Bleak outlook
While the outlook is bleak for the financial markets, the analytics of the bleak outlook have rarely been clearer than today, and this is the really frightening point. As far as certainty goes in economics and the financial markets, one can make a bet that the US economy will go into recession — or rather that it is already in a recession as we announced it here at this site some time ago.
The bubble of all bubbles in the US housing market that came about as the result of low interest policies in Japan and the US is deflating — with dramatic impact on wealth and consumer spending.
The transfer channels in the banking system are blocked, and the money plumbers who press liquidity into the system achieve only a temporary relief. The dollar is weakening; gold, oil and food prices are rising. The worst of possible scenario looms on the horizon: stagflation.
Confidence has disappeared from the interbank market, and soon the trust in central banking that is still with investors will go down the drain as well.
The American president is most likely planning another attack. He seems to adhere an “all or nothing philsophy” and may not be too wrong in his belief that “all or nothing” is not just at stake for him, but for the United States, too. The financial and thus military power of the US will severely be amputated when the dollar loses its role as the dominant international reserve and trade currency.
All of that amounts to a bleak outlook composed of clear-cut components, components that hardly will go away in the near future. As the impotence of central bankers becomes more and more obvious, the incompetence of the government that is already obvious, will combine to turn a bleak outlook into a disaster scenario.
Gold is back on its upward track, and the dollar is back on its downward track. The stock market will be the next corner stone to fall. When the Chinese economy goes into contraction — along with most of South East Asia — a huge repatriation of central bank reserves of these countries will occur. This way the worst of all scenarios will emerge: at the very moment when the US economy is in recession, interest rates will rise.
This will affect the whole world. There will no no safe haven left. The only thing that one can look for are those areas and assets that will be affected less. Yet one winner can already be identified: it will be gold. Demand for monetary gold will rise because gold is the only debt-free monetary means of exchange, and gold will be in demand because it is the only safe store of value.
Bankers don’t like gold, central bankers don’t like gold, governments don’t like gold; they do not like gold because all of them are inflationists.
For a considerable long period, central bankers could pretend that under their shepardship, fiduciary money would be as good as gold, suggesting that when you hold dollars, you are actually holding a better kind of gold, because you also earn interest. But this belief has fallen into pieces. How high would interest rates have to rise to compensate for the risks of inflation and default?
CEI Outlook by Antony Mueller