At the beginning of 1939 Germany was in full arms race. Hitler has a very strong need for money and asks the Reichsbank to grant large credits to the government to finance the preparation for war. Governor Hjalmar Schacht and some members of the central bank board, all members of the Nazi party, opposed the request and in a very heated letter exposed the risks of stability for the mark and solvency for the Reich. They know this will get them fired.
A few weeks later, in March, Hitler annexes what remains of Czechoslovakia and creates the Protectorate of Bohemia and Moravia. His intention is not only dictated by the desire to expand Lebensraum, but, more prosaically, also by the desire to get his hands on Czechoslovakian gold. Seven days after the annexation, Germany asks the SS to move the gold from the Czech account to the German account. The BIS asks the Bank of England, where the bullion is physically stored, to proceed. The next day the gold became German.
For this decision, the Bank of England was criticized by France and the British Treasury itself, but defended its choice to the end. The BIS is our client, he says, and we are contractually bound to respect its requests. A few years later, at Bretton Woods, US Treasury Secretary Harry Dexter White asked to dissolve the BIS, but nothing was done.
The story was reconstructed by Pavlos Roufos of the University of Kassel on the basis of documents recently published by the Bank of England. It shows, one might say, the radical difference between how we once thought and how we think today. In fact, let’s try to think of a Russia that, a few days after having invaded Ukraine, asks the Western central banks to hand over the gold and securities that Kiev has in custody with them and of a Fed, ECB and Bank of England that on the day next they arrange the transfer. As we know, things went differently and the United States and Europe are preparing to transfer Russian gold and reserves held in the West from Russia to Ukraine.
There is an impact on the issue of the changing rules on international relations China and on what its central bank is doing, which nHe has recently accelerated his gold purchases despite the sharp rise in prices. As always when talking about gold and as always when talking about China, the debate is animated and the positions radically different.
Somethe majority, they argue that China and Chinese citizens are buying gold because a massive devaluation of the renminbi is imminent. This, in turn, would be due to the structural difficulties of the Chinese economy and the loss of competitiveness against Japan and South Korea, which have allowed the yen and won to fall against the dollar.
The question concerns us very closely, because if China devalued and it took, for example, 9 renminbi to buy a dollar instead of today’s 7.25, China would give the rest of the world disinflation and therefore lower rates and higher stock markets. In fact, China would have more difficulty buying oil (the price of which would fall) and we would have less difficulty buying Chinese products, which would cost even less.
No, replies Louis-Vincent Gave, the risk is not that we will wake up one day with the renminbi at 9, but at 5. China is buying gold because its dollars held abroad have become confiscable (see Russia), but above all because it wants to build a strong currency, a new mark, which constitutes the alternative to the debt currency, the dollar. China, says Gave, is ready to introduce deflation with a strong currency and does not want to give us any gifts. On the contrary, when the renminbi is even stronger, China will sell its Treasuries, cause rates in America and Europe to skyrocket and cause their crisis.
These are two hypotheses, the renminbi at 9 and the renminbi at 5, which are very suggestive, but they do not necessarily describe what will actually happen. The Chinese leadership has a long time on Taiwan and it also has a long time on the renminbi. She has an ambitious agenda, but is extremely cautious in pursuing it. He intends to show more stability than strength for now. Nor does it have such serious problems that it has to resort to a devaluation when the trade balance is in surplus and the economy is growing three times faster than the American one (5 versus the American 1.6 today). If we had to bet, we would therefore bet on a stable renminbi over the foreseeable horizon.
We are on the subject of debates and let us then mention the flourishing of theories on rates. A recent article by Bloomberg reevaluates Modern Monetary Theory’s idea that high rates are expansionary. In fact, high interests fuel the spending capacity of bondholders and are money transferred from the state to the private economy. The positive effect compensates (or more than compensates) for the higher costs for debtors and this is why the American economy is not slowing down (the article was published before today’s GDP data).
Another thesis is that high rates initially cause the cancellation of some investment and spending projects, but after the initial moment the economy adapts and starts growing again. The effect of high rates, therefore, would decrease over time.
Classical consensus theory, on the contrary, holds that the effects of high rates accumulate over time. The progressive slowdown of the American economy in the last three quarters confirms this hypothesis, but the weak (but perceptible) reacceleration of the European economy (despite the fact that Europe is fiscally less expansive than America) denies it.
Our idea is that monetary policies, for various reasons, are not as restrictive as they appear. It is also true that individual bondholders receive more money with high rates and that large companies have so far found a way to neutralize them. However, it is also true that small businesses are losing out and are starting, in the United States, to be more cautious in investing and hiring staff.
In short, it is a complex reality. Today’s American GDP figure is perhaps not as negative as it seems (less growth and more inflation than expected) but it is combined with data on company profits substantially in line with forecasts to make us hypothesize a lateral phase of the stock markets. Once the idea of immaculate disinflation and a perfect world has passed, we are entering a phase in which monetary policies will have to bite at least a little and in which a risk of a moderate slowdown in the American economy towards the end of the year is still present. Stocks and bonds, after the correction, are at balanced and even interesting levels, but their recovery will probably take some time.
By Alessandro Fugnolistrategist of Kairos (The Red and the Black column)
