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Lord Copper gives his views on quantitative easing and why it is not the answer to Europe’s financial woes.
Traders in the past used to have to understand and analyse lots of factors, both economic and political, when deciding their trading strategies. They were not blessed with the computer power to develop sophisticated mathematical models, they relied on knowledge and experience.
Sometimes they got it right, sometimes they got it wrong. The important thing is that there were a lot of different factors at work on the way prices moved.
Contrast that with today’s market. I wrote a while back that the investment decision now comes down to a binary risk on/risk off choice, with the so-called risk assets on one side and gold and the US dollar on the other. Well, I stick with that view, but I would say now it goes even further.
Driver is cheap – free – money It seems to me, looking at the financial markets within the context of the global economy, that there is effectively currently only one true driver of that risk choice. And that is the amount of cheap – or should we be honest and say, effectively free – money that the US and, to a lesser extent, the UK governments are prepared to throw at the banks.
I say this because more and more the theme of most market reports and predictions is the likelihood of greater or lesser amounts of quantitative easing (QE), to give it its respectable name. It makes logical sense to concentrate on this, as we’ll see in a moment.
But first, let’s look at what it actually means. Politicians of a certain bent are keen to point to the USA and tell us that the experience there, particularly in the way that its economy appears to be recovering faster than those in Europe, demonstrates that flooding the economy with money is the way to grow out of the financial crisis we have suffered.
I’m not completely convinced by that, because I think it ignores the major differences between the USA and most of the rest of the world.
Prime among those differences is the fact that the US economy has the ability, mainly because of its size, to be effectively self-sufficient. And before anybody says, “ah, what about the EU?,” let me point out that the USA is a single, coherent, homogenous economy, which the EU is not. The EU is still a collection of individual national economies, partly held together by a unified currency.
I’m not going to go into the problems created by the lack of fiscal unity within the eurozone, because I think they are self-evident. What the EU is not, though, is a single economic unit.
My contention is that the USA has a big enough economy, and, crucially, has a strong enough resource base, to recover its stability, even without the rest of the world.
It is likely, of course, that China will achieve this sort of strength in the future, but as yet it is still making the transition from an export to a consumer base. Europe and Japan, to name but two, do not have that luxury; their recovery will only be as part of a global improvement.
So what has all this got to do with QE and the price of metals? Just this – if you believe what I have said above about the robust nature of the USA, then is QE necessary?
Danger of an asset bubble If it is not, then surely it is highly dangerous, because what it is doing is creating an asset bubble, and we all know where that leads. The more money that the government creates to pump into the economy, the more it is logical for investors to take that money and convert it into hard assets.
The reasoning is clear – QE will create inflation, and keep interest rates low, making the holding of cash a less than attractive prospect. What the government would like is to see the money used to develop manufacturing enterprises, but that’s pie in the sky, and demonstrates the lack of comprehension of real-world behaviour among the professional political class.
The reality is that the most sensible thing to do is to take the cheap (free) money and convert it into solid things, like, for example, industrial metals. That’s why the warehouses are full, and why the prices remain firm. Keep on watching that QE figure as your investment guide, but beware.
Ultimately, the house of cards will crash, because nothing can go up forever. Then we’ll have another government-sponsored financial crisis. But don’t worry – the politicos will manage to find another asinine way out of it, again.
Lord Copper editorial@metalbulletin.com