by Claudio Grass, Gold and Liberty:
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. Stöferle: 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.
Global Gold: Do you believe central banks still have other options they could resort to or will this be the end of the road for them?
Mr. Stöferle: Central banks still have several options for further monetary easing. For instance, they could cut rates deeper into negative territory. However, to create an environment in which banks could pass on negative rates to their customers’ savings accounts, cash would have to be abolished first, in order to avoid bank runs. We are already seeing signs of such intentions. But I cannot imagine these brutal measures being implemented, without stirring up even more unrest, in times when anti-establishment sentiment is already spreading. Moreover, negative interest rates have already been introduced in five currency areas with hardly any positive impacts on growth and inflation.
“Helicopter money” would be a more likely recourse, e.g. cash transfer payments to governments or private households, QE combined with fiscal expansion, or the cancellation of outstanding debt securities, which central banks hold as assets on their balance sheets. Some leading economists argue that helicopter money would be legally feasible and within the mandate of the central banks. It’s very likely that inflation would be triggered in this scenario, but the growth impetus depends on how the money is spent.
The easiest measure to implement would be “Forward Guidance”, which is a communication policy that affects the market participants’ expectations. Theoretically, they could also do open market operations involving gold purchases, which would be a kind of deliberate devaluation of the USD versus gold. What is certain is this: Once the feared recession kicks off, the adoption of further monetary and fiscal policy measures is as sure as night follows day.
Global Gold: Monetary policy is one of the tools of financial repression, or measures the state resorts to when it simply can’t afford its own expenses. What other tools are there and what can investors do to protect their wealth?
Mr. Stöferle: Artificially low interest rates and inflation are forms of financial repression, as they favour debtors to the detriment of savers. In the extreme scenario of negative interest rates where cash is abolished, we can expect negative nominal interest rates on peoples’ savings accounts.
The list of potential tools of financial repression is very long and inter alia includes a prohibition of the possession of gold. In the current environment of pronounced indebtedness, the survival of the system can only be achieved through a combination of economic growth and financial repression.
Hence, it’s crucial for savers to be aware of traps in large parts of the bond market, i.e. putatively risk-free government bonds, and to investigate investment options that are resistant to the grabbing hand of the state. Even though the possession of gold could also be restricted, gold is still a safe vehicle if it is owned physically. Although sceptics consider it a strange investment, as it doesn’t pay any interest, gold has instead now become relatively attractive, as it doesn’t cost any interest. If consumer price inflation is the gateway of financial repression, then of course the whole spectrum of inflation-sensitive assets, like silver, mining stocks, energy titles etc., should be considered. Generally, investments should be diversified – also geographically! – and resilient to different scenarios.
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