Gold in 2013 And Beyond
Ten days ago I wrote: “Adding to the upward pressure on gold at year end, a new nationalist government took power in Japan on December 26th, promising to force the Bank of Japan into a policy of unlimited monetisation, and promising to start a new war with China if necessary, to back up its claim of sovereignty over the uninhabited Senkaku Islands in the East China Sea.”
This morning Japan has announced a new $116 billion fiscal stimulus policy intended to end deflation in the Japanese economy and boost growth. All the extra spending is according to the government, going to generate about 600,000 new jobs. The new programs kick in in the new financial year that begins in April. It is also intended to weaken the yen, hopefully stimulating exports. All part of a new international fiat currency war, where each country tries to weaken its currency and export its way back to prosperity. In the 1930s this was the beggar thy neighbour policy that led to protectionist tariffs and duties.
We now have the US Fed monetising at a rate of $85 billion a month, over a trillion a year, and promising to continue to do so for at least two years. The European Central Bank promising to monetise unlimited quantities of European Monetary Union members sovereign debt for as long as it takes to save the euro. The Swiss National Bank attempting to devalue the Swiss Franc against the euro and British Pound by selling Francs and buying unlimited quantities of euros and Pounds. And finally the Bank of England signalling under its new incoming Canadian Governor, its readiness to engage in further Quantitative Easing and adopt other unorthodox stimulative policies. In effect, most of what used to be called the G-7 have entered into a currency war to devalue against each other for competitive advantage.
Quite how high gold and silver will rise in the face of all this fiat currency creation is hard to predict, but in a zero interest rate environment, fiat currency will get traded in for physical precious metals all year. Eventually, assuming such policies could ever work as intended, a self-sustaining global recovery gets underway, and a new round of inflation also gets underway, but the next time from a massively larger pool of global fiat currency. A massive scramble to buy up the limited supply of tangible assets led by gold and probably silver, commences, as holders of the masses of paper currencies attempt to protect their wealth.
In theory the monetary authorities are then supposed to raise interest rates and start reducing the balance sheets by selling off some of the assets they bought during the great monetisation. In practise they can’t without killing off the self-sustainable recovery they worked so hard to start. In addition meaningfully raising interest rates will give pension funds and insurance companies massive losses on all that sovereign debt that they were forced to acquire during the era of the zero interest rate policy. Private policy pensioners in particular would be devastated.
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In other words, despite what our central bankers may say in public at present, all our central bankers are forced into living with a higher “natural” rate of inflation in our future, probably low double digit annual inflation rather than the low to mid-single digit inflation of the 1945-2000 era. This possibility alone ought to have all prudent money managers partly hedged with a holding of some physical gold and silver from now on. Sadly most will miss the train. I leave the last word to Lord Keynes:
Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
Japan’s Abe Unveils 10.3 Trillion Yen Fiscal Stimulus: Economy
Jan 11, 2013 6:06 AM GMT
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