About a week ago, I wrote that the Fed could not afford to cut interest rates. Doing so would leave them without enough conventional policy tools to combat the next recession, which is backed by data from the IMF.
However, on the chance the Fed did cut, I ended the article with the following comment.
However, if they choose to resume QE, then it will be the beginning of the end for the stability of the monetary system. They will not be able to stop the program without contracting the markets, so they would keep the easy money flowing. And it would basically guarantee negative interest rate policy in the US in order to have enough room to deal with recessions.
The Fed’s policy of artificially managing interest rates has led to distortions in the markets. The interest rate has been held low for so long that the market cannot survive without it. Everyone is now ghastly afraid of a recession, including the current presidential administration.
What happens in these situations is that fear drives policy decisions instead of logic and reason, and the economy enters a terminal decline phase known as the crack-up boom.
Crack Up Boom is Coming
A crack-up boom is essentially a fiat monetary system that implodes upon itself when the cost of capital becomes too high to sustain. As more money is printed, real inflation grips the economy. As prices rise, more money is needed in this system to pay for the rising prices of goods and services.
This is in contrast to a pure gold monetary system, in which natural limitations on the supply of money ensure each ounce of money grows in value over time, providing persistent price deflation benefiting savers and investors. I documented this process across America’s financial history in my book using data from the Fed and other sources.
When the Fed announced cutting the interest rate, they are telling the market they will never stop devaluing the currency. They would prefer to do that than to face a deflationary recession, which scares them more.
But, people now know that the currency will never holds its value, and will seek to exchange it faster and faster for real goods.
Consumers Spent Their Cash and Fell Deep Into Debt
The average American does not have $400 available to cover for emergencies. According to a Bankrate survey, the vast majority Americans could not live 6 months off of their savings, and an alarming percentage of people have no money saved.
The statistics on American savings pretty much point to the fact they have spent nearly all of their cash. And not only have they spent their cash, they built such a debt balance it is likely they will never get out of it. There isn’t even enough printed money to do so, without much more of it needing to be created.
The banks are relatively flush with cash themselves, keeping much of the money printed since the last recession, which will help many of them stave off bankruptcy from the coming default. It will utilized during the next recession, causing higher price inflation. And even in this scenario, there isn’t enough bankers cash to extinguish the trillions upon trillions of debt.
I have written in a previous article that consumers are so far in debt they are reaching the point they cannot service the interest payments. Credit cards now charge less in monthly minimums than are needed to pay off the interest, much less the principal.
And per the census, retail sales are beginning to fall YoY.
That article also highlighted the explosion in consumer debt levels, per data from Experian. Americans have used cheap money provided by the Fed policies to fund massive debts in real estate, student, and auto loans. The average American net worth is decidedly negative.
Bonds Are Already in Self-Destruct Mode
Falling bond rates will destroy demand in the debt market. Rates are low enough now that they do not offset the risk of potential default. In fact, almost $13 trillion of bonds now have negative interest rates, in which investors pay the issuer for the privilege of holding their debt.
This is absolute lunacy. Negative yielding bonds tell the market that the currency is not worth holding. This will eventually drive all available cash out into the markets and substantially increase monetary velocity.
Here Comes NIRP to Destroy What is Left of Savings
The IMF has written articles in favor of removing cash from the system so they can set negative interest rate policies. Cash forms a lower bound of zero on interest rates, and must be removed from the system to allow for interest rates to work below that threshold.
The Fed NEEDS negative interest rates during the coming recession, and will have no choice. The system will force NIRP rather than collapse on its own.
The whole problem with this approach is it makes the situation worse. First, it destroys the savings value of those Americans who have any. Second, it reduces the ability of consumers to spend by discounting their discretionary income by the amount of negative interest rates set by the banks.
But because Americans mostly lack savings, it will be up to the Fed to bring out the helicopters to increase actual currency in circulation, of which there is only enough to extinguish a fraction of outstanding debt.
Combined with banks dumping their $1.6 trillion in reserves on the market, we will experience sharp rises in price inflation, causing more debt defaults, and the downward spiral of the system into collapse.
Central Banks Turn Back to Gold
The BIS recently equated gold with cash as a high quality asset. That is also why central banks have been on a gold buying spree across the world since the last recession. They are aware of what their own policies will do to the quality of paper debt assets they hold. Physical gold is limited in quantity and cannot be debased using a printing press at the whim of a bureaucrat, so it is an effective offset to destructive fiat currency policies.
Source: Bloomberg, IMF
The banks are stockpiling gold to support their balance sheets while they devise systems to steal value from consumers via NIRP in the coming recession. The system will do whatever it takes to prevent a full deflationary collapse.
Your only real alternative is to follow the central banks’ lead, and buy physical gold while you still have time.