-- Posted Monday, 13 October 2008 | Digg This Article
| Source: GoldSeek.com
Oct 13 a.m. (USAGOLD) -- The G7 met over the weekend with the hope of re-instilling confidence in global financial markets. The communiqué was the standard "we're prepared to do whatever is necessary" message. Of course no details were provided, but what is abundantly clear at this point is that they're prepared to throw as much money at the crisis as they possibly can.
The limits on dollar swap lines have been completely abandoned. According to this morning's press release, "swap lines between the Federal Reserve and the BoE, the ECB, and the SNB will be increased to accommodate whatever quantity of U.S. dollar funding is demanded. The Bank of Japan will be considering the introduction of similar measures." (Emphasis added).
These latest measures come on the heals of last week's announcement by the ECB that they would provide unlimited euro funds to financial institutions. This morning there is also a Eurozone bank rescue package on the table that will be in excess of €1,400 bln.
The UK has already announced a £500 billion bailout of their banking sector. The plan includes provisions for the government to make direct investments in RBS, HBOS and Lloyds.
Unlimited dollars. Unlimited euros. All but unlimited sterling. We are talking about a global re-inflation on a massive scale. I think everyone would agree that stabilizing the current situation is of paramount importance, but we also must consider the longer-term implications of these actions.
After all, loose credit and expansionary monetary policy here in the US are arguably the root cause of the crisis. I'm not sure how reducing interest rates further and pumping massive amounts of liquidity into the system are going to do anything other than potentially forestall the day of reckoning. Of course the risk is that the delayed reckoning is even more cataclysmic than the one we are faced with now.
With all this newfound money sloshing around the system it's hard to imagine how we'll be able to avoid significant inflation. While the G7 is at least attempting a 'we're all in this together' tone, things could easily deteriorate into a competitive currency devaluation as countries scramble to mitigate the effects of the global recession that seems to be at hand.
We've recently seen gold set new all-time highs against euro and sterling. Gold nearly set a new record high against the Swiss franc. Given ongoing strong demand for physical gold and incredibly tight supplies, one has to wonder how long the dollar gold charade can be maintained.
Government intervention to prop up the global banking system comes at a price. Arguably the systemic risks remain, but there are increasing growth and price risks. Push on a balloon at one point and it bulges at another.
I'd like to think that the central banks are simply attempting to provide themselves some breathing room with the intention of finding a long-term solution for this crisis. Once the immediate storm has passed, that all of this liquidity will be systematically drained as market conditions provide the opportunity.
Of course, monetary discipline is one thing that has been sorely lacking over the past decade. Hence the predicament we find ourselves in today. I don't think newfound discipline is something that can be counted on. Therefore physical gold will remain the best choice for wealth preservation.
Gold Market Movers:
Germany unveils €500bn rescue plan
Spain provides up to €100bn of bank guarantees
UK launches £37bn bank rescue
Gold will thrive on dollar flight
Fannie, Freddie to buy $40 billion a month of troubled assets
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-- Posted Monday, 13 October 2008 | Digg This Article | Source: GoldSeek.com
