Bernanke signs the dollar’s death warrant. Buy gold.
Yesterday's half-point cut in US interest rates may have sent stock markets around the world soaring, but it's left sensible investors with only one choice.
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The Greenspan put' is alive and well, even as the old man himself tries to drum up publicity for his new book by saying that interest rate cuts won't save the US economy this time.
The credit crisis has given Helicopter' Ben Bernanke the excuse he's been waiting for to slash US interest rates. Bernanke's been desperate to push the rate cut button since he first heard that US house prices were falling, but couldn't for fear it would destroy his dubious inflation-fighting credentials.
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Now he's still trying to insist that he cares about inflation, but yesterday's half-point US rate cut told the markets otherwise. Stocks soared in the US yesterday, and will soar across the world today.
Theres only one thing for a sensible investor to do. Buy gold, and plenty of it
Faced with the choice of propping up the US dollar or propping up the US consumer, Ben Bernanke was always going to opt for the consumer. The American way of life is non-negotiable, after all. And it's very hard to explain to people whose houses are being repossessed that keeping interest rates at a reasonable level is actually a good thing in the longer term.
And unlike his predecessor Alan Greenspan, Bernanke actually believes that the best way to clear up the mess from one bubble is to blow up another one. Greenspan, as we pointed out a couple of days ago, always knew the true consequences of his actions. He pinned the blame for the Great Depression squarely on too much loose credit in the lead-up to 1929.
Bernanke on the other hand, takes the more popular view that the real problem was that the Fed didn't cut rates fast enough after bubble burst. So his somewhat drastic-looking action of slashing rates by a half-point was to be expected.
Stock markets loved it. Bernanke might as well have written a blank cheque, and posted it to every dodgy lender and over-hyped hedge fund on Wall Street. He could have enclosed a little note saying, "Don't worry guys. Screw up as much as you like - the American taxpayer will bail you out."
Our own government did exactly that with Northern Rock and the banking sector yesterday - even more explicitly promising that taxpayers' money would be put on the line to prevent any UK bank, no matter how badly or recklessly run, from going to the wall.
Small businessmen might think it unfair. After all, right now they are feeling the squeeze because the big banks who loan them money are tightening their lending criteria because of mistakes that those same banks made in the first place. If they run their business into the ground, then they go bankrupt, and often lose their homes. If the bank they borrow from runs its business into the ground, the government twists the Bank of England's arm up its back until it bails them out.
And people who lost their company pensions and are still fighting for compensation from a government that advised them wrongly that they were safe, might wonder at how Gordon Brown can deny them money but then turn around and promise billions, if necessary, to Northern Rock savers.
It's all about scale, of course. A few thousand impoverished pensioners or homeless entrepreneurs can't hurt the government. Pictures of rioting outside banks can.
But enough of the unfairness of life and the evils of big government (of whichever flavour, Tory or Labour). What was that I mentioned about gold earlier?
Ah yes. The one thing about slashing interest rates is it also means that you pay less to the unfortunates who hold your debt. And at the moment, the US relies on foreigners to fund it, particularly foreigners in China and Japan. All those Japanese housewives are going to find other homes for their carry trading now. And China may well accelerate its moves to find other homes for its vast currency reserves.
You see, despite the sub-prime carnage, our leaders still just don't get it. Bad debt doesn't just disappear - it spreads like a bad smell until it's permeating the entire financial system. Mortgage lenders sold loans to people who could never repay them. They went bust, but they'd passed the debt to the investment banks. The banks thought they'd sold the risk to the markets, but that rebounded on them when everyone in the markets realised they could no longer trust anyone else, and the money markets entirely froze over. Now that the US and UK governments have bailed the markets out, they have effectively taken those bad debts and dumped responsibility for them onto their nations' taxpayers and savers.
Do you want to put your money into a country whose financial system is riddled with the economic equivalent of woodworm? As Jim Rogers puts it: "Every time the Fed turns around to save its Wall Street friends it makes the situation worse. The dollar's going to collapse, the bond market's going to collapse. There will be a lot of problems in the US."
And indeed, the dollar tanked after the Bernanke put' swung into action. It fell to an all-time low on the euro, and even the pound - the currency of a country that has just narrowly avoided a full-blown banking crisis - leapt back to above the $2 level.
But how could the dollar collapse, really? After all, it's the world's reserve currency - isn't this all a bit far-fetched? It does seem hard to imagine. But then, if I'd told you a month ago that there'd be a run on a major high street bank before 2007 was out, you'd have thought that was scaremongering claptrap (and to be fair, I'd have been pretty sceptical too).
A weak dollar is good news for gold. If you want to know how to buy it, see: A beginner's guide to investing in gold.
Turning to the wider markets
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In London, the FTSE 100 index rallied 100 points to close at 6,283, with support coming from a resurgent banking sector. The broader indices were also higher. Alliance & Leicester led the climbers with a share price rise of over 32%, and there were also gains for troubled mortgage bank Northern Rock. For a full market report, see: London market close.
In Europe, the Paris CAC-40 closed 109 points higher, at 5,549, after a late rally in the banking sector. And in Frankfurt, the German DAX-30 was up 95 points at 7,575.
On Wall Street, US stocks surged after the Fed's decision to slash interest rates by half a percentage point. The Dow Jones jumped 336 points to end the day at 13,739. The tech-rich Nasdaq was 70 points higher, at 2,651. And the S&P 500 was 43 points higher, at 1,519.
Asian stocks tracked the stellar gains on Wall Street overnight. The Japanese Nikkei was up 579 points - or 3.5% - to 16,381. And in Hong Kong, the Hang Seng had climbed by as much as 977 points - or 4% - to 25,554.
Crude oil futures closed at a fresh record high of $81.51 in New York last night and had since edged up further, to $82.11. In London, Brent spot was at $77.89.
Spot gold hit a sixteen-month high of $726.00 in Asia trading, before slipping back to $724.10. And silver hit a six-week high of $13.05 in intra-day trade before falling back to $13.00.
Turning to the forex markets, the pound had risen to 2.0076 against the dollar this morning, and was steady at 1.4365 against the euro. And the dollar was at 0.7153 against the euro and 115.82 against the Japanese yen.
And the minutes of the Bank of England's latest rate-setting committee, published in London today, revealed that the MPC voted unanimously to keep rates on hold this month. The committee agreed that higher credit costs meant 'the upside balance of risks to inflation had probably receded.'
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