G-20 Dodges Deflation

While I didn’t like the senseless destructive behavior outside the weekend’s G-20 gathering in my native Toronto, I did like some of the constructive results that emerged from the meeting.

The risk of dangerous deflation in the developed markets is still very real, so it’s a good move by the debt-loaded members of the G-20 to take a balanced approach to cutting their deficits by half by 2013, gradually reducing their stimulus spending and stabilizing debt burdens by 2016.

At the same time, the countries also committed to growth as a top priority – had they imposed harsher fiscal and monetary terms, capital could have been choked off and the potential for growth gravely threatened.

While inflation remains a significant risk in the long term, given all of the economic stimulus money in the system, right now the bigger hazard is deflation.
The big problem with deflation is that once that cycle is under way, it is very difficult to get out of. Just look at Japan – consumer prices there have fallen for 15 straight months and pessimism is running high.

Falling prices may sound like a good thing, but when people see falling prices, they delay their spending because they want to see if prices will fall even more. This waiting game further slows economic activity and raises unemployment in a crippling circle.

Stubbornly high joblessness is plaguing the U.S., and it may worsen now that the boost from Census Bureau work is winding down – nearly a quarter-million temporary Census jobs have ended this month. On top of that, more than 1 million Americans are at risk of losing their unemployment insurance and health benefits as of July 1.

We believe strongly in government policies as a precursor for change.

Every member nation of the G-20 acts in its own economic self-interest; however, they also recognize a broader interest. Had they as a group opted to be more austere, the multiplier effect (the G-20 represents 85 percent of the global economy) would likely have been severe.

About Frank Holmes 263 Articles

Affiliation: U.S. Global Investors

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.”

He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications.

Visit: U.S. Global Investors

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