The Gold Standard | Printing orgy on its way

Blogging has been a bit erratic lately because of some unexpected travel to Mumbai (Aambi valley) last week and because I was leaving my employer after 5 years and nine days. Yes, I have left Bank Julius Baer as of July 19th, 2011. I am not joining another financial market or capital market institution. I think I won’t for a while. But, never say never. Given my personal expectation of turbulent times in financial markets in the next two years, I thought it would be better to be a ringside observer than a participant. It was not a surprise to read about the myopia of the banking industry here.

It was a pleasant surprise to find TGS mentioned in the directory of best Indian blogs. My fellow bloggers at the INI have been there before and done that. It was a good motivation to begin and complete this blog post.

Today being the first ‘off-day’, I decided to resume blogging since I had not posted any comment after the US employment data. On getting up, was surprised to read that US stocks have rallied 200 points (DJIA). The ostensible reason is that the US Congress and the government seem to be reaching an agreement on deficit reduction and a rise in debt ceiling. Good news for the US. But, with the US Treasury bond yields never budging from their lows recently, I wonder if the market was already pricing in a bad outcome. It was not, in my view. But, silly me. Since when stock investors have needed rational arguments to ramp up asset prices?

By the same token, I am not sure why housing starts rising in the US should be good news when there is so much inventory of unsold homes left. Just as the rise in the Chicago PMI in June was due to auto producers producing more cars for inventory (ht: Vasan Sridharan).

With the UK economy in doldrums and with political support for David Cameron peaking and coming off, it is a matter of time before the Bank of England pursues another round of quantitative easing. The European Central Bank – if it wished to preserve the single currency project – must, somehow, engineer a weaker Euro. That would squeeze the Switzerlands, the Singapores, the Brazils and the Japans of the world real hard. Their currencies – rising inexorably already – would soar. They have to join the quantitative easing party.

The big daddy of ‘em all – the United States – will not be sitting quiet and watching. After all, it has got a free pass so far on dollar debasement. If the room gets crowded, it has to find new tricks to keep the dollar from rising against the rest.Gold dropping 20 dollars overnight sounds like a terrific summer sale opportunity! (Caveat emptor, of course)

No surprises therefore that the price of crude oil (Brent crude) is not too far below recent highs. Check out this news on the rise in Saudi oil consumption. Stock investors know how to ignore inconvenient news until it is too late to ignore them, that is. My latest MINT column talks about frogs basking in the warm glow of boiling water.

Niranjan has a very succinct reminder of the inflation risks here:

The current mess means that Western central banks have an incentive to maintain loose monetary policies and keep interest rates low, even if these policies impose huge costs on economies in our part of the world through inflows of speculative capital and high commodity prices.

I must concede that Niranjan’s column this morning in MINT makes this blog post redundant.


DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.