Today’s global economic crisis (GEC) which has hit hardest most
developed countries, and whose economic experts are trying hard to
rectify it, are results of the sub-prime financial debacle and the near
collapse of the United States of America automotive industry.
The
governments of most affected countries managed to quickly and
decisively avert an immediate global economic meltdown, by using
stop-gap measures of huge financial bail-outs to avert an economic
slow-down. But this was at the cost of the real effects of the GEC being
felt in the near future. In essence, these governments took over the
financial responsibilities of temporary funding economic growth.
The
question that one should ask is where did the government get the
massive funding to plug the black-holes in their economies? The answer
is they went to the printing press and printed fresh currency which they
used to inject into their economies, in order to fill up the
black-holes.
These measures brought some form of short-term
relief to these economies by averting massive industry closures, high
unemployment and most importantly an economic depression. But it’s well
known in economic circles that such measures always come with a hidden
cost, printing currency to stimulate an economy can only bring
short-term relief.
Today the results of such measures are just
starting to be felt, with a steady rise in unemployment, company
closures, credit crunch and property fore-closures. In essence these
economies are going through a period of economic slow-downs or
stagnation, better known as recession.
These symptoms are just
the beginning of what is still come, and that is inflation. At the
moment those with a general understanding of economics have started to
take precautious measures to ride the tide of tough times that are set
to come, by hedging their wealth and or savings against inflation by
investing in art or gold.
That should explain why prices of art and
gold have been achieving record prices.If one opens up the business
section of any newspaper, one will read about record prices that gold is
fetching in the markets , what is driving these record prices is the
fact that many investors are liquidating their currency holdings and are
investing in what has always been a safe-haven against inflation that
being gold.
The reason why gold is regarded a safe hedge against
inflation, is because of its scarcity, just like true art-works. The
only known time that gold prices have been low was during the period
when many central banks in developed countries opted to dispose the bulk
of their gold reserves.
For one to fully understand the current
events occurring in the global economy and to have reliable information
to choose investment options in order to ring-fence themselves against
the effects of the GEC soon to come, one must understand how the current
currency system works.
Historically countries currencies were
backed by what was known as “the gold standard,” this meant that the
real value of every dollar printed by a central bank was backed by gold
reserves held by the central bank. This meant that a central bank could
not print currency above the value of gold held in their possession. In
1971 the then United States of America president Richard Nixon ended the
international gold standard. The gold standard system is a monetary
system where currency backed by gold, that is to say, the currency
simply represents the gold that you own and can be converted into fixed
quantities of gold freely.
From 1971 up to 1973 the Smithsonian
agreement was passed pegging world currencies to the USA dollar rather
than gold as a fixed exchange. In 1973 the Basel accord established the
current floating exchange of currency rates we use today, called the
fiat currency system. In Fiat currency system money is not backed by a
physical commodity, instead its value is based on its relative scarcity
and faith placed in it by people use it.
However, when people
loose faith or confidence in the money, it irreversibly becomes
worthless , regardless of its scarcity Initially a rapid growth in
availability of credit is often mistaken for economic growth, as
spending and business profits grow rapidly, and a rapid growth in equity
prices. In essence as there are no real control measures to prevent the
over-printing of currency in a Fiat system, a fake illusion of
well-being and prosperity is created when in reality people are actually
digging themselves a deep hole.
In the long run the economy
tends to suffer much more by following contraction than it gained from
the expansion in credit. In plain English, the economy starts shrinking.
Hence the reason why some economies are now witnessing massive job
losses, company closures and property fore-closures. When an economy
reaches this stage, the next stage is the terminal effects of printing
currency in Fiat system that of hyper-inflation.Hyper-inflation is the
terminal stage of any Fiat currency, which occurs when money looses its
value practically overnight. It is often the result of increasing
regular inflation to the point where all confidence in money is lost,
life savings are wiped out overnight and prices rise faster than
people’s incomes.
Current financial instability has brought
about lots of talk about international financial reform, and even return
to the gold standard as proposed by some. The gold standard stands in
contrast to Fiat currency which has no intrinsic value, but governments
declare it to be legal tender, meaning it must be accepted as a means of
exchange. One of the main benefits of the gold standard is that it
protects citizens from hyper-inflation and debasing of the currency
through excessive government spending. With a fiat currency, a
government can print as much new money as it likes spending, which leads
to a gradual decline in value of currency and citizens’ savings. Under
the gold standard, a free banking system stands as protector of an
economy stability and balanced growth.
In the absence of the
gold standard there is no way to protect savings from confiscation
through inflation. Russia and China have suggested the establishment of a
super-sovereign currency, while Brazil and India have suggested
substituting other assets for their dollar holdings. Currently the U.S.A
and China are embroiled in a currency dispute over the value of the
Yuan. The U.S.A is claiming that the Yuan is under-valued, giving China
an advantage over the U.S.A in global trade markets, as Chinese exports
are deemed to be cheaper than the U.S.A. The currency stand-off between
China and the USA seems to have no end in sight as under a Fiat currency
system, any powerful economic country can determine the value of their
own currency to ensure no set system or measures can determine the value
of their currency. What is inevitable is many countries are to go
through a phase of hyper-inflation and the Fiat monetary system will
eventually die a natural death, and be replaced by the gold standard
system.
The question one must ask them self is, if the wealthy
investors are hoarding onto gold bullion's and if currencies will be
backed by the gold standard in the near future, then how does art come
into the equation as a safe hedge against inflation? Firstly before one
considers investing in gold they must understand that they need deep
pockets, as a kilo bullion bar is currently trading at $45 000. Even
after parting with such a huge sum, one must realise they can’t keep a
$45 000 gold bullion bar under their bed, so monthly storage charges
must be taken into consideration. Historically art has always been the
alternative to gold.
During the period of high hyper-inflation
in Germany which occurred after the First World War those who had
invested in art came through that period better off, as the return on
their investment in art-works out-performed investments in options that
were available during that period. Most importantly art managed to beat
the extremely high inflation rate, which would explain why so many
art-works were looted during the Second World War.
As an
alternative investment to gold, art has over years proven to be a real
solid investment. With these uncertain economic times that we are in,
its time to seriously consider your future by taking prudent
pre-cautions to ring yourself against the effects of the current
economic upheavals and events that are soon to come. In times of
economic instabilities you are better off investing in art or gold.
SOURCE
The
Ashok Art Gallery
is internationally known for one of its most important holdings: more
than 2000 major works by the world's most significant Artists.Over the
past years, as
Ashok Art Gallery has become a major centre for contemporary visual art,
the Gallery
has built a strong collection of contemporary work of different
artists, we became a sponsor of the STANDUP-SPEAKOUT Artshow, Organized
by Art Of Living Foundation and United Nations.Organized an
International Contenmporary
Art Exhibition
including artists from USA, The Nederlands, Pakistan and India.We have
also participated at Art Expo India 2008, 09 Mumbai and India Art Summit
2008 New Delhi.
