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.

 

Conclusion

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: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

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:

  • India: The World’s Fastest Growing Large Economy?
    Popular Narrative India has been the world’s favorite country for the last three years. It is believed to have superseded China as the world’s fastest growing large economy. India is expected to grow at 7.5%. Compare that to the mere 6.3% growth that China has “fallen” to.   India's quarterly annualized GDP growth rate since 2008, according to MOSPI (statistics ministry) - click to enlarge.   The IMF, the World Bank, and the international media have celebrated...
  • Gold Sector Update – What Stance is Appropriate?
      The Technical Picture - a Comparison of Antecedents We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of...
  • Don’t Blame Trump When the World Ends
    Alien Economics There was, indeed, a time when clear thinking and lucid communication via the written word were held in high regard. As far as we can tell, this wonderful epoch concluded in 1936. Everything since has been tortured with varying degrees of gobbledygook.   One should probably not be overly surprised that the abominable statist rag Time Magazine is fulsomely praising Keynes' nigh unreadable tome. We too suspect that this book has actually lowered the planet-wide IQ –...
  • What is the Best Time to Buy Stocks?
      Chasing Entry Points Something similar to the following has probably happened to you at some point: you want to buy a stock on a certain day and in order to time your entry, you start watching how it trades. Alas, the price rises and rises, and your patience begins to wear thin. Shouldn't a correction set in soon and provide you with a more favorable buying opportunity?   Apple-Spotting – a five minute intraday chart showing the action in AAPL on February 1, 2017 - an...
  • Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections
      Looming Currency and Liquidity Problems The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into...
  • Trump and the Draining of the Swamp
      Swamp Critters BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp. What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best...
  • Gold and Silver Divergence – Precious Metals Supply and Demand
      Gold and Silver Divergence – Precious Metals Supply and Demand Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising. Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it...
  • Making America Great Again – How to Judge Policy
      A Simple Formula MIAMI – How do we know if new programs will make the economy better... or worse? Here’s a simple formula:   W = rv (w-w – w-l)   That is, wealth is equal to the real value of win-win exchanges minus the loss from win-lose exchanges. Yes, dear reader, it’s as simple as that. Like a whittler working on a piece of wood, we’ve shaved so much off, there is nothing left of it... except the essential heartwood.   When devising a win-win,...
  • When Trumponomics Meets Abenomics
      Thirty Year Retread What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway]   Japan's prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America's...
  • The Great Wailing
      Regret and Suffering BALTIMORE – Victoribus spolia... So far, the most satisfying thing about the Trump win has been the howls and whines coming from the establishment. Each appointment – some good, some bad from our perspective – has brought forth such heavy lamentations.   Oh no! Alaric the Visigoth is here! Hide the women and children! And don't forget the vestal virgins, if you can find any...   You’d think Washington had been invaded by Goths, now...
  • Receive a One Percent Gift When Buying or Selling a Home
      How to Save Money When Buying or Make More When Selling a Home In your professional capacity and perhaps also in your private life, you may be closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine.  Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if own a home you wish to sell.   The people who took this photograph probably want to...
  • Silver Futures Market Assistance – Precious Metals Supply and Demand
      Silver Is Pushed Up Again This week, the prices of the metals moved up on Monday. Then the gold price went sideways for the rest of the week, but the silver price jumped on Friday.   Taking off for real or not? Photo credit: NASA   Is this the rocket ship to $50? Will Trump’s stimulus plan push up the price of silver? Or just push silver speculators to push up the price, at their own expense, again? This will again be a brief Report this week, as we are busy...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

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

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com