My grandmother used to tell me, “Sugar, if it’s free, it’s worth exactly what you paid for it.”
She usually told me that after I’d fished some useless “prize” out of a box of Froot Loops. Still, the sentiment applies to central banking as practiced in most of the Western world, most particularly here in the U.S. (Not coincidentally, Froot Loops is the perfect cereal when discussing the antics and philosophies that drive Western central-banker thinking).
We are rapidly approaching a new paradigm — a point where money means nothing. It will simply be free.
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Negative interest rates now cover almost a quarter of the global economy. And the Federal Reserve is telling U.S. banks to stress test the possibility of negative rates at home. Given that quantitative easing failed and that near-zero interest rates failed, why should anyone think negative rates are the magic elixir?
Of course they’re not. They’re perverted finance that turns everything we know about saving and borrowing upside down.
The problem is that this, too, shall flounder. And when it does, central bankers will have one final option: free money — the equivalent of Janet Yellen standing on the street corner tossing out C-notes as though she’s at a monetary Mardi Gras.
And at that point, money means about as much as those tchotchkes I rooted for in my boxes of Froot Loops.
Lots of commentators say negative rates aren’t on the American agenda. They tend to be the same band who crow about the wondrousness of every monthly jobs reports. (They never stop to look beyond the numbers to realize a boatload of low-wage jobs that pay well under the median wage in America does little to grow a middle class, much less an economy.)
Call me an irrational cynic, but government doesn’t pursue a path without a purpose. I’m betting that the Fed telling banks to stress test for negative rates is the Fed checking for potential leaks — unintended consequences of a negative-rate policy — before it launches this particular boat.
So, in my personal life I’m preparing, too.
I’m buying gold — physical gold. (And if you want to know what gold I am specifically buying, why I’m buying that particular kind of gold, and where I’m buying it, you’ll find more in the upcoming April issue of my Total Wealth Insider newsletter.)
Like cats and dogs living in sin, negative rates are an abomination. They pervert our world.
Borrowers earn money for taking out a loan (their loan value declines each month by a certain percentage), while savers pay money to the bank for warehousing their cash. In that world, savers will, at some point, abandon banks and store their cash at home (which is why sales of safes have surged in Japan in the wake of the country announcing negative rates).
When savers flee, banks will not have the cash they need to lend to borrowers — unless the Fed steps in and prints oodles of Franklins to air-drop into every bank in the county. The banking system begins to erode, and money, when the Fed is effectively giving it away, begins to lose its value as a medium of exchange.
And, thus, the answer is gold.
We Need a Great Financial Purge
These days, it seems, gold is the answer to everything. But, then again, politicians, central bankers, Wall Street’s band of pirates, the lobbyists who have robbed America — they’ve all done so much to screw democracy, capitalism and the economy that the only way we will ever return to a place of normalcy is through a great purging … a catharsis.
Throughout history, every financial catharsis — every reckoning that repaired the built-up ills —required that gold play a part. It will again this time, too.
My concern, though, is that not all gold will win.
In a catharsis, some gold will not act as you assume. Some gold could very well vanish in a government confiscation. And some gold will soar in value — and I can make a mathematically rigorous case for gold prices between $10,000 and more than $50,000 an ounce. Sounds loony, I know. But when the world is hemorrhaging debt the way ours is, gold takes on a radically different value when the catharsis comes.
But if you want to know more about all that, you’ll have to read my April issue of Total Wealth Insider — or just wait until the catharsis happens and wish then that you’d been buying the right kind of gold today.
Until next time, good trading…
Jeff D. Opdyke
Editor, Frontline Investor