This permanent state of emergency is doing a wonderful nothing to unwind the
So 2012 will
mark the fifth anniversary of the global financial crisis. There's little
reason to think it's reached its end yet. Merry Christmas.
household leverage in the rich West has barely ticked lower from the credit
bubble's historic peak of 2007. Financial leverage has only been reduced by a
fraction, while governments have been stuffed like a French goose with that
new debt spurned by the private sector since 2008.
So why this
slow, seemingly permanent pain? Because interest rates are still set at zero,
with no uptick in sight - an emergency measure that's now etched in stone.
"There is a lot of financial stress out there," the UK insolvency
specialist Begbies Traynor moaned
last week. "[But] if it wasn't for low interest rates the number of
insolvencies would have been twice what they are." Twice as many debtors
would have enjoyed a write-down, in short. But do you really think their
creditors sleep any better knowing what's keeping debtors in debt?
The gambit of
low rates - first played in mid-2007 and now stuck - comes from studying the
Great Depression of 80 years ago. If only the US Federal Reserve had slashed
rates to zero, then today's central bankers could have avoided the deflation
of their grandparents. Low teaser rates under Alan Greenspan have thus become
permanently low revolving rates under Ben Bernanke. Which
is where the mechanics of this depression stands apart from the downturn of,
say, 30 years ago.
central bankers imposed deflation by hiking short-term interest rates towards
20% per year. Today the credit crunch is priced into the weakest
balance-sheets only, and in the interbank lending market, where liquidity has
vanished again in 2011. Contrast with the early 1980s' depression, when bond
yields badly lagged policy in forcing through the deflation. Ten-year US
Treasury yields, for instance, broke into double digits 10 months after the Federal
Reserve's overnight target rate breached that level. It wasn't until 1983
that the curve reverted to normal, with 10-year bonds offering a higher rate
of return than overnight credit held at the Fed.
The impact of
this policy-driven deflation? A rise in the Dollar so strong - both in real
purchasing and forex conversion terms - that it
unwound all of gold's plunge for non-Dollar
living through deflation again today is plain, no matter how far the Fed and
other central banks string it out. A deflation in credit, asset prices and
economic activity. A deflation that doesn't need shop prices to fall; it's
still "a deterioration of the monetary standard",
this one characterized by volatility as much as deleveraging, but also
squeezing debtors every time the Dollar rises.
That in turn
is squeezing creditors, of course, now terrified of default and writedowns but so far spared the actual pain. The worst
of all possible worlds results. No new investment,
because lenders won't lend and debtors won't borrow. No write-down or
write-off of existing debt, lugging a permanent drag onto economic activity.
And meantime the Dollar remains money the world over, proving last decade's
Cassandras early, wrong or just stupid.
Call me all
three if you like; the last thing the world wanted pre-2007 or today is a
rising Dollar. Not the US, China, Europe or anyone else. So just to screw the
most people the most, that's what we keep getting. But only in fits and
starts. Which like the wonderful nothing achieved by zero interest rates,
might just be the very worst we could ask.
chart analysts and media hacks will tell you today that the price of gold
just broke below its 200-day moving average. The smarter ones
will add that it fell through the uptrend starting with the great deflation
of Lehman's collapse, too. But only in US Dollar terms, we note here at BullionVault.
Look at gold
ex-the Dollar - as our bright orange line does above. The Dollar devaluation,
forced through by Ben Bernanke cutting in line and slashing rates faster than
anyone else in 2007-2008, worked such magic that non-Dollar investors are now
- to date - wearing a much shallower top-and-drop pattern in gold so far.
matter. Because gold has outperformed all other assets (and very nearly all
mutual and hedge funds too) since the eve of this crisis. Most people thank
the inflationary response of central banks everywhere. A handful think gold's
rise might instead be due to bullion offering the perfect deflation escape -
a route to extricating yourself from the debtor/creditor relationship underpinning
the vast bulk of alternative homes for your savings.
Either way, a
Dollar rally is rarely good for the gold price. And no one, least of all the Bernanke
Fed, wants to allow a persistent Dollar rally on their watch either.