‘For two years, financial markets have repeated the same error — predicting that US interest rates will rise within about six months, only to see the horizon recede. This serial misjudgment is the result not of unforeseeable events, but of a failure to grasp the strength and global nature of the deflationary forces now shaping the economy.
‘We are caught in a trap where debt burdens do not fall, but simply shift among sectors and countries, and where monetary policies alone are inadequate to stimulate global demand, rather than merely redistribute it.’
These two opening paragraphs came from an article on Project Syndicate. It calls itself ‘the world’s opinion page.’
Whether it is I don’t know — after all, there’s a whole internet for that!
But I reckon it summed up the global economy better than any mainstream article I’ve read recently.
In less than 100 words, the opening paragraph explains the three key economic problems we’re facing: interest rates, a deflationary period and the shifting of debt.
The author goes on to point out that no matter what the Fed and other central banks try, they simply can’t stimulate demand to grow the global economy. Pumping up markets with quantitative easing isn’t working.
‘The fact is that QE alone cannot stimulate enough demand in a world where other major economies are facing the same challenges. By boosting asset prices, QE is meant to spur investment and consumption. But its effectiveness in stimulating domestic demand remains uncertain.’
‘Seven years after 2008, global leverage is higher than ever, and aggregate global demand is still insufficient to drive robust growth. More radical policies – such as major debt write-downs or increased fiscal deficits financed by permanent monetization – will be required to increase global demand, rather than simply shift it around.’
After reading this article, Jim Rickards summed it up on his Twitter feed: ‘People’s QE is another form of helicopter money. Technical name is ‘permanent monetization’.
Seven years after the market crash started and emergency measures were introduced, it looks like those emergency measures are actually the new normal.
Less than a decade ago, it was impossible to think the American economy would end up with permanent monetisation.
The ‘permanent’ part means it’s no longer just in case of emergency to keep the economy humming. It means government will continue to create debt for the central bank to buy, in the belief it will stimulate economic demand.
Continuing to monetise the government’s debt all comes down to the inflation outlook.
In the US, inflation data has run below 2% for 40 consecutive months.
So it makes sense that permanent monetisation would be considered.
You see, if inflation is running to target, or returning to targeted levels, permanent monetisation will have a dangerously stimulative effective on the economy.
Right now, there’s no chance of that happening. The Wall Street Journal wrote during the week that even Fed staffers estimate ‘inflation wouldn’t hit the 2% goal’ by the end of 2018.
Why is the Fed so hell bent on inflation?
Simple. It reduces the government’s debt burden.
As Jim explained in his book The Book Drop exclusive to subscribers of Strategic Intelligence:
‘There is a stated reason and unstated reason.’
‘The stated reason is that the Fed occasionally needs to cut rates to stimulate the economy. The unstated reason is that inflation reduces the real value of the U.S. debt. Right now the US has about $18 trillion of Treasury debt outstanding. If the Fed can achieve, say, 3% inflation for about 20 years, the real value of the debt is cut in half, to about $9 trillion in today’s dollars.’
‘Of course, this slow, steady kind is a form of unseen theft from investors.’
It’s not Inflation…it’s deflation
They keep trying, but the US hasn’t been able to manufacture inflation. Yet.
As the article above points out, there’s a ‘failure to grasp the strength and global nature of the deflationary forces now shaping the economy.’
Jim reckons it makes perfect sense. The way he sees it, the US is in a depression, so it’s natural to be experiencing a deflationary period.
The problem is, few people under the age of 90 actually have lived through a sustained period of deflation.
Until inflation takes control — like Jim predicts over the next few years— in times of deflation it pays to load up on hard assets. Think cash, land, fine art and bullion.
These hard assets are all part of Jim ‘barbell’ strategy. The idea is to prepare your portfolio to protect you from either an inflationary or deflationary environment. You can click here to learn more.
Editor, Strategic Intelligence