All major countries and central banks appear to be embarking on the same response to this crisis, which is cutting interest rates, loosening credit lines and devaluing the currency. In doing this the leaders hope to stimulate the economy with cheap and abundant credit, and boost exports with currency devaluations that should (in theory) make exports cheaper to overseas buyers.
However, in practice these policies simply are not working how their designers thought they would. Although mortgage rates are falling (albeit very sluggishly) many people who made property purchases on teaser rates are still facing monthly payments far above what they can afford. Credit cards, which previously had been a good proportion of consumer spending growth, are now increasing borrowing rates, adding to the dampening of demand. Finally, since the foreign currency market is based on relativity and measuring different currencies against one another, if every country is devaluing their currency, these devaluations are negated by similar devaluations in other currencies.
As contrarian investors looking at this situation, we would like to raise the question; why not raise interest rates?
Since all major economies are slashing their rates, there is clearly an opportunity for one country to go the other way and take advantage of this situation. Of course, the immediate impact would be a large drop in that country’s exports and no doubt their economy would suffer, house prices would fall, but these things are happening anyway and a little extra suffering could be well worth its while in the long run.
A strong currency in all this financial turmoil would have incredible buying power, therefore this country could purchase foreign assets at bargain prices. Capital goods would be the main focus of this buying spree, building the foundations for an economic boom in this country once the global economy begins to recover. In addition to capital goods, strategic assets could be purchased, for example in the energy sector. Think what a country could do by securing enough oil and gas to last 25 years, at rock bottom prices.
This would set the stage, not only for the country to recover back to where they were before the recession, but actually to become better off, moving up the economic ladder and increasing standards of living for its citizens.
As well as stocking up on goods, people would also be attracted to the country by the higher wages that would seem extraordinarily high to foreigners. This would mean that the country would have the opportunity to take their pick from the brightest minds and most highly skilled people in the global workforce, further increasing future economic potential.
In terms of possible candidates for “this country”, there are a few. The criteria would be a country of reasonable economic standing, but not so great as to vastly impact the global economy with every move. Possible candidates include New Zealand, Switzerland, Australia, Singapore and possibly Brazil, however Brazil may struggle to build a strong currency with the amount of debt the country currently has.
But until such a country makes this bold move there is only one currency that is not being devalued, and that is: gold. Gold finished 2008 with a gain of around 5%, how many assets offered such gains? So barring a brave central bank that is prepared to make the above moves, we maintain that gold still remains preferable to all other foreign currencies.
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