THE CURRENT MONETARY ORDER IS NEARING ITS END
THE CURRENT MONETARY ORDER IS NEARING ITS END by Claudio Grass
Given the massive intervention and monetary manipulation experiment by central banks over the last decade, the amount of distortions created in the market, as well as the record debt accumulation at all levels of the economy, have given rise to considerable risks for investors. For a more detailed understanding of these issues and for his outlook, I turned to Dimitri Speck, a renowned expert in the development of trading systems and in seasonal analysis, whose experience and successful career spans over two decades. Mr. Speck, founder and head analyst of Seasonax, also has valuable insights into the history of the gold market, as illustrated in his book “The Gold Cartel”. He therefore has a very unique perspective, forged through his experience developing successful trading strategies, combined with his knowledge and deep understanding of economics and the history of our monetary system.
Claudio Grass (CG): After a decade of aggressively expansionist policies by central banks, it would seem we stand at an impasse. Central bankers cannot normalize their policies without risking a market crash and a toxic debt meltdown, while their current overstretched position means they won’t have enough ammunition to fight the next crisis. How do you see this playing out?
Dimitri Speck (DS): In the short term, low interest rates stimulate the economy. In the long run, however, the persistent and aggressive manipulation keeping all interest rates at ultra-low levels since 2008 has led to massive undesirable developments. As the state’s interest burden fell, politicians wasted money that could have been used productively somewhere else. In addition, due to this overly accommodative environment, inefficient companies stayed in the market, reducing the resources and employees available to other more promising companies. In theory, the low interest rates could also have been used to repay and reduce debt. In reality, however, they facilitated new borrowing and thus encouraged over-indebtedness. As a result, bubbles developed in the stock and in the real estate markets, which in turn led to further malinvestments.
In a nutshell: The low interest rate policy weakened the real economy and at the same time increased debt. That’s the exact opposite effect of what would have been desirable.
Overall, it is typical of the hubris of central bankers who try to plan and control the economy to also try and stimulate it by cutting interest rates. Personally, I even think that it is not the task of the central banks to set interest rates to begin with. However, there is one more tool that remained: the printing press. It will most probably be used heavily and excessively as well.
CG: The Federal Reserve already reversed its plans and announced that there will be no interest rate hikes this year and its intentions to slow down its tightening and end it in September. As it is currently facing increased pressure from President Trump to cut rates and even to resume QE, what is your assessment of this dovish policy direction and its expected impact on the economy?
DS: The effect of interest rate cuts is often overestimated. They do not prevent a bear market in stocks nor do they fend off a recession, as shown in 2000, 2008 and even in the 1930s.
It is about the usual sequence of boom, crash and crisis. Supporters of a solid monetary system, like myself, strongly criticize the credit excesses of the boom phase and want to avoid them, as we clearly see the inevitability of what will come next, as it has time and time again. Nowadays however, most politicians, academics and journalists subscribe to the idea that it is crucial to combat a crisis by printing money afterwards. This idea is naturally more popular than sound and responsible policies, however, in practice it only prolongs the credit excess and increases it, as we can see since the financial crisis of 2008.
Anyone who wants to prevent a deflationary collapse like the one in the 1930s must prevent mass debt defaults. Immediately afterwards, however, the debt levels should be reduced. But, still, it is much better to just avoid the credit excess in the first place.
On a global scale, we are now so heavily indebted that it is unrealistic to hope for any meaningful debt reduction. Instead, resorting to the printing press and strong inflation is a much more likely scenario.
CG: Europe appears to be particularly vulnerable, with a stalled economy and an ailing banking sector, with banks like Deutsche Bank and Italian lenders in serious trouble, as well as incredible amounts of public debt in the bloc. What do you think the implications are for the outlook of the Eurozone?
Europe’s main problem is the faulty design of the Euro. It stands too high for Italy and France and too low for Germany. This has already caused damage amounting to some thousand billion euros. However, there are further vulnerabilities and risk factors in the Euro area and those are as diverse as they are deeply entrenched in their respective member-state economies. Overall, the push towards further centralization and the entire idea of trying to forcibly integrate and fuse together economies of different speeds and wildly varying profiles has delivered questionable results and I expect it to continue to weigh down the bloc going forward. Combined with the dangerously high debt levels, I believe Europe’s economic outlook is far from reassuring.