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Central Banks In A Lose-Lose Situation

by Claudio Grass, Acting Man:

Claudio Grass, Global Gold: Ronald, it is a pleasure to have the opportunity to speak with you. We’ve known each other for a very long time, both on a personal and professional level. Because of our central banks, we find our economies today operating on artificial stimulus and negative interest rates. How would you summarize the consequences of this policy?

Mr. Stoeferle: I have always considered it impossible to create a “self-sustaining” economic expansion by means of the printing press. By so doing, central bankers only succeeded in suppressing symptoms, but the underlying structural problems that created the 2008 financial crisis in the first place, have only gotten worse.

The primary goal, namely to stimulate the economy, has not been achieved. Low interest rates have provided artificial life support for unproductive and highly indebted companies, as well as for states. According to Standard & Poor’s, budget deficits in the euro area would on average be 1-2% of GDP higher, if the average level of interest rates between 2001 – 2008 were applicable today. Under normal market conditions, stock prices rise as a result of a fundamental strength in the economy, but in today’s reality, the rally in asset prices has only deceived market participants about the fundamental weakness of the economy.

The alarming fact is that asset prices will likely collapse if central banks cut the artificial support. High asset prices have become vital to maintaining confidence in the economy, while the majority of stock and real estate investments have been financed by cheap credit. Thus, abandoning the low interest rate policy would likely trigger a severe recession. On the other hand, continuing this policy would distort and corrode the economic structure even more, which would jeopardize the business model of pension funds, insurers and banks, and further inflate the real estate and stock market bubbles. The low interest rate policy has rendered the system profoundly fragile, with central banks virtually in a lose-lose situation.

1-TMS-2 and SPXUS broad true money supply TMS-2 and the S&P 500 Index. It is actually not a coincidence that money supply growth and surging asset prices are going hand in hand – in this case, correlation does actually imply causation. One of the world’s best performing equity markets (in local currency) in recent years was the Venezuelan stock market, which has soared even as the economy (and indeed the entire country) has crumbled to dust. During times of rapid monetary inflation, rising stock prices are not a reflection of the health of the economy – click to enlarge.

 

Claudio Grass: Do you believe central banks still have other options they could resort to or will this be the end of the road for them?

1-TMS-2 and SPXUS broad true money supply TMS-2 and the S&P 500 Index. It is actually not a coincidence that money supply growth and surging asset prices are going hand in hand – in this case, correlation does actually imply causation. One of the world’s best performing equity markets (in local currency) in recent years was the Venezuelan stock market, which has soared even as the economy (and indeed the entire country) has crumbled to dust. During times of rapid monetary inflation, rising stock prices are not a reflection of the health of the economy – click to enlarge.

 

Claudio Grass: Do you believe central banks still have other options they could resort to or will this be the end of the road for them?

Read More @ ActingMan.com

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