Money Printing and Price Inflation

Ten years back when the central banks around the western world—as elsewhere—were printing money with abandon, it was claimed by rational observers that this would lead to hyper-inflation. It was claimed that the best the central banks could do was to control short-term interest rates, surreptitiously expropriating the wealth of citizens.

Eventually the market had to find out, directly or indirectly, what was happening — as newly printed currency played havoc in the market — and prices in nominal terms would rise. Long-term yields on sovereign bonds were expected to sky-rocket, to account for increasing inflation.


800px-Salon_de_Madame_GeoffrinThe Age of Reason: Salon de Madame Goeffrin, a painting by Anicet Charles Gabriel Lemonnier, showing distinguished French thinkers of the Enlightenment gathered in one room.


The US, seen as the major culprit in printing money, was expected to destroy its currency. What seemed obvious to the rational observer hasn’t happened. Instead the exact opposite has. Not only short-term rates, even long-term rates have stayed adamantly low, so much so that yields on some bonds in Europe are negative even in nominal terms.


1-Germany, 5 year govt note yieldGermany’s 5 year note currently sports a negative yield to maturity of 0.34% per year – click to enlarge.


Inflation hasn’t happened in consumer prices the way it was expected. Certain asset prices, for example the US stock market have gone up about 100% in the last five years. This happened contrary to the expectations of rational investors, who were expecting inflationary forces to lead to a huge amount of malinvestment and hence destruction of assets.

The US dollar, contrary to expectation, has continued to improve in value compared to other currencies. In the meantime, gold which the rational observer had expected to go up has actually gone down in US dollar terms over the last 5 years. Despite a massive amount of fiat-currency printing, there is no visible price inflation in consumer goods in the US, certainly no hyper-inflation.


2-DXYUS dollar index over the past five years – click to enlarge.


A Peak in Economic and Intellectual Growth

Most of the newly printed cash has been sucked up in sovereign bonds, which now sit with the rich elite and foreign governments. Not that the central banks were geniuses. Despite a flood of cash — to the dismay of the central banks— new investments haven’t materialized.

US companies are currently sitting on trillions of dollars of cash. In Europe, investors would rather earn negative yields in sovereign bonds than invest in manufacturing. The living standard of the average family hasn’t improved.

There is a way to connect all of the above. The rational observer should have paid closer attention to Japan to understand how intellectual and economic growth might peak. Even better, the West must now understand development economics. The answer to this puzzle lies in the negative-yielding economies of most of the developing world, what I refer to as the Rest.

It goes to the very heart of development economics, not the kind peddled by the World Bank and IMF, but the real one, the one that goes to the core of why economies stagnate and even fall.

While a large part of the developing world has indeed grown over the last three decades, contrary to popular perception — except for China — it was not because of any structural changes that were undertaken. Most of their economic growth was the result of a technological revolution related to telephony and the internet, which enabled an easy transfer of technology.

This happened despite a lack of structural and cultural changes in the Rest. One might even contend that structurally the situation is much worse, as governments in these developing countries grew by leaps and bounds, while their rapidly growing economies provided a massive increase in tax revenues and the opportunity to run ever larger deficits.

Regulatory controls over businesses have worsened. Societies in the developing world took prosperity for granted, took on excessive personal debts, and rather than invest, consumed with abandon as promoted by their governments. This not only disincentivized structural improvements, but actually made the situation much worse.


Reason as the Foundation of Economic Progress

The chicken must come home to roost, for technological advancement and deflation exported by China can no longer carry the burden of financial repression. Most of these developing countries — having now plucked the low-hanging fruit that appeared from technological advancements that were imported from the West — are now back to negative-yielding status.

The concept of negative-yields has perplexed many people in the West. They have found it hard to believe that people would buy bonds for negative nominal yields. But in the mysterious lands of the Rest, this concept has been known for almost forever, and instinctively understood. When these people, in the so-called developing world, have historically had a surplus, they have known that their capital would — instead of growing with time — deteriorate.

They know that on a risk-adjusted basis investing in manufacturing and infrastructure, does not offer them a positive return. This is why they invest in land and gold—both offer zero-yields and hence better than negative-yields. What is the core reason why negative-yields happen?


3-India GoldIndia’s gold demand according to the WGC (note that the WGC merely undertakes a superficial analysis of flows – in reality, demand is far higher; nevertheless these data serve as a good illustration of how popular gold is as an investment asset in India) – click to enlarge.


There is no shortage of natural resources, human ingenuity, or any reason why economic, cultural and spiritual growth of humanity should not continue into a very-long foreseeable future. However, the concept of reason is the glue that enables accumulation of economic and intellectual capital.

