This past week saw continued tension and conflict between the 27 members remaining in the European Union and the British who are preparing to reclaim their own destiny and national identity in March as they invoke Article 50 in the Brexit procedures that will require two long years to complete. The rhetoric continues to suggest that material economic harm will come to both the EU member states as well as Britain when it is all finished.
Meanwhile, across the pond in America, President Trump received a stern warning from Clinton-era Treasury Secretary Larry Summers. Summers strongly opined that he fears enormous economic damage will be done by the new administration’s revolutionary economic and trade policies.
In China, the government began to admit to and address concerns regarding the impact of a possible financial crisis within their $9 trillion-sized managed assets market. They started writing new legislation to deal with the moral hazard surrounding expected bailouts of the investment sector when the next economic catastrophe hits. Everywhere you turn, you see reasons around the globe to protect your financial and retirement accounts with gold. It explains why you should own gold in times of financial crisis.
Brexit To Cause Material Harm to EU Member States As Well
It is an already hotly debated topic of conversation that Brexit may harm Great Britain’s economy and influence in both the EU and world. What is not being discussed enough is the damage that Brexit promises to do to individual member states of the 27 remaining nations in the European Union.
This past week, the Hungarian Economy Minister weighed in on the subject regarding what the results of Brexit will mean for Eastern European nations which have traditionally been closely aligned with Britain on several important EU debates in the past. For one thing, Hungary feels that the Brexit will likely increase the speed at which a two- tiered European Union occurs. This will threaten the economic development of many eastern members which are outside of the euro zone area. It could also lead to social unrest per Hungarian Economy Minister Mihaly Varga. He warned:
“There’s a real threat that with Britain leaving the EU, some very strong actors who favor a two-speed Europe will say that those who’re in the euro area are in and those who are out of the euro are out. The threat is that the gap between developed and less-developed EU member states won’t narrow significantly” within a post Brexit European Union. This has “the potential to generate social unrest.”
Varga also raised the spectre of the single currency eurozone becoming a dividing force that pushes apart the core European states from the other ones which do not adopt the euro. Despite his assertion that such a sundering of Europe is imminent after Brexit, the economy minister restated Hungary’s official position that it is not interested in converting its own currency to the euro now.
He spoke of the damage that the Brexit will directly cause to Hungary’s economy as well. Tariffs on Britain will diminish the economic growth of Hungary up to .4 percentage points during the next three years. The economy of Hungary will be “bruised by Brexit” Varga claimed. This is because not only are there direct trade links between Great Britain and Hungary that amount to a two percent of economic output surplus. There are also impacts on the loss of free trade between the U.K. and Hungary’s other trading partners within the European Union.
Regarding the British exit terms, Hungary’s position per Varga was harsh:
“It looks like the imposition of trade tariffs is inevitable. The EU-27’s common interest is to maintain preferential treatment within the bloc and not extend that to a country that is about to leave the community. There’s simply no reason to do that.”
Hungary and Eastern Europe will similarly be losing their strongest Western European ally on many issues regarding the European Union. They shared a common rigorous interpretation regarding the EU deficit rules. Britain as a net contributor of the EU budget (second largest contributor after Germany) has been pushing for Eastern Europe to catch up economically and developmentally with the richer, Western European nations. Hungary only has 68 percent of the average GDP per capita for the EU, as this graph below demonstrates:
The EU is determined to play hardball with Britain on the Brexit negotiations to punish Britain for leaving the club and to set an example for the other members who might follow suit if it seems like they can have the best of both worlds— independence and free trade. Last week, the Chancellor of Austria Christian Kern stated that Britain should be required to pay around 60 billion euros (or $63 billion) in penalties when it leaves.
Former Treasury Secretary Fears “Enormous Economic Damage” from Trump Administration Policies
As President Donald Trump pursues his (groundbreaking to some, revolutionary to others) economic policies, Clinton’s longtime Treasury Secretary Larry Summers has issued a stern warning about the economic and trade policies and rhetoric coming from the White House and administration. Summers labeled the new American President’s ideas on trade and trade restrictions as “potentially very dangerous” and “wildly irresponsible.” Summers stated:
“We’ll have to see how the policies evolve. At this point, the details of tax legislation haven’t been spelled out. At this point, the details of what’s going to replace Obamacare have not been spelled out. At this point, there’s been a lot of attitude, but not yet a clear indication of what the new trade policies are going to be. We haven’t seen a budget proposal from the new administration.”
“I think the instinct that business confidence is an important issue, I think that’s a valid instinct, and I approve of that. I think the things that have been said in the trade area are wildly irresponsible, and potentially very dangerous. I think the proposals on regulation could do enormous damage to the environment, to financial stability, to the functioning of the economy. And I think that the sense of uncertainty that’s being introduced is something that’s potentially very dangerous. And my fear is that all those downsides will catch up with the positive element, which is a sensitivity to business confidence. And my fear is that it will turn out that the strength in markets will be seen in retrospect as having been something of a sugar high.”
Whether Summers is right in his opinions or not, it is good reason to include gold in your precious metals IRAs just in case.
China Addresses Moral Hazard in $9 Trillion Managed Assets Market
China has finally become concerned enough about its $9 trillion asset management products that its various financial regulators are actually working together to draft new rules which are intended to warn people that there will not be any government backstop, bailout, or guarantee of these assets in the event of another financial crash and global panic.
The problem is that many investors see these higher yielding offerings as a type of no-risk savings. In fact, they have become a core component of the entire Chinese financial system since they grew to close to $10 trillion by June 30th of 2016. The problem for the policy makers is that they are walking a narrow tightrope. By doing nothing, they cause more dangerous investment classes to multiply and threaten the financial system and economy of China even more in the next instance of chaotic markets.
If instead they overreact now, they might create a self-fulfilling prophecy of fear. This could cause the investors who are already nervous to stampede toward the exits and could subsequently crush the investment vehicles which have evolved into a critical source of funding for Chinese banks. The graph below illustrates this point:
This is also a dangerous time for the government of President Xi Jinping to be overhauling the industry which directly manages an asset base equal to over 75 percent of the entire annual GDP of China. Besides having their twice per decade reshuffling of the leadership in the Communist Party in 2017, the Chinese government is struggling to contain a number of other threats. These include the possible upcoming trade war with the United States, a potential Chinese currency crisis, North Korea’s out of control nuclear program, and political turmoil in Europe between the effects of the Brexit and the march of rising populist parties on the continent.
Gold is both your best defense and offense in the geopolitical and financial struggles occurring all over the world today. Nothing safeguards your IRA assets better than the yellow metal which offers insurance and protection during market turbulence.