Unintended Consequences Of The Ongoing Financial Repression

Thank You Dear Government. That is a final quote that we found missing at the end of an excellent presentation by Grant Williams, investor and editor of the economic newsletter Things That Make You Go Hmmm. Williams explains exactly in which situation we find ourselves today thanks to excessive interventions of governments over the past decade. For people who have the time to listen to the whole presentation, we can only say it is worth your time. We have summarized five key take-aways for readers who have less time.

(1) Distortion of price signals for any type of investor

Once upon a time investing was based on a yield that reflected normal economic and monetary conditions.

financial_repression_2007-2013

Since 2007 financial repression became the dominant policy of our central planners. Yields were taken down to an absolute minimum. A lot of countries have negative real rates for some time now.

investing_before_2007

(2) Safety is not what it used to be

Risk and safety are worth our attention, for sure in these times where counterparty risk has never been that high. This quote from Grant Williams is key for us, individuals and small investors:

Since 2008, the vast majority of the risk has been transferred from private balance sheets to those of the tax payer himself. Piling into government bonds is like storing your possessions next doors when your own house is on fire. It is an incredibly foolish and dangerous thing to do.

Furthermore, what is the Volatility Index signaling? It says that the safety level today is the same as it was in 2005, before any talk of a housing bubble and before the explosion of government debt. Really, is the world as safe as in 2005?

VIX_index_2005-2012

(3) Confidence seems to have returned but nothing is further from the truth

Because of the achievement of the central banks to establish “confidence”, and given zero interest rates on government bonds, it is very likely that investors will consider government bonds soon as a terrible investment. The most likely scenario is that investors will start selling bonds forcing the interest rates to rise. The explosion of debt in the last 5 years means governments cannot afford interest rates to go higher because it makes their debt impossible to service. That is the corner in which governments and central banks find themselves into.

This is the picture that central planners send across the world. They want to make you believe that this is the reality.

calamity_now

If you look into the real numbers, however, you see that the worst is NOT over. There are a lot of risks looming. Only a couple of them are presented below.

central_banks_view_on_reality

(4) The fractional gold system is on its way to blow up

Given the ongoing trends which were discussed above there is one asset that protects you: GOLD. Indeed, every Cypriot that had his/her money in physical gold (rather than on a savings account in the bank) was not affected by the act of confiscation. As things worsen, the value of gold goes only higher.

With his quote in 1998 “ Central banks stand ready to lease gold in increasing quantities should the price of gold rise” Alan Greenspan openly confirmed that central banks are willing to work together to manipulate the price of gold with the aim to make their currency and the financial system look good.

Now central banks have applied the principles of their fractional banking system to gold as well. Readers interested to know exactly how this fractional gold system works should take their time to listen to the presentation of Grant Williams from 14m30s till 34 minutes. “Fractional gold” is nice from the bankers’ point of view, in “normal” circumstances. However, there is one tricky thing in this whole system. As soon as an increasing amount of owners ask for delivery the whole system falls apart. Can this happen? Well, it IS happening right now. Grant Williams points to the following countries that already asked for delivery (their gold reserves were stored outside their own country; a lot of countries in the world have brought their gold to the US over the course of the 20th century):

  • Venezuela in August of 2011
  • Switzerland in March of 2012
  • Ecuador in October of 2012
  • Austria in November of 2012
  • Netherlands in January of 2013
  • Azerbaijan in January of 2013
  • Germany in January of 2013

Everyone can see, based on this picture, what happens when “fractional gold” approaches the following situation.

gold_leasing_the_unwind

(5) Gold in physical form in your OWN possession will be THE safe haven

One picture tells more than 1,000 words. We have nothing to add.

gold_ownership

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