Without reason the natural state is entropy. Without reason and the resulting calculations, what capital people have starts to get dissipated. It is for this reason that even those parts of the poor world that have seen no wars in recent memory still look like war zones.

The chisel of reason constantly challenges society. The individual weighs his options. He is constantly deciding between options that promise to better his future. Using reason, he attempts to understand universal principles and how he can align his actions for the sake of the well-being and improvement his family and society.

He constructs — over generations — traditions and social habits that maximize his well-being. No-one can see the future, but reason allows — despite errors on the way and much stumbling and many devastating accidents — for economic and spiritual growth.

The long march of Western civilization over the last 2,500 years, from lack of reason to reason — very slowly and subtly — brought the West to where it is. Before the advent of reason, any capital accumulation was only a matter of chance, with no better odds than those in a casino.


Western Enlightenment in Retreat

Alas, the age of enlightenment and reason is now over in the West. The main, dominating social force is no longer that of reason, but of non-reason. Over the last several decades, collectivism and cultural Marxism have started to dominate society as an “intellectual” force in the West, leading to an increase in the size of governments, growth in regulations that suffocate entrepreneurship, and a welfare-warfare system.

The end result is a halt of tangible and intellectual capital accumulation in the West, not too dissimilar to what has historically been the case — except for the last three decades of interlude — in the Rest, the so-called developing world. As it stands, the West has started to stagnate under the force of this lack of reason, and perhaps begun to dissipate its capital. The West is losing its grip on morality, setting in place a vicious downward spiral.

Under the rule of the irrational — epitomized by governments growing like a cancer — companies and people with cash in the West no longer find it sensible to invest in manufacturing and infrastructure. It is for this reason that they are sitting on cash and even worse, are opting to earn negative yields in sovereign bonds.


4-5 yr. inflation breakevensUS 5 year inflation breakeven rate – inflation expectations continue to decline – click to enlarge.


As long as newly created currency continues to go to the already-rich rather than society in general, the central banks have seemingly won in quite an Orwellian fashion, for their continual printing seems not to cause inflation, certainly not for the moment. This achievement sits on the back of stagnant economies in the West.

Alas, the central banks cannot win the war on economic stagnation. In fact, economic stagnation is not even in the realm of the central bank influence. It belongs to the realm of regulations and enforcement, the working of governments, and the intellectual force of irrationality in society’s popular culture.

As long as the economy is repressed through regulations and irrationality, central banks’ expectations to reignite growth are not going to come to fruition. The West finds itself in a negative-yielding economic structure today, similar to that which has dominated societies outside the West.



So, when might this stop? Once the major force dominating society is irrationality, it tends to do more of the same that created the original problem. The slippery slope of irrationality no longer allows reason to find a foothold. The voice of reason is marginalized and morality goes into a downward spiral.

Expect these cancerous governments to impose more financial repression, for in their irrational minds and in the minds of the voting masses, more repression is seen as the solution to our economic problems. This is where the biggest danger lies. Overbearing, powerful and self-righteous governments can quickly — and very likely will — plunge the global economy into a deep depression.


Charts by: BigCharts, StockCharts, Bloomberg, St. Louis Federal Reserve Research


Chart and image captions by PT


Jayant Bhandari grew up in India. He advises institutional investors on investing in the junior mining industry. He
writes on political, economic and cultural issues for several publications. He is a contributing editor of the Liberty magazine. He runs a yearly seminar in Vancouver titled Capitalism & Morality.



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One Response to “Negative Yields and the Future of Growth”

  • vfor:

    Thanks for your analysis Jayant. BTW, I have already studied your investment guide for miners and it has been a truly rewarding read. Really good work and a prime reason for that I found some excellent plays. PTM for example.

    If you have read the book Pater and co wrote last year it would be quite obvious that what happend is quite rational. By putting the pedal to the metal central banks have enormously stimulated investments in the far end and the short end as well to the determination of the middle part. They thus stimulated growth at both tails so to say. These tails expanded, think shipping and mines for the far tail and shopping malls?, KFCs? for the (relatively) short tail. Everything in between, whatever that is, suffered. During expansion nobody earns money as it is expensive to grow. Guess what, now that they plan to earn a living it is suddenly not possible due to mis-allocation/overallocation of capital. They are scared to death and so are their bondholders and employees and families. Those between the tails haven’t had a good time either for many years and are already suffering because they where the ones that had to actually provide the capital for the expansion. Pensioners are not better of as they too know they are sitting on a powder keg. They may not admit i intellectually but deep inside they know that the state borrowing will blow up sooner or later and so will their pensions. So who is left having a good time? Us of course, now at last when it seems to start to pay of by investing in real desirable capital that lasts. Gold mines for instance.

    Hope to see you as a guest author soon again.

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