Open Letter to the G20 Leaders

Markets make money whether the economy is going up or down – it is only the rest who stand to lose.

It is apparent that the global economy is still very fragile and that a return to recession (or worse) is still possible. This is the worst possible time for governments in developed economies to cut public expenditure.

Yes, it is true that the ratio of government debt to GDP is too high in some countries (but not Germany, so why are they cutting expenditure?) and that long term stability demands something be done to reduce that ratio. However, as with any ratio, there are two ways of reducing this one, not just one. We can cut expenditure or increase GDP.

It so happens that European governments are all choosing the one that does not suit our times, spooked and bullied by the financial markets. The risk now, as in the 1930s, is that winding back public expenditure will depress demand and hurt confidence, perhaps fatally. Allow me to propose an alternative.

My alternative is simple, predicated on these assumptions. First, the British Pound (especially the Pound!!), the Euro and the Yen are overvalued. This creates a false feeling of wealth in the economies that own those currencies.

That false feeling of wealth drives consumers to travel abroad, to buy expensive imported goods and to take on too much debt. For example, British expats now have truckloads of groceries sent to them in Spain because the exchange rate is so favourable to them! Is this not insane? Also, of course, overvalued currencies damage the potential for export, especially to developing economies. Second, money spent to buy gold instantly becomes dead money, money that is no longer available to circulate in the economy and to create more value. So, gold is a deadly substance, as deadly to the global economy as Kryptonite is to Superman. To make matters worse, at the moment we are experiencing a gold bubble, with the price of gold going up and up, sucking in more and more money from concerned investors.

Relying on these assumptions, what I propose is this:

1. G20 central banks should take rapid, coordinated steps to bring about an orderly devaluation of the Pound, the Euro and the Yen. Central banks should start selling those currencies and should buy currencies from countries such as Brazil, for example. The devaluation will make exports cheaper and will encourage people to vacation at home and to start considering how to live more modestly. At the same time, people in countries like Brazil will have greater capacity to purchase the goods that Europe and Japan will try to sell them. This would replace a vicious cycle with a virtuous one. By the way, exceptional times require exceptional measures, so central banks should be prepared to force a devaluation, if necessary, by government fiat.
    

2. G20 central banks should immediately sell all their gold holdings (estimated at around 30,000 tonnes) and undertake not to buy any more gold. This will burst the gold bubble and force dead money – money tied up in useless bars of yellow metal – to find another, more productive home. The US Gold Reserve alone is just over 8,000 tonnes – which is about 6% of the total gold ever mined. It is worth about $100 billion or 1.5% of the US national debt (see http://tiny.cc/atwzq). Because most gold in the world is in private hands, there will be a natural floor in the price of gold that will manifest itself when the bubble bursts. It is likely to be in the region of US$ 600-800 per ounce.

As I said, these are exceptional times and exceptional measures should be considered, but what we should not be doing is allowing the financial markets to push governments towards the abyss of a new Great Depression.

Remember that the markets make money whether the economy is going up or down – it is only the rest who stand to lose.

Originally published at www.openforum.com.au on 27/6/10

 

Patrick Callioni is a former senior public servant, with the Queensland and Australian Governments, and is now the Managing Director of consulting company, Enterprise Intelligence Pty Ltd, which specialises in helping business to do business with government and vice-versa. www.enterpriseintelligence.net.au His books Compliance Regulation and Financial Services & Waves of Change: Managing Global Trends in the Financial Services Industry are available at Amazon