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Might the days of money printing be coming to an end?
John Butler is Chief Investment Officer of the Amphora Commodities Alpha Fund. He believes that a report published today heralds good news for all those who think that monetary policy among the Western industrial nations has run out of control. If John is right, some sanity may yet return to monetary policy. And that could be the best news savers have had for some time.
In a report published today, the Official Monetary and Financial Institutions Forum (OMFIF), a global organisation of central banks and sovereign wealth funds, recommends that gold once again be used as an international form of money, alongside major currencies. Dollars, euros, yen, sterling etc will now need to compete more directly with gold for use not only as reserves but for settling international balance of payments transactions between countries. This means they will have to compete to maintain their value against gold.
OMFIF’s internal discussions are secretive but, while the report has been commissioned, it will undoubtedly be a reflection of internal discussions. OMFIF gives a number of reasons for their recommendation but they essentially boil down to gold’s historical role in establishing and maintaining confidence and stability in international monetary relations.
This confidence and stability has dramatically declined as a result of the global financial crisis that began in 2008, to the detriment of the global economy. People always want to be paid in sound money but, as we’re only too aware, domestic complaints from savers and others on this topic have been ignored by Western central banks. What the report says is that international creditors may no longer be willing to accept payment in devaluing sterling, dollars and other paper currencies to the same degree as before. In future, they may prefer to be paid to some degree with gold. This use of “golden handcuffs” would constrain the ability of the Bank of England and other central banks to print money.
Falling back on the solid foundation of gold is, I believe, the best way to eventually move forward with healthy and sustainable growth in global trade. This is to all countries’ mutual benefit, and would bring about an end to the escalating ‘currency wars’ that increasingly threaten global trade and commerce. This development is actually one that I predicted in some detail in my book, The Golden Revolution, a synopsis of which was published by the London Bullion Market Association in early 2011.
Potentially great news for savers
What’s good for savers globally is good for savers locally. The global savers are those countries that export more than they import. They accumulate surpluses that they then invest and re-invest in global assets. Ever since the world went off the gold standard in the early 1970s, rather than accumulate gold reserves, central banks of surplus countries have accumulated paper reserves that have continually lost their real value. This was never a stable, healthy equilibrium and this helps to explain the periodic financial crises that have gripped various parts of the world at various times in recent decades and which finally gripped the entire world more or less simultaneously in 2008.
The OMFIF report indicates that the global savers are finally taking action to move back toward a more stable international monetary system, backed by gold, which will make it far harder to “kick the can” and print money to paper over fundamental economic problems. This implies that profligate governments will find it more difficult to finance deficits in future, but that is a good thing.
The UK, of course, has been one of the most excessive money printers in recent years. This is unfair to the UK’s global creditors and well as to local savers, who have seen their purchasing power erode at an accelerating rate. As such, UK savers should welcome this development. International discipline is finally beginning to rein in the Bank of England and make it properly accountable to savers again. Globally, interest rates may now be on the way up.
The UK may have to live within its means again
While this is good news for savers, it does imply that the UK economy is finally going to need to learn to live within its means. Such adjustments can be painful. But they lay the foundation for healthy economic growth in future. Responsible savers deserve to be rewarded and, in time, they will be.
In my opinion, young people just starting out in life will reap even greater rewards in time, as a rebalanced UK economy will offer a greater variety of jobs and be free from large financial crises. This is precisely what prudent UK savers should desire for themselves and for their children.