“Our prosperity is temporary and illusory. “

As we go through an important paradigm shift in politics, in the global economy, in equity markets, and of course in precious metals too, the fundamental economic principles we used to rely on seem to be increasingly under attack. Central bankers the world over are doubling down on reckless monetary policies, punishing savers and responsible, long-term investors.

In Europe, we have already seen the damage that negative interest rates and protracted QE have inflicted, and will continue to do so, as the European Central Bank recently confirmed its intentions to insist on cheap money policies. Now, as the Fed seems to be going down that same path and as the US President himself is calling for zero and even negative rates, the present challenges for conservative investors are only bound to be compounded.

To get a better understanding of the current situation in the US and of the tremendous impact that the Fed’s decisions have on the economy and on the average citizen’s life, I turned to my good friend Jeff Deist, President of the Mises Institute in Alabama. For decades, Jeff has been a strong advocate for property rights, free markets, self-determination and open debate, while he has also worked as a longtime advisor and chief of staff to Congressman Ron Paul. His experience, his deep understanding of economics and his analysis of the dangers of politicizing monetary policy, not only provide a lot of food for thought, but can also help responsible investors identify the challenges and opportunities that lie ahead.

PART I

Claudio Grass (CG): Fears of an upcoming recession are on the rise in the US, rattling investors and dividing analysts. On the one hand, we see robust economic data coming out of the country, like consistently solid jobs reports. On the other hand, the global economic slowdown, the trade war and the overall uncertainty have taken their toll, while the underlying, fundamental problems of the US economy, such as the debt burden, remain unsolved. What is your assessment and expectations for the next couple of years?

Jeff Deist (JD): The economic data produced by the US federal government, in particular GDP, unemployment, and the consumer price index (CPI) are all dubious from the perspective of sensible economics. GDP is nothing more than a Keynesian aggregate that includes government spending (regardless of borrowing/deficits) and makes a fetish out of exports (regardless of consumer preferences). In the early 2010s, Turkey was able to borrow and spend considerable sums on public works, and thus reported very high GDP. But today we see that Turkish prosperity was an illusion, funded by debt. In the same way, US GDP is very much driven by nearly $4T in government spending. A better measure of an economy’s true output is the Rothbard/Salerno “gross private product,” which subtracts government outlays.

Unemployment figures are also unreliable, because they do not measure millions of Americans who have simply stopped looking for work– for example early retirees, housewives, and graduate students who would rather be in full-time jobs. And of course, CPI does not measure food, energy, and taxes, nor does it measure hidden forms of “shrinkflation,” such as when a packaged food item stays at the same price but slightly reduces the ounces contained in the package. John Williams at ShadowStats.com provides much more accurate data on inflation.

Overall, there is a profound sense the American economy is living on borrowed time and borrowed money, all made possible by loose monetary policy and low interest rates engineered by the Federal Reserve. US debt will prove to be a huge drag on growth in the very near future, as interest rates must rise to attract purchasers– otherwise the Fed, the “buyer of last resort,” will become the primary market driver for US debt. But if interest rates rise even to only 5%– well within 100 year norms– debt service will quickly rise to over $1T annually in the US federal government’s budget. Our prosperity is temporary and illusory.

CG: The President tends to blame the Fed for the increased volatility of US markets and has even described Fed Chair Powell as an “enemy”, placing the country’s economic growth at risk. Do you think that a more decisive return to expansionary monetary policies would suffice to protect the US economy and prolong the bull market? Are further rate cuts and more money printing the way forward, and if so, would you expect to see the US join the negative interest rate club?

JD: More QE (i.e. adding to the Fed’s balance sheet via asset purchases, and driving the Fed Funds rate back toward zero or even negative territory) will not revive the US economy any more than increasing the credit limit for an addicted gambler will save him at the casino. Trump’s call for looser monetary policy is unfortunate and deeply misguided. Alan Greenspan recently alluded to the possibility of negative interest rates in the US, and we can only assume the Fed will follow the ECB’s example. The fundamental mistake is in thinking consumption is key to a healthy economy. Negative rates only make sense if one believes in this Keynesian mania, the idea that the goal of fiscal and monetary policy is to encourage or even compel spending. JB Say taught us otherwise; all healthy economies begin with production.

Certainly, central banks are the “enemy” of real savings and investment, but not because they have been too tight! The opposite is true, especially in the US. The Fed’s 20 year experiment with cheap money–beginning in 2000 with the “Bernanke put”– has only created the veneer of growth. One need only look at the Japanese economy and the BOJ’s actions to understand this. The frightening possibility is that the Fed will begin buying equities, like the BOJ (and the SNB!).

CG: Could you explain the real, long term effects and mechanisms behind Quantitative Easing and artificially keeping interest extremely low or even negative for so long? Who are winners and who are the losers of this policy direction and how does it interfere with fundamental economic principles like time preference?

JD: Both Cantillon and Mises explained that money is never neutral. New money does not spread across the economy evenly; if it did, prices would quickly adjust and nobody would become richer or poorer. Instead, the benefits of newly-created money and credit flow outward from their source, and those closest to government (e.g. contractors) and central banks (e.g. commercial banks) avail themselves of the new money sooner, before general prices rise. Poor people, and those living on fixed incomes, are hurt the most because they are not early recipients of the expansionary money flow.

Low or negative interest rates affect society and culture far beyond the realm of pure economics. If simple, safe savings vehicles– like CDs or money market funds– only earn 1 or 2% interest, even middle class people and retirees are forced into equity markets seeking yield to keep up with inflation. Rich people benefit because asset prices (real estate, equities, privately held stock and partnership interests) become inflated when the cost of borrowing money is cheap. And poor people, who lack investment capital and knowledge, save less than ever because saving hardly pays any return.

The overall result is a spendthrift society, one that lives today at the expense of tomorrow. Our great-grandparents did the opposite, and in fact all prosperous civilizations save more than they consume, thus bequeathing a surplus to the next generation. Central banks have turned this most human tendency upside down, deeply harming civilization in the process.

In the upcoming second part of the interview, we discuss the trade war and the effects of the tariffs, the 2020 US election and the radical economic ideas and fiscal policies put forward by leading Democratic candidates, as well as the role of gold and its importance in hedging against financial and political risks.

Claudio Grass, Hünenberg See, Switzerland

www.claudiograss.ch

Bildrechte: Photo by Anthony DELANOIX / unsplash.com