SEMI – MONTHLY FISCAL/MONETARY REPORT – NEVER BEFORE IN RECORDED HISTORY – TRILLIONS WITH NEGATIVE INTEREST RATES – IS THIS CONSTRUCTIVE ?
While this is just one of the monetary milestones, and marketplace distortions, we are witnessing, never before in 5000 years of recorded history has there been a period where interest rates were negative. This is not a geographically isolated or immaterial development, nor is it limited to short term securities. Something like 35% of all the sovereign (governmental) debt that is outstanding now yields less than nothing, penalizing “savers” for their prudence. In a financial world far more financially linked than ever before, these debt instruments are not issued by “banana” republics, rather by countries that include Japan, Germany, and Switzerland (and the U.S. is barely above zero).
Central Bankers remind me of too many Pychotherapists who, when faced with an unexpected or inadequate response to prescribed medication, take the simplest, and apparently the most obvious, remedy: Just Increase the Dosage ! Another way to put it: “In a hole? Just keep digging!”
Since the financial crisis of 2008-2009, major trading countries have taken turns in implementing various forms of monetary stimulus, including government spending, financial bailouts, transitioning from minimal interest rates to ZIRP (Zero Interest Rate Policy) to NIRP (Negative I.R.P.), to weakening their currencies. Debt around the world piles up faster than respective GDPs, so it has become increasingly impractical to allow interest rates to rise, which in turn would wreck governmental budgets. At the same time, the increasingly large stimulus programs have generated less and less productive growth. The “financial heroin” hit must become increasingly large to even approach the most recent short time “high”. Of course, more than one Central Bank has expressed their hope that politicians would replace monetary measures with budgetary approaches. In essence, the Central Bankers have no bullets left, but THERE IS NO POLITICAL WILL, on either side of the aisle, to implement the necessary budgetary reforms. In a historical context, this is not new, or surprising. There has NEVER been an unbacked “fiat” currency that has survived. Our 1913 dollar, when the Federal Reserve Bank was established to control inflation, is worth less than $.03 today. In another 100 years, I have no doubt, it will be worth $.03 x $.03, and that’s close enough to destruction. Best to have your wealth in asset classes other than government issued paper money.
Books have been, and will continue to be, written, which describe the cause, the effect, the prescriptions, the “endgame”, the unintended consequences. We don’t know exactly how all this plays out over time, and the timing of our suggestions would be uncertain in any case, but some things we know. Major distortions to the “normal” marketplace are already evident. With all the monetary stimulus, banks are not lending, and businesses are not borrowing. Corporate executives would rather make an acquisition or buy back stock, than build a plant and take on long term employment responsibilities. While the stated “unemployment rate” would normally indicate that we are at “full employment’, the jobs are temporary, relatively low paying, and the most stable group of workers has been those above 65 years of age. May have something to do with the fact that their savings are earning nothing, so they prefer to keep working. At the other end of the spectrum are the recent college graduates, burdened by student debt (often backed by Uncle Sam).
The ongoing Central Bank strategies have not worked in Japan over the last twenty five years, have not worked in Europe or the US over the last 8-9 years, and are running out of steam in China. Yes, a financial calamity was avoided in 2009, so that can be considered a Central Bank victory, but that’s getting to be a long time ago. Balanced and effective productivity enhancing measures have to be put in place, but the politicians and the Central Bankers seem to be calling the same old plays.
We believe that interest rates will remain negligible, if not negative, as far as the eye can see. We believe that Central Banks will be increasingly desperate to stave off deflation, as we have witnessed in Japan over the last twenty five years, Europe and the U.S. more recently. It hasn’t worked, it doesn’t work, and it will not work. We believe that gold related securities will continue their recent rise, as this reviled and (we believe) misunderstood asset class catches up with alternative investments. If someone tells you that there is not enough gold to back government issued paper currency, as it once did in more productive times, it’s true. At $1,350/oz, they are right. At $7,000/oz, they are wrong, One way or another, currencies around the world have to be “restructured”. Without a sound currency, we will not have a sound economy.
I created several three minute videos on Youtube, relating to gold as an asset class, which can be accessed from the right side of our Home Page. Enjoy !