I happened to be in Dubai in November 2008 and more freakishly, out on the end of the Palm Jumeirah, watching as the first sighting of the Queen Elizabeth 2 (QE2) made her last voyage into port. The QE2 is arguably the world’s best-known cruise liner, and was to dock at Port Rashid, where she would be turned into a floating hotel, and moored off the end of the Palm Jumeirah. I could not help thinking at the time that more hotel space in Dubai might be superfluous to the city’s needs. Nostalgia, and too much debt in the form of easy credit, seemed to be driving the whole floating hotel idea for the QE2, rather than common sense.
What I am sure of is that the other QE2, the ‘Quantitative Easing‘ variety, which set sail from the U.S. Federal Reserve (the Fed) this week, captained by Chairman Ben Bernanke, is definitely superfluous to the needs of everyone except banks holding bonds they cannot sell. Last Wednesday, the Fed decided to buy $600 billion worth of U.S. Treasuries from banks giving them money to buy other debts and stocks. To imagine that more debt will solve the existing problem of too much debt, and somehow stimulate job growth in the U.S. economy and therefore lead to a global recovery, is not what QE2 was designed for, just as the original QE2 was never designed to be a floating hotel in Dubai.
The World is in a deflationary cycle, meaning asset prices are contracting, especially in the housing sector, where banks are heavily exposed through mortgage related securities. As banks try to sell some of the underlying assets, in this case houses acquired via foreclosure, the prices are pushed lower, thus accelerating the deflationary effect. The $600 billion the Fed plans to inject into the economy will not outpace deflation with inflation. It is certainly not going to reduce unemployment or put families back in their homes. What it is doing, is giving speculators fodder to blow air into more bubbles as the funds will be invested in more debt hardly backed with assets.
There is a saying in the markets: You have to speculate to accumulate. In other words, you have to take a bit of risk. Have a punt if you like. It helps though, if you are speculating based on something. Speculation for the purpose of speculation does not create wealth. It transfers it. As Gordon Gecko famously posited in the movie Wall Street: “Speculation is a zero sum game - for every winner, there is a loser. Nothing is actually created.”
The problem with today’s markets, and today’s banking system, is that the speculation has grown so big, that it completely dwarfs real trade and real markets. And the U.S. dollar is now feeding the speculators itself, rather than being a store of wealth. Speculation is like a drug. The more you do, the more you want. And you keep going until there is nothing left. The latest round of QE2 is not for the real economy to grow, it is for the speculators to get their next fix.
The QE 2 ship that Captain Bernanke is driving is a warship: a currency warship. This ship blows bubbles, bubbles into emerging markets in the form of inflation, aided by speculators with freshly printed U.S. dollars. The one assumption that is critical to the Fed’s plan for the QE2, is that the U.S. dollar will remain as the world’s only reserve currency in its unilateral framework, able to dictate global monetary policy at the stroke of a pen.
The U.S. dollar will not remain the world’s only reserve currency. A new currency system is emerging: one which will be asset-backed and one which will have key trading currencies working together to create a reserve. So, the argument that the latest round of QE2 will only accelerate the demise of the USD is absolutely correct. That we should somehow be scared or fearful of that is ridiculous.
The Fed’s QE2 announcement is a good thing. It is good because it will accelerate the process of change from a single reserve currency fiat system to a more robust, asset-backed, multi-currency system. New, bigger, more robust markets will emerge. The Fed and the USD will have a critical role in the new system; it will not have just the sole role.
I went up the BurjKalifa last week, the world’s tallest building here in Dubai. From the viewing deck on the 124th floor, I could see the QE2 sitting, alone, in Port Rashid. To think that she could have value as anything other than a cruise liner was a stretch. That she could become a floating hotel moored of the Palm Jumeirah, itself a man-made sand island with thousands of hotel rooms already, seems ironic.
Captain Bernanke’s QE2 is also due for retirement. The fact that many believe that it set sail to defend the U.S. dollar as the world’s only reserve currency, when, in fact, it will accelerate the move to a multi-currency system is ironic. QE2 will sail no more.
Global Markets are anything but integrated. What if we had a paradigm shift in the way we think, the way we actually do business with each other, between nations. Balanced global trade can only occur if we have transparent, accessible, efficient markets, with standardized contracts and on a standardized platform of global exchange. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.
Sam Barden is CEO of SBI Markets General Trading LLC, a Dubai-registered trading and advisory company. Barden, 39, has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.