The fast deteriorating world economy is putting pressure on currencies. Fast rising unemployment is going to cause social strife, and gold is reacting accordingly.
World unemployment rising fast
US unemployment is publicly stated to be 7%. But those numbers are understated. If you add the people who stopped looking, and the part timers who want full time, that number roughly doubles. ShadowStats.com talks about that. 14% unemployment is over 1 in 8 people. You can basically apply that rate to the US and Europe as well.
Now, we estimate the US will see a minimum of 3 million more jobs lost in 09, probably a lot more, maybe 4 to 5 million. If we take the number of people working in the US (roughly 130 million) 3 million more lost jobs will increase unemployment by roughly 2 to 3%. That would bring official US unemployment to 10%, and the unofficial rate to about 20% by the end of 09.
That is depression level unemployment.
The rest of the world is faring as badly. GDP in Germany and the UK declined at a 6% rate in the last months of 2008. GDP in the US is expected to decline 5 to 6% in the last months of 2008. China has lost over 10 million jobs in 2008 and is seeing riots in the big manufacturing cities, something that China is very worried about. 100,000 factories were closed in China in 2008.
Japan saw an astonishing drop of 35% in exports (by some measures) in later 08. China stated their 'growth' slowed to 6.8% annualized, but I want to offer this proposition: that China actually saw zero growth in latter 08. Time will tell on that one, but it's no secret that China often understates bad economic data, and who doesn't?
The EU is having fits with a debt bubble implosion, and the weaker economies like Spain, France, and particularly the Eastern EU members are either having riots now or are on the verge of them.
How well will the world handle a depression today?
If the world is entering the beginning of an actual depression, how will it fare socially, and what effect will this have on the currencies, bonds, and financial standing of each country? And what will happen to gold and oil as well? Well, for one thing regarding oil, it was thought to be as good an inflation hedge as gold in recent years. We can see now that was definitely not true.
I want to point out that if the US and the EU end up having 20% plus unemployment by end of 2009 (which would be 10% officially), that the people in these areas will not tolerate the pain well. And the 'economic web of stability' will unravel, and the people will not handle it without chaos. The matter is made far worse by the huge debts all segments of society have built up in the last decades, particularly the last 10 years.
China is worried about this social instability, they have repeatedly stated this. The EU is closely monitoring the various riots, such as in Greece, which were sparked by local incidents with the police, but are thought to be actually a result of simmering discontent due to the terrible economies in those areas.
The social pressures will force each country to try massive stimulus, which will put pressure on their currencies and bonds.
Fate of Euro is called into question
The fate of the Euro is being called into question by this. The weaker EU economies such as Spain, France, and especially Greece, Ireland, Italy, Portugal and Spain may face the decision of either going bankrupt or leaving the Euro. The single currency is proving difficult to manage with very disparate economies, some strong like Germany, and some terribly weak and debt burdened and uncompetitive.
If any of these nations bolt the Euro, and they can by the way, the Euro will fall like a rock. It might survive as a currency still, but its credibility will be severely damaged. In any case, it is doubtful at this stage that the Euro can be regarded as a safe haven currency right now, due to this issue alone.
If the web if economic stability falls apart, the social pressures and riots that result will force some of these countries to bolt the Euro. And, I think we are already seeing indications of this in the South and Eastern EU.
The pound has taken a severe beating in the last year. The British Pound has dropped 30% to the USD, fallen an amazing 40% plus to the Yen, and fallen drastically to the Euro.
The UK has more debt problems than even the US. Their bank problems are so severe that they barely managed to avoid a bank crisis and holiday in October last year. This is why the pound is tanking. It's said that the pound may fall to parity with the Euro, and in fact drop below parity. If that happens, FX experts say the Pound can fall a great deal more from there.
Again, social instability is assured if this happens, and the UK will find it impossible to easily resolve the financial causes of the Pound's decline; they have very limited borrowing prospects in the Bond markets to alleviate the pain with stimulus.
Asia/West currency and trade frictions- and gold
The rapidly slowing Western economies are causing even more slowing in the Asian export economies. That is not a surprise since they predicated their entire economies on exporting to the West. If the West slows, they slow even more.
This leads us to the Chinese Yuan manipulation controversy. The US, with a new Democrat government which is very labor friendly, is likely to push for sanctions if China keeps the Yuan low. But, the problem is China's likely strategy to combat their rapidly slowing economy will be to keep the Yuan low, or even let it fall lower to encourage exports.
That will definitely lead to growing US/China trade frictions. If that gets out of hand, with the US bleeding jobs and China too, the recipe will be for trade restrictions or tariffs. And that is what really caused the last Great Depression to deepen in the 1930's.
The EU zone will have the same reactions to China using a weak Yuan to prop its economy up. IE, certainly trade restrictions and tariffs.
If a trade war develops and there are competitive currency devaluations (each country lowering its currency to try to stimulate exports) then you can guarantee that gold will rise inexorably. Gold will then detach from its commodity correlations, and become primarily driven by currency developments around the world. This is already starting to occur.
With the trouble the British Pound, the Ruble, the Euro, the Korean Won, and the USD are facing, and then add this pending competitive currency devaluation, gold will be the final measure of the whole situation. It will rise relentlessly in all of these currencies.
Now, gold is already near new highs to the Pound and the Euro. It's not at a new high to the USD as of yet because the USD has risen so much since April of 2008, from about 70 on the USDX (basket of currencies heavily Euro weighted) to around 85 now. But gold will rise to new highs in the USD too, and we believe likely this year.
The world governments are already hitting some resistance to all the new sovereign debt issues. Germany amazingly had what's being termed a failed Bund auction in January this year, when only about 80% of the issue was taken up. If that happens to Germany, the strongest of the EU economies, what does that bode for the rest of the EU bond markets? They all were rattled when that happened.
US, UK and other long term bond rates have just started turning up. Spain was just downgraded by Moodys below AAA. The UKs prospects to issue new Gilts are getting thinner, since talk is going around about the UK even going bankrupt, something that seems unlikely ultimately, but their public financial situation and banking system is a shambles.
So is the US a financial shambles. The world bond markets are just about hit the wall, or certainly will by the end of 09 or latest by early 2010. Since the only thing that has slowed the economic decline at all is massive public borrowing and bailouts around the world, when the bond markets call it a day, a new true economic depression will rapidly rear its head. Social strife and currency instability worldwide will follow.
The PrudentSquirrel newsletter is our financial and gold commentary. We discuss currencies, gold, bonds, and things like 401ks and other tax deferred retirement accounts, and the dilemmas people face trying to preserve their savings in these chaotic times. We put out email alerts during the week when important financial developments are breaking. Subscribers have told me they find it invaluable help tracking the fast changing financial times. We have an enviable renewal rate.
Stop by and have a look.
Disclaimer: Chris Laird is not an investment advisor/professional. This article, and the PrudentSquirrel newsletter and alerts, are general market commentary only. They are not intended as specific advice. You should talk to your own investment professionals for specific advice. Information here is deemed reliable but should be verified by you if you think it's important.