THE PRICE OF MONEY IS FAKE

Democracy and deflation are like oil and water. Virtually no popular appetite exists for deflation. The consequence is that policymakers are doing “whatever it takes” to stabilize the price outlook after the deflationary pulse of the global financial crisis, and the result is that the price of money today is actually fake. What do we mean by the term fake?

Short-term real interest rates are negative and meaningfully so. Fiscal deficits aimed at sustaining or smoothing aggregate demand are creating a burgeoning supply of government bonds. Governments are intervening directly in the long end of the bond market through quantitative easing and long-dated sovereign liquidity facilities. Even bank debt during the crisis was guaranteed. Central banks are adhering to exchange pegs, despite the fact that fundamentals do not warrant the exchange pegs and are thus producing vast amounts of reserve accumulation or the need for complicated bailout facilities to ease the required real adjustments.

In some ways, nature’s currency, gold, is an alternative store of value to the paper currency conundrum because it cannot be printed, it is scarce, and its supply is not subject to a political process. But the challenge investors face is that gold has been symmetrically re-rated upward in value as the quality of man-made money has deteriorated. There is no free lunch.

The primary goal of avoiding permanent impairment of capital is difficult to achieve in the current environment ...

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