G-8 Too Optimistic About Economic Recovery
Over the weekend, finance ministers of major countries got together to give a pep talk on the U.S. dollar and assure the world that the world will be squarely focused on the exit strategy – i.e., how to get out of this money printing mania.
The markets reacted promptly, sending the Dow down almost 200 points, the dollar rallied.
Finance ministers will always say that things are under control; just as the Fed will say that they control inflation. That talk is about as credible as the U.S. administration talking about balancing the budget.
In my view, this recovery is way too fragile for finance ministers to take tough action. But even if they did, the world has changed over the past year: the "balance sheet" of the U.S. government has deteriorated because of all the money printed and debt issued. So if indeed market forces are allowed to play out – which in my view means the economy dives into a deep recession as interest rates rise, the U.S. may no longer be the safe haven it was a year ago. While we may see some flight to the U.S. dollar, I currently doubt it will be to the same extend.
If we do pursue this path, expect a roller coaster of policies. One of the Fed governors today referred to the new policy as one of whitewater kayaking – referring to the quick and often jerky moves one has to engage in to master the whitewater. As a teenager I loved whitewater kayaking (even participated in some competitions); trust me – this is not something Fed governors should play with!
Early on Monday, Bloomberg Radio called me to comment on the G8 meeting. Here’s the interview:
Merk Says G-8 Too Optimistic About Economic Recovery
June 15 (Bloomberg) — Axel Merk, president of Merk Investments LLC in Palo Alto, California, talks with Bloomberg’s Ken Prewitt and Tom Keene about the Group of Eight meeting in Lecce, Italy. (Source: Bloomberg)
Axel
Axel Merk
Author of Sustainable Wealth
President and Chief Investment Officer, Merk Investments
(By the way for those who pay attention to the little details: it used to be that "G-7" referred to a meeting of finance ministers, whereas "G-8" was a reference to the meeting of heads of states. These days, 8 finance ministers gather; in the background of their meetings are posters that say G-7/G-8. If you are confused, don’t worry, you are not the only one)
