Thieving gold to take control
The Fed throws up the white flag
Since the end of QE (quantitative easing) and the ‘taper’ in October 2014, the Fed has been trying to ‘normalise’ its balance sheet and interest rates.
The balance sheet needed to be reduced from US$4.5 trillion to about US$2.5 trillion through ‘quantitative tightening’, or QT, which is tantamount to burning money.
Interest rates needed to be raised to around 4% in stages of 0.25%.
The purpose of QT and rate hikes was so that the Fed would have the capacity to lower rates and increase the balance sheet (‘QE4’) again to fight a new recession.
The rate hikes started in December 2015 (the ‘lift-off’) and the balance sheet reductions started in October 2017.
Both started slowly but have gained momentum.
Rates are now up to 2.5% and the balance sheet is just below US$4 trillion.
The Fed’s problem was that actual rate hikes were about 1% per year and the balance sheet reduction — at US$600 billion per year — had the effect of another 1% of rate hikes.
Would the Fed be able to achieve its goals of 4% rates and a US$2.5 trillion balance sheet without causing the recession it was preparing to fight?
It turns out the answer is no. In late December, Fed Chair Jay Powell announced that the Fed would be ‘patient’ on rate hikes. That means no more rate hikes until further notice.
Now, the Fed has also thrown in the towel on balance sheet normalisation.
When QT began, Janet Yellen said it would ‘run in the background’ and would not be an instrument of policy. Oops.
Now the Fed is ending it, so it clearly is an instrument of policy.
The Fed may have avoided a recession for now, but it has left itself far short of what it’ll need to fight the next recession when it comes.
That could lead to another lost decade.
The US looks more like Japan with each passing day.
First Venezuela, now Italy
In the past few weeks, both Shae and I have sent you articles about the custody and ownership of Venezuela’s gold.
First, Venezuela requested the return of 14 tonnes of gold held in custody at the Bank of England.
The bank refused to return the gold and said it would be held on account for a future legitimate government of Venezuela.
Next, Venezuela tried to ship about 20 tonnes of gold on a plane sent from Russia, and another plane headed for Dubai.
The US put out the word that anyone in the world handling the Venezuelan gold would face US economic sanctions and possible exclusion from the US dollar payments system.
That was enough to keep the gold where it was. It seems that Venezuela had lost control of its own gold by remote control from the US and the UK.
Italy could be the next in line to learn a lesson about sovereign gold ownership. Italy’s government (ruled by a coalition of nationalist parties, including the right-wing Lega and left-wing Five Star) is in severe financial distress but wants to spend more on social programs.
Italy has the third largest gold reserves in the world, after the US and Germany.
The government planned to sell or lease the gold and use the proceeds for spending programs.
But it turns out that about half the gold is stored in New York, London or Switzerland in vaults controlled by the Fed, the Bank of England or the BIS (Bank for International Settlements).
Ownership of the gold is not in the hands of the government, but in the hands of the Bank of Italy; the central bank.
Now the government is in a fight with its own central bank about who owns the gold.
Even if the government wins the argument, it’s not clear whether the Fed or Bank of England will return it anytime soon.
When it comes to gold, governments around the world are learning that you can’t mess with the central banks.
Professor who wrote the book on abolishing cash
says…he likes gold!
Professor Ken Rogoff of Harvard is a chess grandmaster, world-class economist and author or co-author of several bestselling books on economics.
He is also an advocate of negative interest rates, which is a form of wealth confiscation from savings accounts.
Rogoff understands that savers who face a negative interest rate on bank deposits can easily avoid the confiscation by taking their money out of the bank and holding it in the form of cash in a vault or other safe place.
To prevent this avoidance, Rogoff also supports the end of cash.
In his last book, The Curse of Cash (2016), he proposes the elimination of cash.
This would force everyone to hold their savings in the form of digital bank accounts, which would make it easy for the government to spy on every transaction and impose negative interest rates.
You would think that the enemy of cash would also be the enemy of gold. Not true! Even the sworn enemy of cash has a soft spot for gold.
Rogoff writes, ‘As a hedge, gold has enormous value. You never know what’s going to happen and when something really bad happens, gold is probably going to be worth a lot to you.’
Read this article to see what the Harvard professor has to say about cash, cryptocurrencies and gold.
It may surprise you.
All the best,