December 10, 2015

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Talk to asset managers long on gold and they may mention “€œbunkers”€ and survival packs alongside topics like liquid assets. It’s unmistakable: The smell of fear is in the air. Remember the “€œsystemic risks”€ that those worthless CDOs exposed? This near panic inside those who understand the system is focused on concerns that one or two systemic flaws may have been overlooked. A great many hedge funds, George Soros”€™ included, have shut their doors and returned their investors”€™ money to them in the past few years. If such a flaw, along the lines of TOO BIG TO FAIL, were to appear”€”then it may all be over. Then “€œfinancial capitalism,”€ as conspiratorial bloggers call it, is a doomed practice. A victim of the mega monetary apocalypse coming down the line. If the Armageddon scenario is (supposedly) bad enough to scare ordinary citizens, the consequence of widespread panic is reason alone for our governments to keep us distracted from fear.

Max Keiser, a keen prophet of gloom, said in September that “€œit’s not that difficult to predict that the next global financial crisis will arise not in the banking sector but in a market that’s beyond the reach of central banks. That is, printing $1 trillion and promising to do “€˜whatever it takes”€™ won”€™t fix what’s broken.”€ Not like last time. Keiser himself fears the strengthening of the U.S. dollar in recent years and its potential therefore to “€œfatally disrupt the central bank-managed “€˜global recovery.”€™”€

The poor quality of corporate credit across the globe is something that has not only Keiser worried. Corporate credit is cited frequently as a problem. Who’s to know, until you”€™re looking at it?

Another sign that all is not normal is the last fortnight’s resurgence of the price of the widely derided cryptocurrency Bitcoin, whose price fell from $1,200 in December 2013 to around $200 six months later. BTC’s fall from grace seemed to spell its demise when a year had passed and its price merely flatlined or worse. This in spite of the growing appreciation of its technology, named “€œblockchain,”€ whose potential utility in a digital world gained enough admiration for UBS”€™ CIO Oliver Bussmann to comment: “€œI think distributed ledger, blockchain technology will disrupt trading and settlement in five years.”€ He argues that while it takes two days to settle trades, blockchain could make it much faster. UBS”€™ endorsement of this once-underground technology betrays the need for a better system. And the price of BTC just exceeded $400 again this week.

The big draw is not the currency. It’s the currency’s architecture. The big and biggest banks and corporates are waking up to just how quick, neat, and transparent such an invention as blockchain can be”€”in manifold uses for manifold businesses and clients, especially in banking and remittances. It may well become the game changer it once promised to be.

However, believers point out that the use of, say, Bitcoin is “€œthe ability to tackle the mammoth abuses of governments in our currency markets. Central banks”€™ very existence would be rightfully challenged as they would no longer own a currency that is international and decentrally managed”€”€”as excerpted from the “€œaward-winning research”€ to be found on The unnamed author extols the cryptocurrency’s potential in rebalancing financial inequality; or, as he puts it: “€œThis is making the rich richer and is and will [sic] lead to social unrest.”€ Can we add both doubts about central banking and increasing financial asymmetry to the list of risks facing today’s would-be investor?

Discussions concerning the “€œoverall crisis of the capitalist system”€ are apparently becoming commonplace; it’s no reassurance that the end of the old order is nigh. The real news behind the doomsday headlines and European scaremongering, on the other hand, is rather fascinating and maybe even optimistic. It is neither the end of capitalism nor cause for World War III.

People fear change the most, perhaps. And change is afoot. Asset manager and gold/silver specialist Ned Naylor-Leyland puts it succinctly:

We are going into a total destruction of the current monetary system, and a function of that is the role of gold.

As sure as night following day, [we] need to make people recognize what has happened to the monetary system. Only a collapse will incite for a replacement of what we have [now] that is sensible.

Or, in the words of Jean-Claude Trichet, governor of the European Central Bank in 2010: “€œWhen the crisis came, the serious limitations of existing economic and financial models became immediately apparent.”€ This is not the rhetoric you”€™d expect from a leader of the ECB.

Negative interest comes of age

What good could negative interest rates possibly offer us? First, according to Naylor-Leyland and his ilk, negative rates are useful when other options for reviving the system are exhausted. Second, they push people to move their money elsewhere (away from the banks).

The economist Larry Summers warns of so-called “€œsecular stagnation,”€ which is not the product of a business cycle but rather a more-or-less permanent condition. He points out that interest rates can”€™t be much below inflation when inflation itself is near zero, providing observers with some relief for now. Summers actually noted the disturbing similarity of the U.S. and Japanese in a speech on Nov. 8, when he highlighted the similarity between Japan’s stop/start recovery throughout the “€™90s and the U.S. cycle of contraction and growth. He offered us a choice: Negative interest rates on deposits”€”or a Japanese-style deflationary rut?

In Europe, negative yields on eurozone sovereign bonds are becoming the new normal”€”as Finland is the first nation to pay a negative yield on a five-year debt sold at auction.

Bloomberg’s Simon Kennedy avers that negative interest rates are in fact “€œthe new normal”€”€”or certainly will be the next time economies slump. The trend goes back three decades, no less: “€œRates and troughs of rates have fallen overall across the last 3 decades.”€ In 1984, Paul Volcker lifted the federal funds rate to 11.75%. Then he cut it 5.88% two years later. The last expansion saw the benchmark top out at 5.75%”€”before being slashed to near zero.

Negative interest is now, despite its adoption already across Europe, from Finland to Switzerland, where the “€œovernight”€ deposit rate is now “€“0.2%. Deutsche Bank has stated that the ECB may never again lift its deposit rate above zero.

The unorthodox may soon become the “€œnew orthodoxy.”€

What does it mean for savers; for investors? And for banks?

Next week I”€™ll tell you what it means in a little more detail, but today I”€™ll leave you with a tantalizing glimpse:

Paradoxically, negative interest may be the best thing that could happen to the world economy. And this is because negative interest might well spell the end of cash.

Until next week…


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