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<p>[QUOTE=&quot;Morgan1878, post: 748227, member: 17869&quot;]My main reason for optimism is that the health of the global economy is an inter-related process. All of the G20 countries know this and they are working to eliminate the excesses that cause financial crises. They have at their disposal communication and analytical tools that were non-existent during past economic crises. Although not perfect, there is a willingness among the world&#039;s 20 most important economies to find solutions in spite of each countries different economic objectives. A <i>common</i> objective for all G-20 countries is political stability...no waving of pitchforks in the street please!</p><p><br /></p><p>A lot of the stimulus money (a huge number 700+ billion) that was printed is sitting in banks, not in circulation. Unless lending standards are eased and/or banks are willing to take more risks, that money isn&#039;t in play. And that won&#039;t happen. The old model of borrowing cheap and leveraging it to take you to treasure island is gone for our lifetime. </p><p><br /></p><p>There is however the &quot;dollar carry trade&quot; that is causing problems for emerging market economies by virtue of the vast amounts of dollars looking for higher yielding investments that exist outside of the U.S. This is a by-product of our low interest rates. The problem for these emerging economies is that their currencies go up making their exports more expensive especially relative to China whose currency is pegged to the dollar.</p><p><br /></p><p>As you may be aware, the dollar carry trade works like this: As an example, you borrow dollars at a very low interest rate, sell the dollars to buy Australian dollars and invest the Australian dollars in Australian government treasury bonds that yield 3%. If this trade works perfectly, the U.S. dollar will depreciate, the Australian dollar will appreciate and you will pay back your depreciated dollar loan with a higher value Aussie dollar making 3% plus any profit you might clear on the currency trade. Since this type of scenario has been repeated jillions of times recently, it is a big reason why the dollar has depreciated due to the large amount of dollars that have been sold to buy other currencies. You can get screwed on this type of trade when you bet the wrong way. Today, the Dubai debt crisis sent the dollar up which means that you <i>might</i> be paying back a stronger dollar with a currency that lost value after you bought it, possibly losing money on your trade.</p><p><br /></p><p>As far as inflation, you need inflation at a reasonable rate to grow any economy. Businesses need to be able to raise prices in a responsible way so they can expand. Expansion implies hiring more employees, accelerating inventory build-up, etc. When the fed thinks that this process is catching fire and has enough heat, it will start to raise rates. Look to around early 2012 for this.</p><p><br /></p><p>Actually, the fed is <i>more</i> concerned with the possibility of deflation a la Japan and its &quot;lost decade&quot;. Why? Because the Fed has fought inflation many times before and globally there have been enough historical inflation events to provide a blueprint to combat it. Deflation, however is a different story. Deflation as you are aware, is a situation in which prices continue to head lower and with it economic activity. If not stopped, it spirals out of control with ever increasing layoffs, businesses shutting down, etc. Too much of this and you&#039;ve got social disorder which governments loathe. The Fed will do anything, including <i>negative</i> interest rates to avoid deflation.</p><p><br /></p><p>So where does that leave us? The Fed says that it can pull the extra stimulus cash out of the system before it causes runaway inflation. The world says &quot;O.K.&quot; but I&#039;ll buy some gold as insurance in case it doesn&#039;t work the way you planned it. The world is also buying gold because of the effects of the &quot;dollar carry trade&quot; which causes inflation in emerging economies. </p><p><br /></p><p>As long as the global economy has these concerns regarding the outcome of liberal central bank policies (U.S. and Europe), gold will continue its path upwards.[/QUOTE]</p><p><br /></p>

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