Ambrose Evans-Pritchard, international business editor for the Daily Telegraph in London, says debating the risk of a full-blown depression is pointless.
“There’s no risk,” Evans-Pritchard told Moneynews.com in a wide-ranging interview. “We’re in it. It’s begun.”
Evans-Pritchard has covered world politics and economics for 25 years. His reporting in the Telegraph about the global liquidity crisis and now banking crisis was way ahead of the curve.
In an exclusive interview, Evans-Pritchard compared the present economic environment to the beginning of the Great Depression, just before the European banking crisis of 1931 that took down the German and central European banking systems.
He pointed out that, during the past six months, the world’s major economies contracted at rates more severe than those of the 1930s.
During the last quarter, Japan’s economy contracted at a 12 percent annual rate, Germany’s at an 8 percent annual rate and some of the Eastern European economies fell by 30 percent.
“I know that people in America see the damage all around them and think it couldn’t be worse, but it is actually worse in a lot of other countries, in part because they didn’t respond in time,” Evans-Pritchard says.
Stressing the need for a well-coordinated global stimulus, Evans-Pritchard observed that countries that tried to enact stimulus plans by themselves during the 1930s were severely punished in the currency markets.
For this reason, he favors a worldwide, if temporary, fiscal plan.
“Everybody’s got to do it simultaneously,” he says. “We’re in a once-in-a-century crisis, a classic Keynesian liquidity trap where the government needs to step in to some degree and replace the private economy temporarily with demand.”
Stimulus plans aside, Evans-Pritchard believes that, ultimately, the cure for this crisis must come through the monetary policy of central banks. The question here, he says, is whether zero interest rates, followed by quantitative easing in the major economies, is going to work.
“An economy can cope with deflation, with falling prices, that’s not a problem in itself. It can cope with high levels of debt,” Evans-Pritchard says.
“What it cannot cope with is the two together. It’s the combination of these two things that’s the absolute killer, and this is what we face in the United States, Europe and Japan … basically globally at this point.”
Additional key points from the interview:
• Evans-Pritchard, long an opponent of the euro, believes now that the European currency will fall apart. “I think it’s an arrogant project pushed by political elite for political reasons,” he says.
“We’re now seeing the consequences, where a whole lot of the weaker countries are trapped in permanent deflation and depression” as countries like Spain and Ireland let their wage costs rise much too high in the years since the euro launched.
• In contrast, Evans-Pritchard is convinced the dollar will remain the world’s default currency.
“I know a lot of people think the dollar’s going to plunge, but I don’t really see what it’s going to plunge against,” he says.
“Ultimately, I think the dollar may get into difficulty three or four years down the road, but that’s a different story. As long as this crisis goes on, people want dollars,” he says, noting that hedge funds and other big financial players have done most of their financial transactions in dollars.
“As the global system implodes in on itself and there’s all this deleveraging going on, they all have to get dollars,” he says.
“Basically, the dollar is king and all the other currencies are revealing their weaknesses.”
• European response to the financial crisis was far too slow, Evans-Pritchard says, because European leaders didn’t take it seriously enough at first.
“There was this complacency, particularly in Germany, where they thought, ‘Well, this is an Anglo-Saxon problem and an American problem and it’s nothing to do with us,’” he says.
However, he says, France’s President Sarkozy did a good job of helping to rescue the European banking system after Lehman Brothers collapsed last year.
“He’s made a lot of other mistakes, but he was very quick to recognize intuitively, before the others, how serious this crisis was going to be.”
• Evans-Pritchard now believes gold will continue to rise regardless of what happens to the banking system.
He notes that massive buying of gold exchange-traded funds is already happening, as well as purchases of the pure metal and coins. The price has just surpassed $1,000.
Banks in London, he says, report that their very rich clients are requesting delivery of the metal itself. “They don’t want a piece of paper, they want something they can keep hidden away in their homes,” Evans-Pritchard says.
“I think there are two outcomes to this crisis,” he continues.
“Either the central banks of the world succeed in reflating, in which case inflation’s going to take off and then gold will do very well — or they fail, in which case the institutional structure that we’ve know for the post-war era will start to unravel, in which case gold will also rocket.”
“I think it’s going to be one or the other, and both seem to me to be favorable to gold.”
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