• The currency war is back with a vengeance.
The decision by the Swiss to peg their currency to the euro, and stop the Swiss franc from strengthening beyond 1.20 to the euro, wasn’t the biggest headline of the week.
The story was overshadowed somewhat by tedious speculation over what might be in US President Barack Obama’s big speech. (In the end he said he wants to spend another $447bn on trying to create jobs – yet more stimulus that may not even be passed by US politicians).
But as I noted in Thursday’s Money Morning, this Swiss action really is big news. It knocks out another ‘safe haven’ currency, and it also means the gloves are off as far as other beleaguered exporters go. We’ll be looking at the consequences in more detail in the next issue of MoneyWeek magazine (If you’re not already a subscriber, subscribe to MoneyWeek magazine.)
• What does it all mean? Well it’s yet more evidence of the inexorable breakdown of the current global monetary system. How are you meant to plan ahead if the currency you own can be devalued overnight by a determined central bank?
Yes, it might be good news for Swiss exporters. And the Swiss may even be justified in feeling the need to do something, given that everyone else is manipulating their currencies one way or another.
But it underlines the point of this week’s most popular article very well. Dominic Frisby revisited the topic of house prices – as measured in gold. His piece, Britain’s secret house price crash, noted that property prices have fallen by 80% in gold terms. “In 2005, the average house cost 720 ounces of gold… [it] now costs 140.4 ounces of gold.”
Dominic reckons that the ratio will fall a fair bit yet. “One of my long-term targets is 100 ounces for the average UK house. I actually think it’ll probably go to 55, as it did in the 1930s and in 1980. But I’m saying 100 as I’m utterly confident that target will be hit and I want to bask in the glory of an inbox of congratulatory emails when it does so.”
• Now this is always a controversial topic. Some thought it was a frivolous or pointless comparison. ‘Annette’ notes that “the price of gold is heavily manipulated too! So I am not sure your argument holds re. measuring houses in price of gold.” Adds ‘Les Cal’: “since none of us get paid in gold, this article is entirely irrelevant.”
Others still seem to view gold as being ‘just another commodity’. ‘NVP’ asks: “Why not house prices in Big Macs? It’s a global and homogenous product and more relevant than gold which has distorting features”, while ‘Mr’ argues that you could “do as well comparing them with the price of Mars bars or condoms.”
However, Tim Price – who writes The Price Report newsletter – also threw in his tuppence-worth on the comments section, and it’s well worth reading if you missed it. Tim sums up nicely exactly why gold is a better measure than Mars bars.
“To anyone that would like to examine the history of money in greater detail, I cannot recommend highly enough Jorg Guido Hulsmann’s The Ethics of Money Production. But I warn you: it will alter your perspective on the current financial landscape.
“We are living through the perhaps terminal phase in a bankrupt credit culture. Fractional reserve banking and baseless fiat currency are inherently unsound, immoral and inflationary systems. We are now all paying the price.
“There are many reasons why gold has always been and will always be money: one is because its use has always arisen in a truly free market. No-one has ever been forced to use gold, or silver. Paper money, on the other hand, has always required a coercive state to enforce its use through monopoly privilege. But the interested should read Hulsmann. They may then want the revolution that we may be headed towards.”
• For my own part, I think Dominic’s comparison gives a very valid and useful way to consider prices. Particularly at a time when most people in Britain are seeing, or are in danger of seeing, their standard of living fall.
The very fact that foreign buyers have seen UK property prices genuinely crash, while domestic first-time buyers are still scrabbling in the margins, trying to scrape together the finance to buy a home, shows you how important sterling’s weakness has been.
Even moving away from house prices, emotive as they are, and sticking with ‘fiat’ currencies, just think about how sterling’s tumble against the euro has affected your ability to go abroad. In four years, the pound has fallen from around €1.50 to around €1.15. So you’ve effectively lopped more than 20% off your foreign holiday purchasing power in that time. Sure, it’s not an essential. But it’s the sort of luxury item that you hope to be able to buy more of if your standard of living is increasing.
Yes, in practical terms, if you earn money in sterling, and pay most of your bills in sterling, and plan to stay in the UK after you retire, then there’s not a lot you can do on a day-to-day basis about this sterling shrinkage. But it’s certainly something you should be considering when investing. Dominic’s piece raises that as a talking point, at the very least.
• One thing that currency debasement tends to lead to, of course, is inflation, regardless of how deflationary the economic backdrop is. Our colleagues at The Fleet Street Letter reckon we could be heading back to the 1970s. If you missed their presentation last week, you can watch it here.
• Closer to home, talk was of taxing the rich, and whether the 50p tax should stay or go. Twenty economists wrote to the FT saying it should go, which means nothing, because I’m sure another 20 will write in next week saying it should stay. I’m rapidly concluding that economics is the science of picking a political viewpoint and cherry-picking arguments to back it up. It only garners the mainstream respectability that eludes the likes of sociology because most people are scared of maths.
Anyway. I can see why people want the 50p tax to stay. And I don’t believe it’s down to the politics of envy. As Merryn Somerset Webb notes on her blog this week, the real problem is that people see those in positions of power – from politicians to bankers to media moguls – milking the system for all they’re worth, and they start to feel that the system is unfair. And it’s very hard to change that.
“The 50p rate is the government’s way of admitting that too many people have high incomes for the wrong reason, and of attempting to calm public anger about it.” But as she also points out, that’s not a good reason to keep it. This is just trying to treat “the symptoms, not the causes of the problem.”
It’s another controversial topic of course, and ‘Adrian H’ says: “I don’t see why it’s so astonishing that the top 1% pay roughly a quarter of all income tax in the UK – they do after all own the same percentage of the wealth of the UK, so their contribution seems no more than fair and they’re certainly in a better position to pay more than any other sector – not being able to buy the latest Ferrari for the little lady isn’t exactly what I’d call hardship.”
But ‘Alex’ chips in with a comment that I think gets to the heart of the matter: “Here’s a novel idea… forget about who pays what tax, and whether someone should be allowed to earn more than their neighbour… and look at why state spending almost doubled over 10 years. Even the OECD stated in a paper that if the UK eliminated just the £80bn totally wasted every year by the state we could all… ALL… be paying a 10% flat rate of tax with no reduction in budgets for the useful things the state does. Articles like this are the equivalent of Gadaffi playing tribes off against one another… so long as people focus on who should be paying more or less tax they are less likely to question why the Government needs so much more money in the first place.”
What’s your view? Let us know here.
• Just before I go – all this talk of currency wars might have you tempted to look at dabbling in the foreign exchange markets. Before you do so, I suggest you watch John C Burford – who heads up our free email, MoneyWeek Trader – discuss ‘tramlines’ and other aspects of technical analysis in his latest video tutorial. It’s been very well received, and should give you a better idea of how traders approach markets, even if you’re not especially interested in spread betting yourself.
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Have a great weekend!
• MoneyWeek
• Merryn Somerset Webb
• John Stepek
• Tim Bennett
• James McKeigue
• David Stevenson