Governments Attempting to Rule Over Bankers

By: Julian_DW_Phillips

The events of the last two weeks have presented enormous ‘moral' hazards for governments and the banking industry.   When we call them moral hazards we are not talking about biblical morality, but the principles behind government [Democracy] and banking [Profit and Prudence].

The effective takeover of the major banks, on both sides of the Atlantic, has brought the interests and politics of government into banking, a place ill suited to such governance.    You may well say that the government shareholding does not represent such interference.   If that is the case then there was no point to the purchase of such a shareholding, except the hope of an eventual profit.

Bankers, driven by prudence in lending, will still have an aversion to lending after their bailout by government and see the injection of capital as profit opportunities for bankers in safe investments, a ‘cushion', which by definition, would exclude broad based lending to an economy in recession, where capital and interest payments will become riskier as economies slide down into what could become a depression.   The injection of capital may well save the banks but their role, as source of funds for the economy, will still be reduced considerably.  

1. If governments do take their seat on the board and tell bankers to be less prudent and lend as a broad source of funds for the overall economy then you will have politicians in banking and profit and prudence out of banking [as is happening now in the UK].  That will lift the economy though.   Without such a step, the broad economy will pay a heavy price to bankers, many of whom the taxpayers have just saved.  
2. If bankers continue to rule lending absolutely, then government will continue to be their servants.  

So there is the moral dilemma!   But it is more than that, for the duty of government and now bankers, is to help the economy, lending the money they have had virtually given to them, by the Fed, that has kept them in existence, is it not?  The sight of a shrinkage of credit card credit is bringing this issue down to street level!

But then the U.S. will have made one step towards the more Socialistic model of Europe, where the same will have to apply, or else the saving of the banking industry will be at the expense of the taxpayers under their charge.   Clearly, the job of central banks is to maintain price stability and growth in the economy.   That surely overrides the profit & prudence priorities of the banks, of which they are now part owners?

China's communistic model of total control of business and banking [without democratic principles there to interfere?] works to support the burgeoning Chinese economy and will be made to do so in the future.   This is a country that rules bankers, commerce and everything else in that country.   But Europe and the U.S. have principles that will not be changed [except temporarily?].  This is why the Chinese government has confirmed that growth in China, in the future will be 9%+.

But in the U.S. and Europe the separation of banking and government is absolute, with the independence of the Federal Reserve and [more complicated] the European Central Bank.  Or is it?   Surely, needs force a change in these principles if the economy is at risk?  

As the government and the Fed rescue the banks and take equity positions in them, who will rule afterwards, bankers or government ?   The answer will point the way forward for the economies of the developed and emerging worlds.   The Fed must re-invigorate the economy, as their obligations demand, but their minority holding in the banks emasculates their investment and simply makes them hope for future profit, in a few years time?

With paychecks reducing or disappearing, house values falling and likely to fall for the next year as well, money needs to flow right out into the streets of the middle and lower classes, on which the economy has and will depend.   If it does not get that far, then the vultures will feast.   Surely that should be part of the process of saving the economy too?   The day after the announcement of the availability of ‘unlimited funds' to the financial institutions and its guarantee to ensure no financial institution will fall, the Dow Jones tumbled again realizing that the recession is headed towards us like a train still, with the vultures in its slipstream.  So the Fed must do more still.

Bankers credit criteria will kick in and prevent them from releasing loans to the general economy so must it fall too, as the markets are now telling us?

So who will rule the economy - Politicians or bankers?  It was Lord Rothschild who said give him control of money and he cares not who makes the laws.

The battle is upwind and we can smell it!

Sadly the moves made to date by central bankers have not addressed the underlying problems simply tended to the symptoms.   This begs the question, are they capable of making the system work after healing its disease or is it crippled?

These questions have become more than important now, they have become critical, for we have seen the crash, and we still smell the fear, the fragility, the lack of trust and confidence.   It is no longer a danger it is on us and must be rectified.   Until our skepticism is removed by the reality of burgeoning growth stemming from the States, we will remain suspicious.  

Why the Indian market buys gold when the price is falling.

The short response to such a question is that they aren't. They are buying gold in Rupees, whose price has been stable as the gold price fell in the U.S. $. Because the Rupee is falling, gold has appeared to hold steady in the Rupee. Because Indians see the Rupee as a problem there is even more incentive to buy gold for the security of their daughters as they enter marriage. But in this essay we also look at other currencies where gold has done its job of holding up when local equities have fallen.

 In the Eurozone recent weeks have seen the € fall from $1.60 to the present $1.25 a fall of 22%. This is the time that gold has fallen in the U.S.$ from $900 to $700, a fall 22%. However, look at this another way. In the €, gold has remained steady at + €560 of late.

Four of the most important gold markets in the world are India, South Africa, Canada and Australia. In recent weeks all four of the currencies has fallen as the $ rose. All four countries have been the darlings of the ‘carry trade' where cheap money was borrowed in the States or Japan to invest in these high interest-paying currencies.

1. In India the Rupee has fallen from Rs.40 to nearly Rs.50 to the U.S.$., a 25% fall.
2. In South Africa the Rand has fallen from R7 to R11.5 a 64% fall.
3. In Canada the ‘loonie' has fallen from C$0.98 to C$1.27 a nearly 30% fall.
4. In Australia the A$ has fallen from A$1.00 to A$1.57 a 57% fall.

Now consider how far gold has fallen since these currencies were at their highs. The gold price was just below $900 so let's take $900 as the level on which we base our numbers. It is now at $700. This is 22% fall in the gold price. This means that the gold price in these currencies has performed as follows: -

1. At Rs.40: U.S.$ the gold price was Rs.11,574 for 10Grams [the usual unit price for gold there. Now it is Rs.11,252 nearly the same as earlier in the year. That is why Indians are buying now. The price has stabilized in their currency and as an incentive their currency has weakened in gold terms justifying more gold purchases.
2. AtR7.00: $1 the gold price in Rands was R6,300 an ounce. At R11.5 and $700 the gold price in Rands is R8,050 an appreciation of nearly 28%.
3. In Canada at C$0.98 and gold at $900 the gold price was C$882. After the fall to $700 and C$1.27 it stands at C$889 up C$7.
4. In Australia at A$1 and gold at U.S.900 it was A$900 and now it isA$1,099 a 22.1% appreciation.

For India, a gold buying nation, gold is steady in the days before the important gold buying festival of lights, Diwali, and subsequent festivals. In the remaining three gold producing countries producers are encouraged by their local currency gold price, as it is the price in which they are paid.

In all those countries gold is providing that wealth-retaining role that is expected of it. And that is in a market where the gold price is falling far too much and is soon likely to recover. Imagine a recovery back to over $1,050, a figure that is more than on the cards and you have an additional 50% rise in these numbers. We have to qualify this and say that we do expect these currencies to appreciate as gold rises. Nevertheless, gold will perform wonderfully, in this event.

Once the rise in the $ is complete as the demand for the $ is met by increasing liquidity, expect the gold price to rise more and show again how in a weakening currency gold is a great investment.

This is a snippet from the recent issue of the weekly newsletter from: www.GoldForecaster.com .

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2008 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

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