too strong, the Chinese determination to maintain its exchange rate to the dollar at very stable levels, combined with recent dollar weakness, has meant that its trade-weighted exchange rate is also being managed lower. It seems that the every country in the world wants a lower exchange rate and is prepared to actively use economic policy to achieve it. By definition though, only some can succeed. The clear conclusion is that this combination is good for gold as the only currency whose supply cannot be inflated. Paul Volcker recently noted with some concern the fact that despite large budget deficits and very easy monetary policies all around the world, the global economy still cannot fully employ itself. Now the engine of US consumer demand, which was the ability of the US public to use their home as an ATM, is broken, there is no clear driver of demand for the world economy – everyone wants to export their way out of this crisis on the back of some other country’s domestic demand. It is this problem which seems to be leading the recent trend of policymakers to feel the need to be doing something. It is clear though that there is very little international co-ordination in any of this – each national government is feeling concerned and seeking to do something to help out their own economy whilst simultaneously hoping that someone else is doing more. For the world economy this may not amount to very much but for financial markets in the shorter term current policies offer hope for all three of the equity, bond and gold markets, which could somewhat paradoxically all rise at the same time. This note is intended to give an insight into the thought processes that lie behind our investment views and our investment strategy. They do not necessarily reflect the current investment policy of Kleinwort Benson. This note is intended for information purposes only and does not take into account the investment objective, the financial situation, or the individual needs of any particular person. Investors should obtain independent advice based on their own particular circumstances before making investment decisions. More articles in
Sectors
CommentsIf you'd like to leave a comment, please register now for free or login
|
