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American economy is caught in a whirlwind

April 04, 2008 15:31 IST

As the global credit crunch wends its way across the developed world, writes Julian Phillips of the Gold Forecaster, we are seeing defensive action by some nations to lower their dependence on the United States.

The aim is to duck the recession now hitting the world's single largest economy. The future of the US in global trade has been damaged, and its currency's weakness has only provided a little defense for the nation so far.

With Europe focusing still on price stability (i.e. inflation), the weaker economies of Europe are taking the strain as the Euro rises on the currency markets. Stronger nations like Germany are doing well internationally, so they are affected far less by a strong Euro than weaker states such as Spain, Greece and Ireland.

These strains within the Eurozone are rising at the same time as strains between the US and Europe are heightened, with the Chinese dragon roaring as it awakens and many nations like Japan penetrating that new market to stem the pernicious effects of their dependence on the US.

This was reflected in the 9 per cent growth in Japanese exports last month, which saw 15 per cent growth in trade with China alone.

Gold and silver have proved to be excellent havens for Western investors seeking shelter over the last few years, moving from $275 to over $1,000 in gold and from $4 to $22 in silver, with much more to come in time, we believe.

But are they still enough, or is now the time to broaden one's thinking, extending one's Gold Investment and other financial arrangements to take advantage of the coming storm?

New Government Controls on the Way?

Frequently we have pointed to the coming imposition controls on capital flows that these long-term changes will inspire. This last week has seen what appears to be a long-term plan to create an environment where controls both inside and outside the US can be imposed.

This environment has been established long ago in the more socialist reaches of the global economy with the huge powers vested in other nation's central banks. The plan by Secretary Paulson is long-term and will not be seen on our screens until next year. It will come under a new government, too. But the wheels have begun to turn in the process.

Right now there is no doubt in our minds that should the Fed want to impose any particular control over any particular market, it would have the backing of government. These controls are primarily aimed at internal capital controls, but to effectively control capital there is often a separation of trade capital from investment capital of all kinds internationally.

What is deeply significant in these plans -- and in the plans of the G-7 nations agreering to "calm irrational market moves" when necessary -- is the belief that it is proper to be able to impose a will on financial markets that meets government requirements and not those of the individual. By definition this implies a diminishing of the freedom of financial markets and their inhabitants.

The very tone of such global moves to control markets has changed to permit a far greater degree of governmental control, no matter which way one looks at it. On the good side this will lead to markets looking healthy despite the unseen props holding them up.

And why not; the good of the nation stands above that of its individual citizens, correct?

This is accepted in most nations of the world where a considerably higher degree of government presence in the activities of the individual has been the case throughout our lives. Such controls, while restricting individuals tremendously can benefit markets too.

In Europe and the United States, the impression persists that any such control is for the benefit of the individual and the financial markets. The moves now being made both inside the US and outside are changing this climate to one where the government interests are being given greater space than previously seen, justified by the (apparently) growing emergencies.
Like the increasing weight of the air before a storm, so this proposed increase in control warns us that lightning could strike soon and clouds will burst. Government feels the need to control the barometer; but can it control the underlying storm?

Paulson is looking to empower himself to act quickly to "stabilize" markets. Surely, that is warning enough for us all and our liberties.

Actions to Start Taking Today

What does one do in such an environment? Clearly, one must place oneself in a position to stand away from the storm and the coming controls if possible. But far more than that, one needs to be able to position oneself to enjoy the multitude of opportunities that such controls throw up.

Sitting in hard assets, such as Gold and silver -- Buying Gold at every opportunity if the price falls in the global de-leveraging process -- should be an excellent way to go, most especially with them overseas in solid bullion vaults.

One also has to sit not only outside the storm but also in an ideal position to jump into the many great opportunities that could appear at any time. Then one can reap the benefits, subsequently adding any gains to Gold Bullion to avoid the risk of holding currency as one's denominating asset.

The monetary authorities are more than capable of putting reins on their citizens. So just as government and the Fed are preparing for the coming storms, are you? What will be involved in "stabilizing markets" or "calming irrational market moves" by individual government action and concerted G-7 government action? One does not have to know the details of government actions, just the principles involved.

The first step to take is to accept the principles that the governments are espousing now and realizing that they will affect you. The second step is to act to re-structure yourself so as to be positioned correctly to enjoy the controls that lie ahead. It is a new way of thinking and one that the entire population of the United States is unfamiliar with. Only 10 million out of 300 million Americans have passports! They have never faced these types of crises before.

Europeans of more mature years are familiar with this thinking, but they too appear to be lulled by the last few decades of success. With the changes in the global economy, we do not believe that Europe can remain isolated from their effects. It's crucial to accept the challenges you are facing as an individual, and take individual responsibility for surviving and prospering as governments seek to "stabilize" the markets at your expense.

JULIAN PHILLIPS -- one half of the highly respected team at GoldForecaster.com -- began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission -- guiding currency decisions on the multi-billion foreign Loan Portfolio -- before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

By Arrangement with www.bullionvault.com

Julian D W Phillips, Commodity Online