|
“The returns of cash are terrible. So as a
result of that, what we have is a lot of money in a place — and it
needed to go there to make up for the contraction in credit — but a lot
of money that is getting a very bad return. That, in this particular year, in
my opinion, will shift. And the complexion of the world will change as that
money goes from cash into other things. ” — Ray Dalio, Bridgewater Associates
The dramatic breakdown in the real rate of return*
on dollar-based savings instruments is perhaps the most important financial
event of the past decade; save perhaps gold’s rise as its most
effective countermeasure. The absence of a real rate of return makes it
impossible to preserve, let alone grow, wealth by traditional means. It
destroys incentive and nurtures a culture of economic uncertainty. It
promotes speculation and undermines the existing social contract. It makes it
difficult for the federal government to obtain financing and for individuals
to plan a comfortable retirement. In short, the problems associated with a
negative real rate of return run deep and create an environment in which gold
demand flourishes.
As illustrated in the first chart below, the real
rate of return on dollar-based savings has been dismal over the past decade.
By comparison gold’s real rate of return, as shown in the second graph,
has been nothing short of spectacular. In the process, gold owners have not
just preserved savings during the uncertainties of the past decade, they have
actually built wealth in real terms — no small accomplishment. Thus the
trend indicated in the first chart serves as an effective argument for a
continuation of the trend demonstrated in the second chart.
 
In this context, Fed chairman Ben Bernanke’s
constant assurances that his easy money policies will continue at least until
2015 are cause for concern. Currently those who save in dollars at the bank
are losing money in real terms at the rate of roughly two percent per year.
Money in the process is losing one of its principle attributes. It is no
longer considered a reliable store of value. Ray Dallio,
the highly respected founder of Bridgewater Associates, the world’s
largest hedge fund, completes the thought posted in this month’s
masthead quote. He names gold as one of those other things:
“I think that their next move will be, as
described, a move from liquidity to purchases and then we have a
shift…I think the shift of the cash, that massive amount of cash will
be a game changer — into stocks, into everything. It will mean more
purchases of goods and services and financial assets. It will be into
equities, it will be into real estate, it will be into gold, it will be into
a lot of….just basically everything.”
Though money pumped into the economy acts like a
high tide that raises all boats, it can also result in a tidal wave of
uncontrolled inflation and out-of-the-box negative real rates of return.
Wealth will be won and wealth will be lost in the years ahead as the cash to
things scenario unfolds. How savers position themselves will make all the
difference as to which side of the wealth scoreboard they find themselves.
The defining question comes down to this: “What’s your real rate
of return?”
*Real rate of return equals the yield minus the
inflation rate.
_______________
Chart Notes:
(1) I used the one-year certificate of deposit as a bellwether simply because
the average investor is reluctant to commit capital to longer term
instruments in a zero percent interest rate environment. (2) Many believe the
BLS’ Consumer Price Index understates the inflation rate. If one were
to use the Shadow Government Statistics’ data model, for example, the
negative real rate of return would be far worse than the one shown in the
first chart. SGS utilizes the same methodology the BLS employed prior to 1980
before it introduced hedonic adjustments. (3) Taxes were not taken into
account in either chart. (4) In the first chart, the extension of the red
bars over the blue bars indicates the negative real rate of return on the
one-year CD. In the second, the extension of the blue bars over the red bars
indicates the positive real rate of return on gold. (5) Monthly data, per
cent change from year ago. With thanks to the St. Louis Federal Reserve.
* * * * *
THIS IS A SNEAK PREVIEW of our upcoming newsletter to be
released in the first week of April. We invite you to sign-up to receive the
APRIL ISSUE by e-mail. It’s free of charge and you can opt out at any
time.
|
