Perverse Generation – World Monetary Wars :: by Wilfred Hahn

As bizarre and woolly as monetary policies are around the world at this point in history, we may have seen nothing yet. The Guardians of the Mammon Temple (central bankers) have engineered negative interest rates (both in real and nominal terms). Presently as much as two-thirds of the European sovereign bond markets have negative yields.

Why is this happening and what does it mean? While virtually no one had predicted that the world would fall into a state of negative interest rates, this state of affairs could well continue for some time.

To begin, the global monetary wars continue to rage. Given the continuing (and still rising) high indebtedness and low economic growth, policymakers are prone to attempt currency devaluation. To do so, they slash administered rates and embark on aggressive monetary programs (quantitative easing and “money finance”).

Over the past two years, the four major central banks (all taken together) bought more government bonds than were issued. In other words, total government bond issuance has been monetized over this period. This commonly believed “central banker impunity” is not factual even based on recent evidence. Past monetary programs (post the Global Financial Crisis) did not pump-prime economic growth. Yet, the “faith” remains firm.

Lately, Europe has launched its reply to the expansive monetary policies applying to both the US dollar (see graph of unprecedented M1 expansion on front page) and the yen. As such, the euro has plummeted in recent months against the US dollar. This can only continue for a short while longer. Before long, a disappointing US economy (relative to current optimistic expectations) and booming European exports will create a new global imbalance. And so the wheels keep turning.

In the meantime, a high level of faith and confidence is given to central bankers. For example, according to a recent Citibank survey, fully two-thirds of participants agreed that central banks are now fully in control.

They are the modern day “court wizards”…the equivalent to the “shamans” of old. A Biblical parallel might be Jannes and Jambres who were magicians of the Pharaoh during Moses’ time.

Recently, there have been a number of weighty research reports issued focusing on the topic of debt. McKinsey Global Institute (MGI) released an update of its 2010 and 2012 reports on global debt trends, titled Debt and (Not Much) Deleveraging. It confirms that now, 7 years after the start of the Global Financial Crisis, debt continues to rise around the world in aggregate. Deleveraging as a whole has technically not yet occurred overall. Debt continues to rise around the globe and is predicted to continue to rise (measured as a ratio to GDP, see graph on page 4).

Also, the Bank of International Settlements issued a report titled Secular Stagnations, Debt Overhang and Other Rationales for Sluggish Growth Six Years on. It argues that large debt overhangs (external, private and public) have been a major reason why economic recoveries have been so sluggish to date. This institution points out that an important marker for the completion of a crisis is a significant unwinding of debt. Darkly, they conclude that “[…] figures indicate that high leverage remains a headwind some 6 years after the initial crisis.”

So there we have it. Debt (and leverage) is still increasing overall according to MGI and the B.I.S. says that this is opposite of what is required to signal an end to sluggish economic growth and crisis.

How do policymakers get around this apparent impasse? According to “new economic thinking” there is an easy answer, this being that one should only focus on net government debt (not gross).

Specifically, one should only focus on government debt netted out for central bank bond holdings. To illustrate, McKinsey points out that overall government debt levels in the US would fall to 67% of GDP as opposed to a gross total of 89% of GDP. Voila. This debt virtually disappears to absolutely nothing. After all, the interest income received on these bond holdings get paid back to the US Treasury in any case.

Consider the transformation of Japan’s debt levels when viewed net of central bank holdings: Net government debt falls an equivalent of 141% of GDP!

This could be a free lunch, according to the “new economic thinkers.” Central banks can continue to buy government bonds (whether in secondary or primary markets) and not worry about any holes in their balance sheets. It doesn’t matter for an institution that can create money. In this way, then, rising gross debt levels will be seen to be benign — actually, highly stimulative — while not raising net government debt.

Of course, this is smoke and mirrors and can provide no free lunch. Ultimately, a price will be paid … with interest.

As we have often mentioned in these updates, we fully expect a decline into rampant “money finance” policies by all of the major central banks. How soon? We can’t exactly say. However, we are less doubtful about the outcome that will follow.

It will be a whirlwind of deceptive trends and developments, underneath of which will lie a desperate and immoral redistribution of wealth. We expect little opposition to these last ditch attempts because financial asset values will be sure to keep climbing. This is the surest way to divert attention from the real underlying destruction. All of this may take a number of years to play out.

However, the ultimate fall-out of these unwise policies will be quite terrible, capturing an even larger percentage of societies as economically oppressed. There is only so long that “Ponzi” type policies can continue.