In The End of Alchemy, Mervyn King, the former head of
the Bank of England, writes of central banks’ frustration in dealing with the
stagnant global economy. “Central banks,” he says, “have thrown everything at
their economies, and yet the results have been disappointing, Whatever can be
said about the world recovery since the crisis, it has been neither strong,
nor sustainable, nor balanced.”
Similarly, former IMF chief economist, Olivier Blanchard
was recently quoted in the Financial Times as saying: “And so the question is
why is it, that with no fiscal consolidation and banks in decent shape, at
least in terms of lending, and zero interest rates, we don’t have an enormous
demand boom? That is now the puzzle.”
Alan Greenspan, in a recent interview with Fox Business News,
offers the beginnings of an answer to Blanchard’s question – a question which
happens to be on the minds of not just policy-makers but ordinary investors
as well. “Our problem,” he said, “is not recession which is a short-term
economic problem. I think you have a very profound long-term problem of
economic growth at the time when the Western world, there is a very large
migration from being a worker into being a of recipient of social benefits as
it is called. And this is legally mandated in all of our countries.” The
western world, he concludes, is headed to “a state of disaster.”
The problem at its core is demographic. Retiring baby
boomers are paying off debt, not borrowing more. As time goes by, they willl
increasingly become consumers of government largesse, as Greenspan points
out, rather than its suppliers. The Millennials and GenXers are struggling
with student debt, low incomes and paltry savings. For them, owning a home,
the traditional means to stimulating overall demand, is more a future consideration
than anything imminent. (In 1960 62% of 18 to 34-year-olds lived in their own
households. By 2015, that number had dropped to just under 32%.) Outstanding
mortgage debt, as a result of these demographic shifts, has gone into a
free-fall. (See chart immediately below.) Simply put, the problem for the
global economy, as King’s successor Mark Carney recently pointed out, boils
down to the lack of demand – for goods and services and for money itself in
the form of credit.
Fiat paradigm falling apart
In short, the whole fiat paradigm of lending money into
existence is falling apart, and no one seems to know what to do about it. If
you would have told me in 2007 that within a decade we would be facing the
possibility of a deflationary breakdown, I would not have believed you. King
concludes that “without reform of the financial system, another crisis is
certain… sooner rather than later.”
King’s use of the word alchemy in connection with central
banks’ policies conjures all sorts of allusions. As we all know, the purpose
of alchemy was to transform base metals to gold. Likewise, the contemporary
central bank is alchemic in nature in that it professes to replace
gold-backed money with sound and effective monetary policies. Those who
believe that the central banks are capable of delivering consistently on that
promise are not likely to become gold owners. Those who question it will
continue to own gold and silver in their investment portfolios as a
countermeasure, and in fact add to those holdings as circumstances require.
It is quite clear that the former Fed chairman and the
former governor of the Bank of England are in agreement that the global
economy is tacking against some heavy headwinds. The demographic shift
Greenspan cites and King’s admission of policy-makers failure in dealing with
it point to continuing long-term demand for gold and silver not just among
private investors, but among funds, institutions and central banks as well.
In addition, it is the failures (or potential for failure) in policy, as
cited by both King and Greenspan, that will give pause even to those who most
ardently profess undying faith in the central banks. Along these lines, it is
interesting to note that Greenspan has already suggested gold as “a good
place to put money these days given the policies of governments.” Mervyn King
may not be far behind.
Post publication editor’s note (6-7-2016): No sooner had
the ink dried on the June issue of our newsletter than Mervyn King was quoted
in the World Gold Council’s Gold Investor magazine as advocating gold
ownership at a time of what he calls “radical uncertainty.” Some might think
that we had an inside track on the World Gold Council interview, but we did
not. Though we have a relationship with the World Gold Council that goes back
decades, it does not send us advance copies of its publications. The
similarities between King’s views and those of his old friend, Mr. Greenspan,
were striking, thus the conclusion above that logically the former BoE
governor might be headed in gold’s direction.
“If we don’t quite know what the future holds,” says
King, “there is little point in getting carried away by very fancy
mathematical calculations of optimal portfolios. Don’t rely on past data to
be a good guide. Try to think through what mix of assets gives you the best
chance of surviving some big event. That must mean including assets that are
negatively correlated or uncorrelated in your portfolio.”
“And I am very struck by the fact that over many many
years, central banks, governments and individuals have always, despite the
protestations of economists, held some gold in their portfolio. Obviously,
there is no high running return, but when unexpected things happen,
particularly when governments rise and fall, then gold is a means of payment
that everyone is always prepared to accept. And I think that’s why even
central banks have always had a role in their portfolios for gold,” he adds.
I might add that the very same logic applies to gold uses
in the private investment portfolio. For the full article, which includes
some of Mr. King’s prescriptions for the global economy, we recommend the World
Gold Council’s Gold Investor magazine.
There you will find more good reading on current happenings in the gold
market.
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Reader note: This article is reprinted from the June, 2016 issue of USAGOLD’s
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