World Trade Organization Warns, Gold Rises, IMF Talks, U.K. Loses Credibility

by: TradingHelpDesk

WTO Warns Against the Rise of Protectionist Policies

The World Trade Organization predicts unemployment across industrialized nations will increase for at least one more year, possibly two. The WTO forecast, endorsed by most economists, warns of the social and political implications of a two-speed recovery in which industrial corporations and investment banks recover swiftly and prosper thanks to government subsidies and loose monetary policies whilst the working class within industrialized nations continues to suffer either unemployment or lower incomes.

The WTO statement warns western governments not to succumb to public pressure nor adopt protectionist policies to save domestic jobs in an effort to gain public support ahead of elections.

Anti free-trade policies would endanger the long term growth potential of the global economy, WTO Director General Pascal Lamy remarked. Lamy also cited the recent growth of “buy local” campaigns and increased political consideration of higher import tariffs as the unwelcome foundations of growing protectionist activity.

The statement is music to the ears of multi-national corporate leaders who in the pursuit of higher profits are keen to cut jobs in higher wage nations such as the US and UK and outsource production to emerging countries that offer employees less job security, weaker health & safety protection and lower wages.

One of the WTO’s stated objectives is to “help trade flow as freely as possible” and it argues that a lack of free trade “ultimately leads to bloated, inefficient producers supplying consumers with outdated, unattractive products”.

However, what the WTO fails to discuss within its rather naive textbook solution to today’s global economic challenges is that its agenda actually helps large western corporations justify the policy of job cuts in home markets, in the name of cost efficiency and globalization.

Let’s not forget it was the extreme application of free trade and the view, now proven as wholly flawed, that lightly regulated capitalist economies could be self-correcting, that created the 2008/09 “greed bubble” recession in the first place.

Gold Stretches into Unknown Price Territory

Gold reached a new record high this week as speculators and central banks continued to accumulate the precious metal as a hedge against dollar devaluation and future inflation.

Further assisting the sharp rally is the absence of technical resistance levels on gold charts with past highs now broken. A number of commodity analysts cheerfully suggested the new highs indicated that a return to below $1,000 per ounce would never happen again, citing the structural decline of the dollar. Despite such simplistic analysis, and although a small technical correction is more likely following recent sharp gains, the long term prospects for gold remain favorable.

Since March 2009, gold price movements have been negatively correlated (inversely related), to the US currency with each step of dollar depreciation being matched with a step-up in the gold price.

The price, $1,117 per ounce at the time of writing, compares with an average sale price of $275 per ounce secured by Gordon Brown when he sold more than half of Britain’s gold reserves between 1999 and 2002. Brown chose to sell at a 20 year low in prices to “diversify” the UK’s reserves despite overwhelming advice to the contrary.

Chart: Gold Weekly to 11th November. Source: StockCharts

IMF Seeks Global Banking Insurance Regime

The International Monetary Fund is promoting the introduction of a new global fund into which banks would pay insurance fees on riskier transactions. The fund would equip the IMF with a cash reserve to help rescue the sector in the event of future banking collapse. The proposal is similar to a suggestion put forward by the UK government at the recent G20 meeting. Timothy Geithner, the US Treasury Secretary, rejected the plans, immediately suggesting a “day-to-day” transaction tax was unsupportable.

The IMF Managing Director defended the idea, disputing the scheme would be a simplistic tax on all financial transactions.

The IMF is to finalize its plans ready for informal presentation to G20 finance ministers next April before an official submission to G20 leaders in June.

Brown’s surprise endorsement of a global insurance scheme represents a U-turn on the UK government’s previous stance which sought to protect UK banks, and therefore predominately City of London institutions, from a global tax.

However, without US support the proposals have a near zero chance of implementation.

Federal Reserve Reinforces its Loose Monetary Policy Stance

The dollar continues to weaken in response to the steady flow of Fed statements promising a loose monetary policy deep into 2010.

Last week’s keenly anticipated Fed statement killed off the ‘will they or won’t they’ question in relation to the possibility of near-term monetary tightening and further comments from the St. Louis Federal Reserve Bank President James Bullard reinforced the Fed’s desire to keep stimulus in place until the recovery is solid. Bullard also implied the Fed had widened its focus from purely growth to include jobs and would refrain from hiking rates until monthly job growth had returned.

The most recent unemployment data disappointed analysts, highlighting 10.2% of the potential workforce were registered as unemployed - though the figure does not include millions more who have at least temporarily given up looking for work.

Bullard also suggested the outlook regarding inflation was highly uncertain and that analysts would need to go back decades for a similar scenario of potential price volatility. He also implied the Fed could wait two-and-a-half to three years after the end of the recession before raising interest rates as long as the current loose monetary policy didn’t fuel an asset price bubble.

Chart: USD Index Weekly to 11th November. Source: StockCharts

Fitch highlights UK as “Most at Risk” of a Downgrade

Fitch, the respected ratings agency, has retained its “AAA” rating and “stable” outlook on the UK but has suggested Britain is most vulnerable financially among the major economies and may suffer a downgrade if it fails to address its huge budget deficit.

Sterling fell sharply on the announcement retreating from its recent high.

Fitch also added fuel to the 2010 election fire suggesting whichever party wins power would have to rush in measures to halt debt growth and introduce a robust plan to reduce the deficit during the life of the next parliament.

The Confederation of British Industry responded to the Fitch report requesting confidence-improving measures be implemented and commented, “The UK’s AAA credit rating must be put beyond doubt and the budget returned to balance by 2015. We have called on any new administration to set out within 100 days of taking office a clear and credible path to achieve this aim.”

The Tories took advantage of the Fitch statement and blamed Gordon Brown for failing to deal with the country’s debts whilst the PM assured listeners that his government would take “the necessary action to cut the deficit in half.”