Facing economic reality after “Financial Botox” wears off
The economic soothsayers appear to have abandoned using the “Great Moderation” and the “Goldilocks Economy” as descriptive economic systems. Instead, the financial world seems to have accepted “Botox Economics”. Botox, of course, is a toxin commonly used to improve a person’s appearance. However, the affect is only temporary and with sometimes significant negative side effects. As the global financial and excess debt crisis continues to roll along, it does so with “Financial Botox” as a flood of money from central banks and governments covering up previous unresolved and, perhaps, very serious problems. One cannot forget the famous Will Rogers’ statement: “If stupidity got us into this mess, then why can’t it get us out?”
We are living today at a time where there does not seem to be a way out of the global monetary madness that exists. By continuing to up the monetary ante with the gamble of the US Federal Reserve policies to revive the US economy, we may be heading in a direction that will not be totally comfortable. Ben Bernanke tries to operate on the basis that his job is really easy. The use of zero interest rates and now unlimited Quantitative Easing, while easily understood, has already failed to deliver a better economic time for the US.
By all measures we should expect to live with global slower growth and for a very long time. In a recent paper, “Debt Overhangs: Past and Present”, authors and economists Carmen Reinhart, Vincent Reinhart and Kenneth Rogoff suggest that the US economy might not recover completely until 2030. The authors are working with the same background ideas that are our concern. The US and much of the rest of the developed world are now contending with unprecedented debt levels that have built up since the 1940‘s. they say that when “gross public debt” is excessive, as it is today, slower growth is existent for a “very long time”. “Excessive debt” is when “gross public debt” is in excess of 90% of gross domestic product, which is the current position of the US and many other countries. As is usual, the Rogoff et al paper concluded by looking back in time. The current situation is likely to be in the average of 23 years, thus 2030 or later. To the extent that emerging markets are not weighed down by excessive debt baggage, they have the best likelihood of growing their economies and have better investment opportunities than developed countries.
For those of you who have read the previous Annual Report messages of our company, Dundee Corporation, you will know that I have been concerned about a global currency war outbreak for some time. But in particular, my reference to James Rickards and his book, “”Currency Wars”, in last year’s review. Well today, one year later, we remain living in the biggest debt bubble in the history of the world and the evidence of currency wars is beginning to be very global evident. The use of excessive monetary stimuli and artificial ultra low interest rates are creating the ultimate bubble in money itself. Central banks – while quietly increasing their gold holdings – are also creating the money bubble. We now are in the biggest debt bubble in history. Country leaders know that each time that they face deflationary forces they require offsetting inflationary forces (monetary stimulus of some form); and they are required to become even more aggressive. The necessary avoidance of the deflationary waves that the world is facing is causing the incubation of the coming wave of future inflation. Most conventional economists do not really accept the lack of “demand pull” and the yet inflationary moves that will likely be felt.
We are headed into a transitional movement of a new monetary system which will be required for essential expenditures on energy, food, agriculture and personal and household care as well as defence. Ultimately, the world will require a new reserve currency to replace the US dollar in order to eliminate what will likely be an inflationary/deflationary crisis. This essentially refers to the rise in price of almost everything in conventional money and a simultaneous fall in terms of gold. The strategic framework behind this concept is based on the long wave of the Kondratieff cycle.
Keeping the global debt bubble inflated is taking trillion dollar deficits which are now supplemented by open-ended central bank money printing, not only in the US but in most other developed countries as well. We are watching the creation of the ultimate financial bubble in money itself. Each monetary stimulus, be it in Euros or dollars or whatever, must be even more aggressive than the last. This is not a sustainable position. As investors we should be preparing for an explosion in an inflationary manner and a major currency crisis.
While most of the obvious outlook for the year 2013 carries uncertainty, there are three things of certainty for this writer:
• Inflation will go higher
• Yield of any kind will be the attraction and will be at higher and higher rates
• The commodity super-cycle is not over
Inflation is a certainty because without any other reasons, and there are many, it is a political and financial tool that allows for deleveraging of debt and payment of deficits. In addition, politicians very seldom get elected by causing deflation. Almost everyone likes inflation. If you are a government and inflate prices, then you keep people struggling and working hard to keep pace with inflation. The poorer the people are, the more likely they can be kept under control. In addition, inflation for rich people is taxable and deflation is less so. No government ever has an incentive to deflate, but has incentive in fact to inflate.
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