Investors
in the United States and elsewhere are observing a rise in the price of commodities. The government in America and elsewhere will explain it is the result of weather conditions or temporary shortages due to a variety of reasons. What officials will not tell you is that it is partly the result of a currency in retreat. Commodities around the world are priced in United States dollars. It still is the reserve currency of the world. The government and the elites will continue to deny that the fiscal deficits and massive debt that the United States has run up will impact the world economy. These same people will also repudiate the idea that the policy of quantitative easing (QE) is creating the ground work for not only the destruction of the American dollar, but a general rise in commodity prices world wide.
The program of quantitative easing is not limited to the United States. The printing presses are also at full throttle in Japan. To encourage economic growth, the Bank of Japan will introduce $1.4 trillion USD (United States Dollar) worth of new currency. It will double the country’s money supply. The intent is to devalue the yen, thus making Japanese exports cheaper. However, it will also make imports more expensive. Japan is extremely reliant on foreign commodities for industry and manufacturing. This is particularly the case with the price sensitive energy markets.
In the United Kingdom the quantitative easing program amounted to 375 billion British pound sterling the equivalent of $640 billion USD. Government officials in the U.K. admitted that the scheme so far has added 4.2% to the inflation rate since 2009.
German Hyperinflation In The 1920’s
Only in Europe does the Central Bank resist the siren call of quantitative easing. The European Central Bank sees Q.E. as a policy of last resort. The reluctance there is driven by German caution in simply printing money. It also is the reflection of a bank that sets fiscal policy for 18 countries, that still retain fiscal sovereignty. As a result, a policy of Q.E. would be more complicated in the Euro-zone. It would require the European Central Bank (ECB) to purchase debt from 18 different countries in amounts linked to the size of their respective economies. So the ECB has decided instead, to continue to reduce interest rates even further. The ECB is the first major bank to introduce negative interest rates on banks that deposit money with the Central Bank.
The main lending rate of the ECB is at a new low of 0.15%. Money market rates in the Euro zone are now almost near zero. These measures it is hoped, will stimulate the economies of Europe especially those in the Southern Europe that are still reeling from the 2008 debacle.
Mainstay economists insist that the fear that Q.E. will create runaway inflation, has been totally discredited. However since the financial meltdown of 2008 where has economic growth returned to somewhat normal levels? Once economic recovery takes hold in the majority of the advanced countries of the world; that is the time when investors will see the true effect of the policies of Q.E.
In the United States the first quarter saw a contraction of 2.9% in the Gross Domestic Product (GDP). The second quarter GDP surge of 4% averaged with the first quarter allows for a growth rate of only 1.1% for the first half of 2014. It is also most likely that second quarter growth will be revised downward. If the United States grows 3% for the second half of 2014, the average for the whole year will only be 2% economic growth. In addition, the second half 3% growth rate is deemed optimistic by some experts. It is important to note that the United States Department of Commerce is now reporting that the GDP decline in the first quarter was only 2%. However,what cannot be denied is that the United States has still not recovered economic growth rates, that would be deemed normal by historic standards
When economic growth rates return to their historic averages, demand for commodities needed for manufacturing and industrial expansion will surge upwards. This will cause a drop in unemployment which in turn will bring more consumers back into the market place. The demand for more consumer goods will also add pressure to the supply of world commodities. After stockpiles are exhausted consumer demand will outstrip supply on many commodities. This will bring about a general rise in prices. As more of the population rejoins the workforce, more of the excess money generated by Q.E. will be injected into the economy. Inflation rates will then surge upwards. This in turn will force a major increase in the price of commodities across the board.
Countries that had engaged in policies of Q.E. will find themselves awash in currency with inflation getting out of hand. The value of these currencies will be dropping precipitously at the same time. Each nation then will need to intervene to attempt to stave off a collapse of their individual currency.
Policies of quantitative easing is not limited to the economically advanced countries of the world. Chinese officials are also having growing concerns about the weakness of the financial system caused by over lending and the subsequent mounting bad debts. As in the United States and elsewhere the Central Bank of China is looking at making direct purchases of bonds and other assets. The Chinese hope that the policy once initiated will support key sectors of the economy. Especially if the slowdown in economic growth rates in China continues, or worse yet accelerates.
The Central Bank of China already has a swollen balance sheet if one compares it to what was held in 2008. It matches what the Federal Reserve bank has done in the United States. Of course the Chinese have purchased foreign bonds to hold down the value of the yuan. The Chinese currency has already declined by 3% this year against the dollar. The Chinese are allowing this to occur to protect their export sector. This is creating a backlash elsewhere, but if the Chinese begin to purchase their own bonds and assets no one can complain about that, considering almost everyone is doing it.
Currencies are declining in value almost across the board in the developing world as these nations take steps to also remain competitive in world markets. Brazil, Poland, Russia, Turkey, India, Indonesia, Mexico and Thailand have all seen their currencies in retreat, especially now that Q.E. in the United States is slowly winding down.
Devaluation of national currencies seem to be the new economic order across the world. The Euro has maintained value, because it has not yet fully engaged in policies of quantitative easing. The currency of the United States has maintained more value than was expected, as a result of so many other nations following policies that in the end devalue their currency. It has become a race to the bottom among nations to maintain and possibly grow market shares in world exports.
When the world economy begins to grow faster again, there will be inflationary pressures across the board. Investors that had the foresight to commit funds towards commodities, will be in a strong position to reap major profits.