Zimbabwe is still number one "inflation" story of the year; however Vietnam is starting to write a similar one. It comes as no surprise that another dollar-linked or semi-pegged currency has collapsed vis-à-vis gold. As usual the weaker economies have to give in before the stronger ones do. Which one will be next!?

Vietnam’s 27 % inflation level has yet to reach the vertiginous levels we see in Zimbabwe but the country is experiencing every problem that causes a rush into precious metals. Interest rates are over 8% and rising, the stock market  was down every day since May, and official unemployment has more than doubled and reached 5.1% this year (Spain has 10,2% unemployment). The real spending power of household has drastically declined. The Vietnamese stock market index has collapsed all the way to the base from where the parabolic rise started (200) and Real Estate is coming down in sequence.

In Vietnam, people are reacting in a different way than in Zimbabwe. The main reason being that the population in Zimbabwe had and has no or little access to Gold. Vietnam (Indochine) was a French colony and it has, like all colonies have, inherited the French way of living. French people traditionally jumped into gold in times of economic and financial hardship. They were over and over again trained by history…and have not forgotten their lessons.  

Hence it is no surprise Vietnam’s economic and monetary problems have sent its people fleeing into gold. Not gold stocks... but physical gold bullion. They're hoarding it and hiding it from their government.

Only about 10% of what Vietnamese hold in Gold has been deposited into banks (which actually pay 2.5% interest on gold). The remaining 90% is likely under mattresses or hanging around the owner's neck.

 The trend toward gold is spilling into other financial areas. After a long period of quoting land prices in Vietnamese dong (the nation's currency), landlords are now setting prices in gold in order to avoid the devaluation.

The Vietnamese economic miracle, averaging a stunning 7.3% GDP (gross domestic product) growth rate this decade, is abruptly coming to an end. Austrian economists would classify the Vietnamese economy as a HOCG economy. What happens here and now is completely in line with the theory as explained by Ludwig von Mises.

Ironically, and as expected, since June, the Vietnamese can no longer buy gold. Officially, the government claims this new policy is to temper booming imports, which resulted in a record trade deficit for the first half of 2008.

 Next step, as Vietnam continues to lose control on inflation and the economy, gold confiscation becomes a real possibility.

Note:

1. Vietnam Suspends Gold Imports, Follows FDR's Great Depression Lead - July 04, 2008 - by Eric Roseman:  It seems Vietnam just borrowed a page from the U.S. financial-history books - by suspending all gold imports in June. This marks the first time a Southeast Asian country has ever barred gold imports during skyrocketing inflation, soaring interest rates and an overvalued currency - the Vietnamese dong.

2. Vietnam's communist authorities have temporarily suspended all gold imports in a bid to tackle the country's spiraling trade deficit and help support the depreciating local currency, the dong. With Vietnamese investors rushing into gold as a hedge against skyrocketing inflation, Hanoi - which sets an annual quota for gold imports - has withdrawn licenses for further imports, traders said yesterday.

3. A remark on an article written in Seeking Alpha stroke my attention.  The total registered FDI  (Foreign Direct Investment) for the first 7 months has been well over over $ 45 bn. I did some research and the result is very interesting. Milton Friedman wrote the early stages of a hyperinflation (Weimar, US civil war) were accompanied by a huge speculative influx of foreign capital. This momentarily can stabilize the equity and credit markets. It is to be seen as a result of false signals given by the Fractional Reserve Banking and the resulting misallocation of funds. However, after the initial benefit, the influx of foreign capital helped to destabilize the system: at first, foreigners are persuaded that the currency would subsequently appreciate. However, as the inflation goes on. expectations are reversed, the inflow of capital replaced by an outflow, and the currency depreciates more rapidly.  This is what happened in Germany and this is what will probably happen in Vietnam too.  Click here for the link to the article...
 

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