QE by any other name – Part II
Depression and mass unemployment are not caused by the free market, but by government interference in the economy.” – Ludwig on Mises, The Theory of Money and Credit
What is clear is that all indications point to the fact that the Fed made a serious judgement error when it began its tightening program in 2017. It overestimated the robustness of the economy, underestimated the level of addiction of the markets to cheap money and it was way too quick to proclaim a “full recovery” from the crisis. As a result, it has backed itself into a corner. Having cut the tightening phase short, it failed to fully reap the intended benefits of the move, i.e. a replenishment of its monetary “firepower” to fight off the next economic downturn, while it also created intense unease in the easing-addicted US market. Now, as the next recession draws dangerously near, it has few options left. While it might be in a comparatively better position that its peers, such as the ECB or the BoJ that never stopped, let alone reversed, their expansionary policies, all likely scenarios are still truly grim going forward.
For example, the very idea of a return to zero interest rates, which would have sounded bizarre just a year ago, is now a realistic possibility. And so are negative rates, for that matter. Once unthinkable, the option is now no longer as outlandish as it might have been only a few months ago. In fact, a research paper entitled “Yield Curve Responses to Introducing Negative Policy Rates” recently published by the Federal Reserve Bank of San Francisco found that negative interest rates “could become an important policy tool for fighting future economic downturns”. Even the President himself publicly pushed for this move, when he demanded in September that the Fed take the extraordinary step of introducing negative rates.
Overall, when considering one’s investment strategy and the risk factors that affect it, it is essential to understand that the actions of the Federal Reserve are now forming an unmistakable pattern. The central bank has seriously damaged its own credibility by saying one thing and doing another. Its officials insist that the economy is in “good place”, right before they announce a rate cut. They do the same, before they begin another balance sheet expansion and effectively restart QE, all the while insisting that no one should call it QE. It useful to remember this pattern next time Chairman Powell offers strong assurances against ZIRP and NIRP as potential scenarios. It is also useful to remember that the central bank has already been “exploring possibilities” and examining Japanese-style interventions since early the summer. According to reports by CNBC, as western central bankers realize how limited their options are and reach for new and much more aggressive tools, “the BOJ has been receiving queries from several central banks, including the Fed” on its “yield curve control” experiment, meant to anchor long-term interest rates near zero.
Finally, in order to effectively protect one’s wealth and make sure it is preserved for the next generation, it is essential to look at the bigger picture when planning ahead. What seems far-fetched today can easily be headline news tomorrow and then established as the “new normal” a year later. “Unprecedented” is by far not the same as “impossible”, especially in this era of radicalism in monetary policy. We saw this in the last recession, when trillions of dollars flooded all major economies and central bank balance sheets exploded to historic, record highs. We will very likely see a similar tectonic shift in the next crisis too and the prudent investor has to be prepared for that.
Whether it will be “more of the same”, with NIRP and ZIRP across the board and massive asset purchases, or whether central bankers will move into new interventionist territory, perhaps emulating Japan, is of little consequence, as the effect of all these policies can be easily predicted, at least for savers and conservative investors. They are all bound to continue to punish those with a long-term investment horizon. Thus, as central banking policies now decisively and uniformly once again enter the easing path, physical precious metals appear to be the only reliable way to protect one’s wealth and to hedge against both economic and monetary risks.
Claudio Grass, Hünenberg See, Switzerland
Source: tim striker auf Pixabay