Global trade imbalances have reached a dangerous point and current policies seem powerless against them, says Canadian economic and gold consultancy Dundee Economics chief economist Dr Martin Murenbeeld.

He argues that what is required to address this problem is a “dramatic” currency devaluation, which would have a significantly positive effect on the gold price.

Murenbeeld elaborates that the gold price is affected by a variety of factors, including concerns about macroeconomic and political stability, currency movements, policy decisions, interest rates and economic growth.

He states that there is another crucial factor in the gold price outlook that has been “virtually overlooked” – the number of significant trade imbalances in the global economy.

“The US has large trade deficits with China, the eurozone and Japan. Germany has one of the largest current account surpluses (gross domestic product- (GDP-) adjusted) worldwide, and significant trade surpluses with the southern half of the eurozone.”

Murenbeeld remarks that these imbalances suggest that many currencies are “badly misaligned”, which he describes as a major factor behind the “secular stagnation” of many economies. Murenbeeld stresses that the situation cannot continue indefinitely; therefore, he believes that, eventually, there must be a correction.

He says that, as a result of the imbalances, protectionism is on the rise, but, at some stage, significant exchange rate realignments will be required. Murenbeeld highlights that these protectionist measures will have a positive impact on the price of gold.

“Europe and the US exemplify the current impasse. The southern eurozone cannot devalue its currency so it can only move towards trade equilibrium with the north through internal deflation. And the US must also deflate its way to equilibrium with Asia, if it cannot devalue the US dollar,” Murenbeeld explains.

He comments that deflation is already a problem in many economies. However, the monetary policy options for dealing with it have become increasingly limited, nontraditional and of “dubious efficacy”.

Murenbeeld remarks that fiscal reflation is currently touted as the next weapon in policymakers’ armoury, or, in other words, larger budget deficits, potentially coupled with so- called ‘helicopter money’ policies to limit the impact on interest rates. Nonetheless, he holds that fiscal policy will not address global imbalances in any meaningful way.

“Only currency realignment can help to raise the rate of inflation, increase domestic employment, return policy interest rates to more normal levels, fight secular stagnation and attack global imbalances head-on,” he contends.

Murenbeeld points out that it was not that long ago that currency realignments were an integral part of the policy toolkit. Between 1957 and 1999, for example, the Greek drachma was devalued by 96% against the deutschmark. The French franc was also
devalued by 75% against the German currency over the same period.

He concedes that opinions vary as to whether such currency devaluations were good or bad. However, Murenbeeld says that one thing is clear and that is that, since the euro was adopted in 1999, and a flexible exchange rate system in Europe was turned into a fixed-exchange rate system, economic growth in many eurozone countries has been “abysmal” – worse in some cases than during the Great Depression.

He notes that some analysts argue that the US Treasury cannot devalue the dollar, even if it wanted to. However, Murenbeeld disagrees with this view, pointing out that China has amassed nearly $4-trillion in currency reserves in recent years, persistently holding down the value of the yuan against US dollar along the way.

He emphasises that there is nothing to stop the US Treasury from doing the same thing by announcing targets for the dollar and intervening accordingly. Murenbeeld says that the “most obvious solution” would be to devalue the US dollar against Asian currencies, and the euro should be split in two so that the southern eurozone can devalue against the north.

“This may sound drastic, but the global economy is in a painful place and neither monetary nor fiscal policies are capable of curing the patient on their own.”

New Policy Proposal

Murenbeeld states that the US needs to consume less and produce more, Asia needs to consume more of its own output and Germany needs to boost eurozone demand by taking in more goods and services from the region’s southern half. Currency realignments would help to resolve all three issues.

He says, come what may, the US dollar will eventually decline and gold will then “almost assuredly” rise in US dollar terms. Murenbeeld acknowledges that it is difficult to say what level the gold price will start from and what level it will get to, but when the US dollar falls, gold will rise “substantially”. Moreover, he adds that, if and when the eurozone splits, gold will also rise in southern Europe’s new currency.

Murenbeeld highlights that, even if policymakers refuse to engineer the necessary currency realignments, the outlook for gold is positive. Moreover, he predicts that the forces of protectionism will rise, discontent with sluggish growth will increase and voters will turn to “economic jingoists”.

“Against such a background, investors will turn increasingly to safe investments in a volatile world, which means demand for gold is bound to grow,” he concludes.