European, Japanese Savings Flow To Australia

“With U.S. economic growth slowing,” Reuters reports, “global capital flows are being redirected to areas of stronger economic activity such as Japan and Europe.” Now here the writer must have been asleep or intoxicated.

Europe and Japan are hardly powerhouses of global growth, anymore than North Melbourne is a powerhouse of the AFL. Both economies face similar demographic challenges, ageing populations and declining birth rates. But both economies have one attribute noticeably lacking in American, savings!

We don’t know why Americans save less. You could find several good explanations. One is that America’s economy has never really been touched by the ravages of a global war. Continental Europe and Japan were devastated, psychologically and economically, by World War Two. Maybe people with a personal recollection of loss are simply more cautious about the future, less trusting in the platitude that it will all somehow work out.

Either way, Europe and Japan have saved and up until recently, invested a great deal in faster-growing American assets. But the big switch is on. And it will continue favoring Australia.

European and Japanese savings are now directed towards Asian assets, and in that category we include resource-rich Australia. In the Novus Ordo Seclorum, Australia may not have China’s booming growth, but it does have deeper capital markets and, of course, huge resource reserves. That is a nice advantage to have. He who owns the gold may not make the rules. But at least he owns the gold!

We’re not saying all this is unreservedly bullish for Australian stocks, forever and ever amen. Financial markets and the real economy often decouple during the bust phase that inevitably follows a credit boom. When this happens, financial markets can go off the rails in a bust without doing lasting damage to the real growth economy. That could be the case here in Australia, although we don’t really know what kind of havoc future inflation will wreak.

Nobody knows. And don’t let any smart-mouthed economist tell you otherwise.
Inflation creeps on its petty pace from day to day, to the last syllable of recorded monetary time, eating your savings away in broad daylight. Which is a fancy way of saying no one really pays attention to the incremental decline in a currency’s purchasing power until the increment increases radically, which is another way of saying a huge crisis in the currency.

By then, of course it is too late to diversify your assets into things (precious metals, tangible assets, more stable currencies) that preserve your purchasing power. And by then, people who’d never given a moment’s thought to wondering what money really is, or that there’s a difference between sound money and funny money…well, they suddenly realize that piece of paper only means something if everyone has confidence in it.

Unfortunately, today’s Western governments don’t do much to encourage confidence in their currencies. Our colleague Adrian Ash put it this way in an article we posted over on our website at // “Could it be – shhhhhh – that modern central banking is impotent in the face of a genuine and sustained rise in living costs? Are the wonks undone by the rest of us – and most especially the commercial banks – scrabbling in the dirt for fresh supplies of money to overcome the loss of purchasing power that higher prices produce? Or will it take a surprise and shocking increase in interest rates, a hike up to double-digits throughout the industrialized world, to cut money supply growth and so cut the rate of inflation in prices?’

The British are so inquisitive with their questions. Americans are so rash with our answers. But we’ll have a go and say this: inflation is higher than the official government rate. It is a function of money supply, and prices are not independent of money supply but directly linked to it.

Modern governments are serial mis-managers of the public trust, especially when it comes to money. The early stages of the crisis feel warm and fuzzy because financial assets go up (the Melt Up.) But the late stages of the crisis are cold and prickly. More on those tomorrow, including the fraud of the trimmed mean.

Dan Denning
Markets and Money

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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