World Economic Growth

The world is gasping for economic growth. Flat or falling populations in much of the developed world has pulled the props out of economic expansion opportunities. This is compounded by a socialism trope that has removed the notion that capitalistic fiscal policies should be used to stimulate things ... like Trump has been effectively using in the US with tax and regulation cuts.

The result of course is that central banks in these countries are being used to try to stimulate their economies ... after all it worked in the US after the financial crisis in 2008-09. This lesson has been followed slavishly until interest rates have gone negative ... even for 30-year German government bonds. Another symptom of this lassitude is in England home buyers can get mortgages wherein only the interest is due monthly. And, in Holland, one can get zero or even negative rate mortgages.

This trend at most of our trading partners ... to ignore fiscal policy and rely on monetary policy for economic growth ... cannot turn out well. Even the US is now being forced to play this monetary stimulus game given that we must compete with the rest of the developed world. American 10-year interest rates have been more than halved in the last year ... yet we are still almost two percentage points above the rest of the big boys.

This pushes up the dollar as other seekers of yield flock to the US ... and a strong dollar hurts our exports ... not that weak economies elsewhere are not also a drag.

The solution: The developed world ... including China ... needs to start focusing on fiscal stimulus and productivity instead of relying on their central banks to hold their economic heads above water. If these Bernanke acolytes don’t change their ways, the world is in for some dark days.

The Path Forward

It is becoming increasingly obvious that we are stuck in an ultra-low interest rate environment and into the foreseeable future. Central banks around the world are keeping rates very low ... even in negative territory ... to keep stimulating their economic growth and foreign trade. This almost universal strategy has forced the American Federal Reserve Bank to stop interest rate hikes ... and its monetary tightening by reducing its balance sheet.

The consequences of this development suggests three things:

1) The United States is losing its ability to lead world-wide economic policy. We started to ‘normalize’ interest rates and, when the rest of the world did not follow suit, we backed off. We thought we were the monetary pied piper ... but we have learned that this is not the case.

2) Being that interest rates should remain so very low, this means that world-wide debt will grow beyond reasonable bounds. This suggests that a debt crisis is baked into our future. And it also suggests that funds holders ... like banks and senior citizens ... will not be advantaged like in past business cycles.

3) When the next economic turndown does occur, the Fed has little or no room to play the dove. If interest rates are still essentially zero, there is not a lot of room to go lower ... even if they are taken into negative territory. And, if the Fed’s balance sheet is still so bloated, there is not a lot of room to inject more money into the economy.

Yes, the current tariff wars complicate these monetary decisions enormously. But, one hopes that today’s lopsided trade balances resolve themselves before the next recession hits ... or the next debt crisis rears it’s ugly head.

I’m holding my breath ...

Inflation

Central banks around the world are pulling out all stops to try to counter what has been a persistent global deflationary trend. ... at least in developed economies. They have tried Quantitative Easings 1, 2, 3, etc. ... purchasing vast quantities of government debt and now even private debt to increase the money supply ... clearly to the point of diminishing returns ... since all this cash is not causing the sleeping giant of inflation to awaken. Of course, with all this debt on their balance sheets, they have also forced interest rates down ... even into negative territory ... so that all this debt doesn't crush their income statements and, more importantly, in an attempt to disincent private savers ... since saving negates spending which, in turn, is necessary for inflation.

What have been the consequences of all these central bank actions?

- I would argue that these central-banks' easy monetary accommodations have given the fiscal side of governments the license to spend beyond reason .. feeding the yaws of these ever increasing central banks' debt issuances. This will surely have longer-term consequences.

- Raising interest rates, particularly in the United States, has been like a trip to the dentist ... something put off until absolutely necessary. Don't forget that most 2015 projections had our Federal Reserve Bank raising rates four times in 2016. How many times so far? Zero! And that tooth is throbbing more and more. And I predict it won't happen before the election either ... since this might damage Hellary's chances. In December, it is more likely, especially if Trump is elected.

- Of course raising interest rates attracts capital from around the world which strengthens the dollar which then hurts exports and helps those countries importing here. Thus, the U.S. balance of payments gets even worse than it devastatingly is. This might be OK with Clinton but wouldn't sit well with Trump. He might lean on the Fed to weaken the dollar (not necessarily with interest rates) to help bring manufacturing back to America. The Fed might resist which would open another can of worms -- more federal government control over the Fed.

- The jury is out about what happens with government spending and deficits after the election. Both candidates have promised increased infrastructure spending and, Trump, a beefing up of our military ... while Hellary will open the spigots on social transfer payments. Taxes will likely go up under either candidate but, I would hope, under Trump, we might get real tax reform which might then spur our economy enough to reduce deficits. In Trump's case the Fed might be able to move more into the background except Trump might push to lengthen the term of our government debt. Clinton would still require a very accommodating central bank.

This is all very complicated with many fiscal and monetary cross currents. I wish I had the confidence that any of the world's central banks knew exactly what they were doing ... including our own. However, I think that one consequence is very likely to occur. Once all these monetary gurus have coaxed the inflation genie out of the bottle, that it will not stop at their targeted 2%. All this money in hiding around the world will then start sloshing around and may well sink a few of the more injudicious ships of state.

Why is Gold in the Toilet?

The price of gold has dropped today $93, as I write this, to $1409 per ounce ... down from $1803 last August ... and an all-time high of $1920 in September of 2011.  That is almost a 27% decline and is causing a lot of consternation among the gold bugs and panic among those schlemiels who bought gold after listening to those high-pressure ads on television.  Now the question is, why has this "guaranteed investment" gone sour,  I can offer four reasons:

1) The price of gold has been anticipating the return of rampant inflation as a result of the U.S. Federal Reserve Bank and other central banks around the world printing new money as fast as they can get the paper delivered to their mints.  Like any speculative market, the price of gold was discounting the future and, when the "future" doesn't occur on schedule, things can get messy.  Ben Bernanke's interest rate manipulations and a continued weak U.S. economy/employment picture has kept a lid on inflation  ... which has pushed back the date of the big payoff for U.S. gold bugs.

2) Since there are significant carrying cost to owning gold (storage fees, margin interest cost, no dividends, and steep selling discounts), an unloading of same was almost destined due to the drawn-out timing of the expected "rally." (The price of gold in Japan, based on the recent and dramatic quantitative easing of the yen, is hitting new highs.  This maybe is another gold market bubble in the forming.)

3) Because of the austerity measures being imposed on some European Monetary Union members, there is considerable pressure on these central banks to sell gold reserves to meet their debt obligations.  Apparently last Friday, Cyprus was the first country to crack under the strain and either is or will be selling off significant amounts (tons) of gold.  Are Spain, Portugal, Italy, Greece, and Ireland to follow?

4) Independent of these three fundamental factors, clearly technical factors are now ruling the roost.  If speculators, such as hedge funds, see the price of gold plummeting, they head for the exits, elbows akimbo.  Small private investors often get crushed in the stampede.

So, dear readers ... gold now is in the toilet ... and may stay there until there are real signs of inflation rearing its ugly head again.  When might this occur?  I am not that good at predicting things.  But, I can safely say that, when it does occur, it will probably be lightning fast.

Afterward: as of 10:30 on 4/15/13 gold is selling for $1342 per ounce.