A Glimpse Into The New Monetary Architecture

from Gold Silver Worlds

This is an excerpt from the latest Advisory Board meeting by Incrementum Liechtenstein as summarized in 25 Monetary And Economic Insights From Incrementum’s Advisory Board. The full transcript is below. In this article, we highlight the thoughts of Jim Rickards (first part of the article) and Heinz Blasnik (towards the end) when it comes to the future of our monetary system.

Global Depression

Going back to the 4th quarter and even the middle of last year, there was a high expectation of a rate increase in 2015 and the talk back then focused on the debate between the March-people and the June-people. March has now come and gone. There will not be a rate increase in June. The debate has shifted to the September-people and a small number of December-people. I have said often that the Fed will not be able to raise rates in 2015.

Right now the Fed’s Funds Future Market is pricing the rate increase for December, it would not take much to push it out to 2016.

Here is the problem: The Fed desperately wants to raise rates, there is no question about this. They signal it, they warn the markets, they continue to talk about it. Anybody who is still in a leveraged Dollar-carry is warned to get out of this trade.

The problem is that actually raising rates and warning people that you are probably going to raise rates is not the same. Meaning: you still have this issue of data dependence. Now where the Fed gets it wrong is that they have removed all forward guidance. The Taylor rule is gone, the shadow gold standard of Greenspan is gone, basically every rule that was used in the last 30 years has been abandoned. The Fed only has two options: one is their own forecast; the other is data dependence.

Here’s the problem with those two tools: The Fed has the worst record when it comes to forecasts. All the way through the last 6 years, they have been wrong each year with their growth forecasts by a huge magnitude. So they are relying on forecasts that are always wrong. But they still trust those numbers.

Now the problem with data dependence is that this data is mostly lagging. You are always the last to know. So you have two tools that do not work and they are flying blind.

You have two states of the world:

Either, the Fed blinks, throws in the towel, says there is no chance of a rate increase in the foreseeable future and says QE4 is not off the table. Then you’ll see a huge rally.

Or, the Fed actually raises rates in September – which is not my assumption – and this turns out to be a disaster as they would be hiking into weakness. Then stock markets get crushed, and the dollar rallies.

What they are doing is the old Draghi trick… talk tough and do nothing. The Fed keeps promising to raise rates, but they don’t do anything.

Now we have this somewhat schizophrenic market, where on certain days, weak data comes out and the market believes that this will delay the rate hike. Then on other days, Fed officials come out and talk tough. So this is another example of what we saw in 2011/2012 in Europe, which is non-directional volatility.

I do not think that business cycle analysis matters in this environment. From my point of view, we have been in a global depression since 2007. People say: “You’re crazy Jim, we are having an expansion for 6 years now, growth is up, unemployment is coming down, etc.” The defining characteristic of a depression is that growth is significantly below potential. So if potential is 3 or 3.5% in the long run and 5% in the short run and your actual growth is 2%, that is a depression from my point of view.

So if you take annual numbers, the US economy has been growing at 2% for 6 years. That is a depression, as the potential is much higher. No monetary authority can do anything to get us out of this mess. We need structural changes, not monetary stimulus.

My expectation is 2% growth as far as I can see, no rate increase but some volatility because of talking tough on the one hand and doing nothing on the other.

A New Monetary Architecture

What to think of the newly created Asian Infrastructure Investment Bank, a multilateral institution which is challenging the Bretton-Woods institutions (the IMF and the World Bank), is an important development to closely follow. There are 43 nations that have signed on so far – including Germany, Switzerland, the UK, France, but also South Korea and even Taiwan, who all are allies of the US. Is this a kind of further sign that the emerging market countries are ready to challenge the status of the US and the US Dollar? Jim Rickards answers these questions.

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