Tuesday, October 6, 2009

Where did all the money go?

some pretty interesting news over the last few days.

First off - american bank insurance.

the FDIC is, essentially, bust. It has enough reserves to cover a few more banks going bust, but given that over 100 have gone bust this year already, chances are they're going to run out of money. Who is going to stump up the shortfall? I'll give you a clue - it's not going to be the banks.

Second - gold prices.

It's been a fair set of up and down swings recently, but given the mind-bogglingly huge amount of money the US, UK and other central banks are printing and releasing into their economies, supply inflation was inevitable. Price inflation has been "negative" for the last year, but anyone who thinks that can continue given that house price falls have mostly been pegged by the governments and banks, and given that oil prices are double their lows from last year and moving up again - well, I think it's pretty safe to say that the combination of those three things only points one way, and that's big big inflation in the coming couple of years.

The governments will do everything they can to lie to the general public about the reality of this, and any business (take Nationwide as an example) that has a vested interest in green shoots, recoveries and the like will be tooting the "everything is fine" horn - but it's not. It's a long, long way from fine.

Lastly - the dollar as a world currency is beginning to show cracks.

The Chinese have a huge vested interest in helping maintain the value of the dollar, due to the massive amount of reserves they are sitting on. However, if the Fed continue to print money, China know that their stock of paper will dwindle in real value, and fast. They will have to shift from relying on exports to internal consumption to maintain growth, but given the poverty gap of the majority of their citizens compared to most first world countries, they can do that in spades as long as they can afford the energy. Which leads to the conclusion that they will most likely want to separate their dollar reserve value and their energy costs, and unless they cash in those paper reserves, the only other alternative is to stop buying oil in dollars.

Many other governments are talking about pricing oil in a basket of currencies, and if this doesn't happen soon I'll eat my gold.

Gold may be a pretty bad hedge in times of inflation (historically it's been good and terrible depending on circumstances) but there's one thing that's nigh-on useless in times of inflation, and that's cash in the bank.


  1. Tim,

    You might also find this interesting - CA property vs. gold since 1975 - http://paul.kedrosky.com/archives/2009/06/california_hous_1.html, and there's a more detailed (and broader) analysis here - http://seekingalpha.com/article/163166-if-housing-were-priced-in-gold

    I was having a chat with a friend who lives in Singapore a few weeks back, and he was saying that all the Indian IT contact workers they have there rush out every pay day to spend their entire disposable income on gold.

    Another friend has recently been involved in the launch of the WoCU, a synthetic world currency unit (20 countries, which turns into 15 currencies [as 6 are in the Euro], balanced quarterly against IMF GDP figures). The point of the WoCU is to reduce FX exposure volatility, and the cost of hedging (which rises as the square of volatility) for corporate treasuries. Watch out for oil contracts in WoCU instead of $. http://www.wocu.com/

  2. http://www.freddestin.com/blog/2009/10/boring-is-good-a-global-view-of-the-housing-bubble.html might also provide some interesting perspective on the property angle.