North Korea fires on South Korea and the gold price falls. Counter-intuitive? Not quite. As I’ve been arguing for the past two weeks, a chill wind of deflation is blowing through world markets. The European Community is rescuing Ireland (and probably Portugal and then Spain) because $1.3 trillion of bank assets are in jeopardy. American banks’ loan quality is not that great, either. China is tired of capital inflows from the US bubbling through its rather primitive financial system and has slapped higher reserve requirements on its banks.
A prospective global contraction of the balance sheets of banks is deflationary. That means cash becomes scarcer. The dollar goes up and risk asset prices go down. The Euro declines as the depth of the PIIGs problem comes to light, and, despite the miserable state of the American economy and the Fed’s determination to degrade the dollar, the US dollar remains the place to hold cash.
Your making my head hurt