Easy does it
September 24th, 2010
The world’s authorities are all worried about slowing growth. They mainly have the same remedy – lower currencies allowing more exports to boost jobs and prosperity. China is trying to keep the yuan down. Japan has recently intervened in a very public way to lower the yen. The US and UK authorities have floated the idea of more quantitative easing, which could have the side effect of lowering their currencies. Even in Euroland there are voices and forces that want a lower Euro to relieve the pressure on the struggling southern economies of the zone.
The truth is they cannot all devalue against each other. They are all busily devaluing against gold. Nor can they all expand by exports, without some of the countries expanding internal demand in imports. They also have to watch out for inflation. India already has a bad dose of it, and China is in danger of catching the same disease. Food prices generally are on the rise.
The US is in pre election mode. Mr Obama is seeking more of his conventional stimulus medicine before he may lose control of Congress. He wants to spend and borrow more in the public sector, and is doubtless happy to see the Fed contemplating further monetary easing. In the UK a government committed to spending and deficit control revealed that public spending was 11% higher in August 2010 than in August 2009, with debt interest a particularly lively contributor to the increases. As the UK government approaches its October 20th deadline to reveal slower growth in public spending in future it is also doubtless happy to see the Central Bank considering more monetary easing. Some will welcome easier money to offset the spending reductions they will be making in planned public expenditure.
In the EU realists understand that the crisis has been managed but not solved. Many still fear a Greek rescheduling of debt at some stage, as the Greek public finance numbers still look exposed. Ireland is wrestling with its underwriting of banks that are large in relation to the National Income. The emerging European Central Bank is gradually gaining powers to print money and buy in bonds, creating a more unified approach and making it more difficult for the prudent countries to back out of some indirect support for the weaker zone members. There could still be another market wobble or loss of confidence.
On the other side of the world India and China are in inflation fighting mode. India faces high profile criticism of its Commonwealth Games preparations, growing concerns about rising food prices, and remains behind the pace when it comes to raising interest rates to curb price rises. China has taken some of the heat out of its economy by direct action on the banks, but is not yet convinced it has done enough to turn the inflationary tide.
The world is still very divided between the exporters and the importers, between the borrowers and the savers. All the time all the world wants to be savers and exporters, there will be tensions. All the time the western economies fall back on the old policy of borrowing and spending more, confidence will remain fragile.
All this continues us in our resolve to run balanced portfolios. The recent run up in the prices of riskier assets, especially shares, inclines us more now towards safer assets again. Corporate bonds and emerging market sovereign debt offer good yields at a time of low income returns on investments generally.
