EDITOR: | July 12th, 2016

Gold: Yelling “Fire” in a packed theatre

| July 12, 2016 | No Comments
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Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money.” — Daniel Webster (1782-1852), U.S. constitutional scholar, Secretary of State, and senator.

It is not often that central bankers start yelling “fire” in a packed theatre, so when it happened in Basel, Switzerland last month I was more than mildly interested. It didn’t happen before the Great Recession of 2008-2009, nor at any other time of interesting financial distress that I can think of. That the Bank of International Settlements (BIS) have done this now speaks volumes about the financial predicament we are in — and the need for most in the developed world to now hold some insurance in the form of fully paid up physical gold and silver.

Though they didn’t come right out and say buy gold (after all, they are central bankers, and serious believers in the cult of Keynes), the implication is that the BIS feels that the world’s central bankers have lost the plot and have strayed into heretical error, with calamity and disaster looming into view.

When the Future Becomes Today was the strange choice of title used by the gnomes of Basel at the Bank for International Settlements for their eighty-sixth annual report. The report itself was largely buried under all the hysteria that followed the UK referendum result declared on June 24. Not that BIS annual reports are ever noted for their exciting content, or rocking the boat; rather they are distinguished by their bland choice of dialogue, dry delivery, and designed to neither frighten the horses, nor disturb the central bankers, nor attract the attention of the world’s politicians.

As renowned economist John Kenneth Galbraith once quipped, “In central banking, as in diplomacy, style, conservative tailoring, and an easy association with the affluent count greatly, and results far much less“.

The BIS (BIR in French,) is the central bankers’ bank. Founded in May 1930, it was originally meant to handle the reparations imposed on Germany by the Treaty of Versailles after losing World War One. The bankers in Basel were also to act as trustee on the international loan for Germany created in 1930. The global depression of the 1930s quickly suspended and then ended the reparations role, and the BIS task quickly switched to promoting global monetary and financial stability through international cooperation, and ending the global depression.

This year’s report though is a little different to say the least, referring worryingly in the opening paragraph of the abstract, to a “risky trinity” of “discomforting conditions” in the global economy.

Global growth continues to disappoint but is in line with pre-crisis historical averages, and unemployment continues to decline. Less comforting is the longer-term context — the aforementioned “risky trinity” of conditions: productivity growth that is unusually low, global debt levels that are historically high, and room for policy manoeuvre that is remarkably narrow. A key sign of these discomforting conditions is the persistence of exceptionally low interest rates, which have actually fallen further since last year.

Basel has taken notice of all the negative interest rates surging around the world, and doesn’t like what it sees. By paragraph three of the abstract, the BIS writers, had thrown all caution to the wind, and were in central banker speak, practically yelling “fire” in a packed theatre.

Here is one chilling section:

Our analysis suggests that different policies could have taken us to a better place. Trade-offs have deteriorated and policy options have narrowed. What, then, could be done now?

A key priority is to rebalance the policy mix away from monetary policy – a need the international policy community has now fully recognised. In doing so, though, it is essential to focus not only on the near-term issues but above all on the longer-term ones. But how? Consider, in turn, prudential, fiscal, monetary and structural policies.

They argue that there is an urgent need to rebalance policy in order to shift to a more robust and sustainable expansion. A key factor in the current predicament has been the inability to get to grips with hugely damaging financial booms and busts and the debt-fuelled growth model that this has spawned. It is essential to relieve monetary policy, which has been overburdened for far too long. This means completing financial reforms, judiciously using the available fiscal space while ensuring long-term sustainability; and, above all, this means stepping up structural reforms.

In central banker speak, the BIS went on: “The contrast between global growth that is not far from historical averages and interest rates that are so low is particularly stark. That contrast is also reflected in signs of fragility in financial markets and of tensions in foreign exchange markets.

Translation: Urgent, the next Lehman is out there and practically upon us. Average historic growth at a time of historically low and even negative interest rates is bad no matter how central bankers chose to spin it. The future has become today, and that is not good.

Since no one is going to do anything before the next crisis hits, let alone ”completing financial reforms, judiciously using the available fiscal space while ensuring long-term sustainability; and, above all, this means stepping up structural reforms” the BIS implies this is a very good time to load up on fully paid up physical gold and silver, as insurance against the next financial crisis. In its ever so genteel, understated, coded way, the BIS is saying to the central bankers it’s about time to panic.

Footnote: “We are in a world of irredeemable paper money — a state of affairs unprecedented in history.” — John Exter (1910-2006), American economist, member of the board of governors of the United States Federal Reserve System, and founder of the Central Bank of Sri Lanka.


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