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.




Emigrate While You Can... Learn More




Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


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.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • US Stock Market: Conspicuous Similarities with 1929, 1987 and Japan in 1990
      Stretched to the Limit There are good reasons to suspect that the bull market in US equities has been stretched to the limit. These include inter alia: high fundamental valuation levels, as e.g. illustrated by the Shiller P/E ratio (a.k.a. “CAPE”/ cyclically adjusted P/E); rising interest rates; and the maturity of the advance.   The end of an era - a little review of the mother of modern crash patterns, the 1929 debacle. In hindsight it is both a bit scary and sad, in...
  • How to Blow $12.2 Billion in No Time Flat
      Fake Responses  One month ago we asked: What kind of stock market purge is this?  Over the last 30 days the stock market’s offered plenty of fake responses.  Yet we’re still waiting for a clear answer.   As the party continues, the dance moves of the revelers are becoming ever more ominous. Are they still right in the head? Perhaps a little trepanation is called for to relieve those brain tensions a bit?  [PT]   The stock market, like the President,...
  • Despondency in Silver-Land
      Speculators Throw the Towel Over the past several years we have seen a few amazing moves in futures positioning in a number of commodities, such as e.g. in crude oil, where the by far largest speculative long positions in history have been amassed. Over the past year it was silver's turn. In April 2017, large speculators had built up a record net long position of more than 103,000 contracts in silver futures with the metal trading at $18.30. At the end of February of this year, they held...
  • Broken Promises
      Demanding More Debt Consumer debt, corporate debt, and government debt are all going up.  But that’s not all.  Margin debt – debt that investors borrow against their portfolio to buy more stocks – has hit a record of $642.8 billion.  What in the world are people thinking?   A blow-off in margin debt mirroring the blow-off in stock prices. Since February of 2016 alone it has soared by ~$170 billion - this is an entirely new level insanity. The current total of 643...
  • Stock and Bond Markets - The Augustine of Hippo Plea
      Lord, Grant us Chastity and Temperance... Just Not Yet! Most fund managers are in an unenviable situation nowadays (particularly if they have a long only mandate). On the one hand, they would love to get an opportunity to buy assets at reasonable prices. On the other hand, should asset prices actually return to levels that could be remotely termed “reasonable”, they would be saddled with staggering losses from their existing exposure. Or more precisely: their investors would be saddled...
  • US Stock Market – The Flight to Fantasy
      Divergences Continue to Send Warning Signals The chart formation built in the course of the early February sell-off and subsequent rebound continues to look ominous, so we are closely watching the proceedings. There are now numerous new divergences in place that clearly represent a major warning signal for the stock market. For example, here is a chart comparing the SPX to the NDX (Nasdaq 100 Index) and the broad-based NYA (NYSE Composite Index).   The tech sector is always the...
  • From Bling to Plonk – An Update on the Debt Mountain
      Serenely Grows the Debtberg We mentioned in a recent post that we would soon return to the topic of credit spreads and exotic structured products. One reason for doing so are the many surprises investors faced in the 2008 crisis. Readers may e.g. remember auction rate securities. These bonds were often listed as “cash equivalents” on the balance sheets of assorted companies investing in them, but it turned out they were anything but. Shareholders of many small and mid-sized companies...
  • US Equities – Mixed Signals Battling it Out
      A Warning Signal from Market Internals Readers may recall that we looked at various market internals after the sudden sell-offs in August 2015 and January 2016 in order to find out if any of them had provided clear  advance warning. One that did so was the SPX new highs/new lows percent index (HLP). Below is the latest update of this indicator.   HLP (uppermost panel) provided advance warning prior to the sell-offs of August 2015 and January 2016 by dipping noticeably below the...
  • Return of the Market Criers - Precious Metals Supply and Demand
      Ballistically Yours One nearly-famous gold salesman blasted subscribers this week with, “Gold Is Going to Go Ballistic!” A numerologist shouted out the number $10,000. At the county fair this weekend, we ran out of pocket change, so we did not have a chance to see the Tarot Card reader to get a confirmation. The market criers are back in gold town [PT]   Even if you think that the price of gold is going to go a lot higher (which we do, by the way—but to lean on...
  • Good Riddance Lloyd Blankfein!
      One and the Same   “God gave me my money.” – John D. Rockefeller   Today we step away from the economy and markets and endeavor down the path less traveled.  For fun and for free, we wade out into a smelly peat bog.  There we scratch away the surface muck in search of what lies below.   One should actually be careful about quotes like the one attributed to Rockefeller above, even if it of course sounds good and is very suitable for the topic at...
  • Incrementum's New Cryptocurrency Research Report
      Another Highly Useful Report As we noted on occasion of the release of the first Incrementum Crypto Research Report, the report would become a regular feature. Our friends at Incrementum have just recently released the second edition, which you can download further below (if you missed the first report, see Cryptonite 2; scroll to the end of the article for the download link).   BTC hourly (at the Bitstamp exchange). Although BTC has been in a bear market since peaking in...

Support Acting Man

Item Guides


Austrian Theory and Investment



THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


Buy Silver Now!
Buy Gold Now!

Diary of a Rogue Economist