By John
Mangun / Outside the Box
THIS
is the way it worked before and should be working now. Greece has
massive debt and a bad economy. They devalue their currency.
Inflation in Greece goes up but prices for foreigners become cheap.
The Germans come to Greece in mass quantities to vacation, a good
form of “bailout.” Greece brings in huge amounts of foreign
currency and makes a lot of money. Greek exports are now cheap and
everyone buys those products. Eventually, their economy grows enough
to pay their debt and gets healthy.
But
they cannot do that because they do not have their own currency.
The
US understands that is the way it is supposed to work. That is why
the dollar is being devalued through Quantitative Easing. Americans
would then see inflation because of high oil and commodities prices
and goods from China would be more expensive.
Europe,
in trying to save its loser countries is trying to devalue the euro.
Japan understands it too and is trying to devalue the yen to help its
economy. China has had a “devalued” currency for a decade, which
helped allow its economy to grow.
But
the problem in 2012 is that when areas, the US and Europe, which are
responsible for almost half of the global economy are in trouble, who
is the “rich” country that can help the “poor” country’s
economy grow?
The
21st century problem is that the “rich” nations have not been
rich for a long time. Where did all the money come from that fueled
Western growth? The economic growth of the West in the last two
decades has been through the creation of artificial money, which
allowed massive borrowing. We commonly talk about the US borrowing
money from China but where did China get that money to loan? China
did not loan the US any money.
China
sent its exports to the West. The West gave China government debt.
That debt was created by merely adding a few zeros to the balance
sheets of the central banks. As I said last week, the price of gold
was $300 in 1998 and is now $1750. The price of gold reflects the
artificially created money. And notice also that the period from 1998
to now is the period of China’s “economic miracle.”
The
US has no choice but to monetize its debt and the debt of Europe.
That means creating an amount of new money virtually equal to the
amount of the debt. The term being used is Quantitative Easing to
Infinity. We will continue to see that happen as the price of gold,
the one constant financial instrument, goes to $3,000 and beyond.
While
there are a large group of comparatively rich countries including the
Philippines, even together they are not a substantial enough portion
of the global economy to bailout the West. With the West going down
and nations like the Philippines and Indonesia going up, the flow of
money, as in the Greece/German example above, should be coming from
the Philippines to the US. But that will not happen.
Part
of the money printing scheme is near-zero interest rates. Westerners,
being able to borrow money for almost no cost, will transfer those
funds to profitable locations like the Philippines. That is why in
spite of massive money printing in the last two years, there has been
little economic growth in the West and increasing growth in places
like PHL and Indonesia.
This
trend will continue and accelerate. The problem is that countries
like PHL are holding their newly found wealth in dollars and euros
and yen. While PHL has collected billions of dollars in the last
years as shown by the Bangko Sentral foreign reserve numbers, that
money is not being invested in the Philippines.
The
BSP is clearly signaling that it understands the problem and is
trying to figure out a way to put those funds to work at home without
a strong appreciation of the peso. But it will happen.
In
the meantime, the financial colonial mentality will continue with the
PSE rising and falling on every move in the West. Overseas
remittances and outsourcing will grow as these industries are
critical to Western businesses. Foreign money will look for a home
here despite the government trying to keep foreign investment out of
the country.
Currencies
are the key to understanding the global economy and where things are
going. There are only a number of chairs on the “Trip to
Jerusalem.” Greece does not have one. The Philippines does and will
in the future if the government does not kick it over.
E-mail
to mangun@gmail.com,
web site is www.mangunonmarkets.com,
and Twitter@mangunonmarkets. PSE stock market information and
technical analysis tools provided by COL Financial Group Inc.
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