Gold market prices remain tentative as QE2 comes to a close, but that is just a symptom that “the effort has done little to solve the original problem. Posted by James Randolph on June 27, 2011
Over time the gold market will stabilize to counter broad-based volatility.
June 27, 2011 – Gold market prices remain tentative as QE2 comes to a close, but that is just a symptom that “the effort has done little to solve the original problem: The government and individuals alike are still heavily in debt,” says the Wall Street Journal’s Tom Lauricella. “The inability of governments and households to reduce their debt continues to cast a shadow over Western economies and the financial health of individuals.”
What has worked in the past – lowering interest rates to jump start the economy on credit – is no longer possible because we allowed debt to continue piling up long after the need was over. “Central-bank efforts have boosted financial markets in the short term … but they have been unable to push people and governments to whittle down debt,” Lauricella says.
“The unwinding of debt on average takes seven years,” Peterson Institute for International Economics senior fellow Carmen Reinhart says. “You can’t get rid of it quickly and you can’t get rid of it nicely.” That’s a far cry from the quick fix we Americans expect, so “U.S. consumers have 37% more credit-card, auto and other nonmortgage debt than a decade ago, before adjusting for inflation,” Lauricella says.
The sole purpose served by the Fed’s insistence on holding down interest rates has been to pump up corporate margins while enabling “individuals and governments to delay taking measures to change the way they spend and save,” Lauricella says. But Jerry Webman of OppenheimerFunds warns “There’s going to be a limit to margin expansion, and we may be there already in terms of productivity improvements.”
The Wall Street Journal’s Jonathan Cheng notes that “Companies offering early downbeat earnings guidance for the second quarter have outnumbered upgrades by a ratio of five to one.” The reason is clear: With their credit cards maxed out and home equity lines of credit vaporizing with the falling home market consumers have no option but to reduce spending. And that drives a vicious cycle.
Companies respond to falling consumption by freezing hiring, investment, and wages. Banks in turn hoard money to ride out the storm as inflation and stagnant wages reduce consumption even more. As a result “the ability to absorb shocks that you normally could withstand … is much more limited,” Reinhart says.
The only way out of this mess is for the Fed to step back and let nature take its course. It’s efforts to date don’t “stop the need for the private sector to heal itself,” says Dominic Wilson, chief global-markets economist at Goldman Sachs.
Absent that we can expect many more years of increasing market volatility and over time the gold market will stabilize to counter that volatility.
Senior Staff Writer – Certified Gold Exchange