Yesterday was a big news day. The markets eagerly awaited news on interest rates and ‘accommodative measures’ from a batch of central banks.
In the end, nothing came – well, not what the markets were hoping for anyway. No big ‘QE’ (quantitative easing) announcement and no drop in base rates.
Just a collective central bank battle cry: “We will do everything necessary to get these economies back on track. We will not baulk at our duty. We are preparing the big guns. Nuclear if need be...”
The battle lines are drawn
In case you need a reminder, the battle lines are drawn between paper (you know, all the promises written down on bits of paper) and real things. I use the gold price as a barometer of which side is winning.
And gold confirms we’re in the middle of the ‘great grind’. Gold’s gone practically nowhere all year. It’s as if a ceasefire has been called.
But now the paper generals tell us they’re about to break cover – they’re just readying themselves. But there are different views from the central banks.
In Europe, it’s a matter of diplomacy. The ECB’s lieutenants are busy negotiating exactly what is legal in this war. How far can they go? The ECB has already shown a willingness to buy the bonds of its distressed allies. Now, they plan to give aid directly to embattled governments and their banks. It’s just a matter of negotiating the terms with the northern allies. Germany in particular.
For the US Fed, it’s a matter of timing. With presidential elections looming in November, the paper generals need to wait. But make no mistake, they’re preparing for war. And in this war, they fight fire with fire, or should I say paper with paper. That is, they plan to cure the economic ills (too much debt) with more of the same. Ben Bernanke is utterly convinced that this will work.
The Fed’s statement said they "will provide additional accommodation as needed to promote a stronger economic recovery" – so the only question is when?
And as for our ‘Fed’, the Bank of England, they’re still busy spending the last batch of freshly minted cash (£50bn). On top of that, they recently announced a £80bn kicker by way of the ‘funding for lending’. That’s where they give the banks practically free cash on the proviso it’s doled out to the public.
See what I mean? You can’t say the paper generals aren’t preparing for war.
An exclusive report from The Right Side
Their tactics are increasingly desperate
The likes of Ben Bernanke thought they had this battle won before it even started. The idea was that an early QE blitz would kick the economy back into action. But he must surely now realise that it isn’t very easy to get paper soldiers to fight.
During a recession, money is destroyed through bad debt – effectively the promises behind these bits of paper are broken. Never mind, says Mr Bernanke. Simply issue more paper and hey presto – the battle is won.
But here’s the thing. They can’t get the cash to flow round the economy. Sure, you can flood your buddies (banks) with cash. You can even tell them you want the new money lent out and into the economy.
But telling a bank what to do is one thing – getting them to do it is quite another. And anyway, the banks need the money now. They’ve got to reimburse the customers they ripped off on various scams, and to pay fines for malpractice on other scams like Libor rigging.
Money is not flowing as it should. Right across the globe, economies are stagnating. Governments, the public and corporations already have enough debt; they’re trying to pay it off, if anything.
But of course, that won’t stop the central planners. Convinced that they are fighting a just cause, and convinced of their state of the art weaponry, they’re still up for a fight.
Weapons of mass destruction
Given that the authorities have started down the road of money printing, I think it’s inevitable they’ll continue with more of the same.
It’s impossible to know exactly how this pans out for your investments. Economics isn’t science, after all. It’s not physics or maths – there are no natural laws you can fall back on – there are only economists’ delusions.
And this war is based on an economic delusion. One that says that the authorities can control economic growth with monetary policy.
That means zero interest rates to drive new debt formation. And because that doesn’t work, it means printing money to help create negative interest rates (where inflation outpaces returns on savings).
With the recent ceasefire, we’ve seen inflation fall back a little. That means we’ve enjoyed a period of slightly less negative interest rates on savings. But I don’t expect the relative calm to last.
The central banks are primed for the next assault. The Fed and the ECB acting in unison will be quite something to behold.
To my mind, the scene is set for gold’s next run-up. The more paper the planners throw into battle, the higher gold tends to go.
I recommend you own gold. The next six months are going to prove very interesting indeed.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
Managing Editor: Frank Hemsley. The Right Side is an unregulated product published by Fleet Street Publications Ltd.
Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No 115234. http://www.fsa.gov.uk/register/home.do