Ronald Stoeferle, author of the respected In Gold We Trust reports, as well as two excellent chartbooks (Gold Bull & Debt Bear and Monetary Tectonics) talked to The Cantillon Observer about the dying global monetary system, about the ongoing fight between inflation and deflation, about the results of central bank policies. One of the things Stoeferle firmly believes, is that gold will become much more important as a monetary asset. From that point of view, he sees gold re-entering classic finance.
Below are several excerpts from the interview which appeared on The Cantillon Observer.
Central bank money printing is all about funding government budget deficits and keeping insolvent banks afloat :
I am firmly convinced that the origin of today’s debt/financial/systemic/political crisis can be traced back to the events of August 15, 1971, when Richard Nixon ended the Bretton Woods agreement with the words “Your dollar will be worth just as much tomorrow as it is today. The effect of this action is to stabilize the dollar” Since then the purchasing power of the dollar in terms of gold has declined from 0.75 grams per dollar to currently 23 milligrams.
We explained this interplay between inflation and deflation in our last Chartbook “Monetary Tectonics”: As Austrians we know that the natural market adjustment process of the current crisis would be highly deflationary. As the financial sector in most parts of the world reversed its preceding credit expansion, overall credit supply is reduced significantly. The reason for this lies within the fractional reserve banking system, as the largest part of money in circulation is created by credit within the commercial banking sector. The much smaller portion is created by central banks.
In a highly leveraged world like today, price deflation is – from a political viewpoint – a horror scenario that has to be averted whatever it takes, due to the following reasons:
- Debt liquidation and price deflation have fatal consequences for large parts of the banking system, in an over-indebted world.
- Central banks also have the mandate to guarantee ‘financial market stability’ so they have to make sure “It” doesn’t happen here and keep inflating
- Deleveraging leads to consumer price deflation and asset price deflation. Tax revenue declines significantly. Asset price inflation is taxed, asset price deflation cannot be.
- Falling prices result in real appreciation of nominal denominated debt.Increasing amounts of debt can therefore no longer be serviced.
Therefore this (credit) deflation, respectively deleveraging, is currently compensated by very expansionary central bank policies. In my opinion, this is an extremely delicate balancing act that will ultimately fail.
On the expected effects of the unwinding of the extreme monetary policies of central banks:
My countryman Friedrich August von Hayek once said that “If a policy is pursued over a long period which postpones and delays necessary movements, the result must be that what ought to have been a gradual process of change becomes in the end a problem of the necessity of mass transfers within a short period”. This basically says it all.
It is very sad that nowadays, the main factor influencing financial markets seems to be the anticipation of central bank actions. Market participants are conditioned to monetary stimuli like Pavlov’s dog! Historical market patterns have been radically altered over the recent years. Since 2009 the Fed has reacted to every economic slowdown by introducing fresh easing measures. As a result, we can observe the following paradoxical situation now: disappointing macroeconomic data lead to price increases in stocks, as a continuation of QE is priced in. Better than expected macroeconomic data on the other hand lead most of the time to price declines, as a reduction of future QE is anticipated.
Based on my observations in the last few years, I expect that financial repression in all its ugly facets is going to gain more and more in importance over the coming years. I regard this as a terrible long term strategy, as it will only achieve redistribution and a delay, but no solution to the problem. We already see that the whole “stimulus bubble” does not produce significant effects anymore, as we are experiencing declining marginal utility of additional debt.
On the breaking down of the current world monetary system of fiat monies and introduction of a newly-designed global monetary system:
I am absolutely certain, that the renaissance of gold in classical finance will continue. Last year, OMFIF, a global think tank for central banks and sovereign wealth funds, in a report argued in favour of a remonetisation of gold. In their view, gold should once again play a central role in the international currency system. It’s a really fascinating piece and shows strikingly that fundamental changes to the currency system are already being discussed at the highest levels.
There are many other interesting developments going on. In a study commissioned by the European parliament, author Ansgar Belke came to the conclusion that gold-backed bonds would be far more transparent, attractive for investors than government purchasing programs. According to Belke, gold-backed bonds would alleviate the sovereign debt crisis at least in the short term, as it should lower financing costs and restore the damaged confidence.
Regarding the US dollar, global confidence for it as reserve currency has definitely started to wane. Without a return to sound financial and monetary policy the US dollar sooner or later will be questioned sooner or later.
Therefore I believe that gold should continue to be an integral part of every investment portfolio, as it is the only liquid investment asset that neither involves a liability nor a creditor relationship. It is the only international means of payment independent of governments, and has survived every war and national bankruptcy. I truly believe that it’s monetary importance, which has established and manifested itself in the course of the past several centuries, is in the process of being rediscovered.
What von Mises would be saying and doing about the policies of the central banks if he were alive today:
I think Mises would be very, very concerned. As he famously said “Continued inflation inevitably leads to catastrophe”. Another one of my favourite quotes is: “Inflation and credit expansion, the preferred methods of present day government openhandedness, do not add anything to the amount of resources available. They make some people more prosperous, but only to the extent that they make others poorer.”… This is what we are seeing at the moment and I am absolutely certain that it will end in tears.
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