Attitude Change - Choice or Chance

Posted On Tuesday, Nov 22, 2011


The world is currently challenged with an acute "attitude" problem in terms of economic and monetary affairs. A change in attitude is a matter of choice not chance. This acute attitude problem manifests itself in the erroneous policymaking that currently prevails.

So, what defines an attitude? As per Lumley’s statement published in Wikipedia; an attitude is "a susceptibility to certain kinds of stimuli and readiness to respond repeatedly in a given way—which are possible toward our world and the parts of it which impinge upon us." This definition perfectly suits the situation of the present economy. At the sight of a trivial problem, a round of emergency meetings and band aid solutions are carved out using money created out of thin air. While this money does provide short term respite, it worsens the problems in the long run.

The approach at the policy making level towards the economic turbulence, reflects a high degree of irrationality. The critical attitude issues have led to the crisis and aggravated the problem. There is a consistent repetition of erroneous policy making whether it was banking system debt problems of the early 1990s, the emerging market crisis, the Long-Term Capital Management (LTCM) collapse, the repercussions of the dot-com bubble burst or the recent housing and financial collapse. With each incident the Federal has responded with its magic wand of reflationary policymaking.

A combination of loose monetary policies, development of toxic financial instruments and high leverage fueled a credit boom which was clearly unsustainable. Market interventions in such times of difficulty kept the momentum going. The masses borrowed from their national wealth and future revenues to spend in the present. It led to a buildup of huge private sector credit. Financial innovations caused an increase in toxic products that helped finance the credit boom. These complex products were structured in a manner that provided a perception of "safe" higher-yielding and liquid investments, which developed into a breeding ground for speculation and leverage. The foundation itself was highly unstable yet, on sight of the slightest trouble, bailouts and monetary infusions were called upon as an instant remedy.

But now it seems that we have reached the final stages of the game. These reflationary policies have developed into a gigantic debt problem at the government level. It brings together extraordinary challenges as it cannot be resolved using the old traditional methods. You cannot solve a debt problem by creating more debt. The private debt problems were solved using loose monetary policies including rate cuts, guaranteeing obligations, junk purchases and liquidity infusions by way of debt issuance or monetization. These measures bring optimism across asset markets as if the issue had never occurred and would postpone the problem, which would in fact complicate matters in the long run – like the recent sovereign debt crisis. The mechanisms that worked as band aid solutions in the past may not work now as the markets have started to question the creditworthiness of the government`s debt load.


A change in attitude does not happen by chance. It needs patience and consistent efforts. Similarly, the issues with sovereign debt, which have ballooned out of proportions cannot be resolved immediately. It is a gradual and painful process as it emerges from deep systemic problems. As can be seen from the above chart, the issue across nations; be it Greece, Spain, Italy, the U.S. or Japan, is that these countries have been spending beyond means – resulting in enormous deficits and huge public debt loads. Not only are the governments running up huge debts, the underlying economic structure has also been heavily impaired from years of credit abuse. The policy response has always been biased to facilitate the credit momentum. This facilitation through monetization programs create an illusory environment intended to promote sound economic and financial recoveries. These expansionary policies foster development of credit driven bubbles that cause economic impairment over the long run.

The unsustainability of government finances are increasingly being questioned by the markets. It reflects in the significant increase in yields of bonds issued by various nations in the Euro zone. In the aftermath of the credit crisis, the periphery European economies were able to borrow at artificially lower rates created by a rate slashing cycle which is prevalent across the globe. Concerted central bank actions in turning monetary policies as accommodative as they can; ensured that markets accepted the continuation of lower interest rates and mispricing of sovereign credit risk.

Sovereign Vulnerabilities and Market Pressures
Sources: Bank for International Settlements (BIS); IMF: International Financial Statistics database, World Economic Outlook database; BIS-IMF-OECD-World Bank Joint External Debt Hub and IMF staff estimates.

But now, the markets have been vigilant at pricing in the risks emanating from unsustainable debt as they look for more prudence from policy makers. And throughout, there will be a growing disconnect between what the markets have come to expect from policymakers and what they can now realistically deliver. We have reached a stage where fiscal and monetary stimulus comes to the inevitable end of the road. Piling on additional government debt is then no longer a solution, leaving the path of “sobriety & austerity” for them to pursue. As witnessed in Greece, Ireland, and Portugal, there comes a point where the market recognizes debt trap dynamics and begins to estimate sovereign risk.

The market today is keen on evaluating risk and debt dynamics, and is determined to push borrowing costs significantly higher. Given the low value of its sovereign, European credit and inter-bank lending markets are faltering. The resulting de-leveraging and de-risking - and tightened general finance - will probably pressurize markets, lower the overall confidence and economic activity which in turn will add further strain to the unfolding debt crisis.

At present, the market seems to be forcing on a financial or economic reform at the center. The problems will not be resolved without a big change in fiscal policy and /or debt restructuring. But it is high time that Europe, and the world, stopped swaying from one short-term fix to the next and addressed the real structural issues. When they use the statement, “This time is different”, it seemingly fits well as this problem will not be resolved easily as the previous crisis. Indeed, there are uncertain times ahead of us and the policy response that we observe is the most alarming aspect.

According to table below sourced from IMF, gold falls under the safe haven asset class. It illustrates the positive movement of gold which almost touches the 20 mark, when compared with other assets such as Sovereign CDs, Bank Equities, Commodities and Risk assets.

Asset Price Performance since the April 2011

(In percent; VIX in percentage points; VIX and sovereign CDS are inverted)
Source: IMF

Such uncertain times and erroneous policy making, calls for an allocation to gold with a hope that it would be helpful against this change in attitude of the market.



The views expressed in this article are the personal views of the Fund Manager of Quantum Gold Fund. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purpose only and is not meant to serve as a professional guide/investment advice for the readers. This article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Readers are advised to seek independent professional advice and arrive at an informed investment decision before making any investments. Please visit – to read scheme specific risk factors.

Above article is authored by Quantum.

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