We need a weak economy for this system to stay afloat
I received an email from a reader yesterday and I wanted to share it with you. His thoughts are not unique, so I wanted to pass along to you my response. I think it will give you an idea of what I see going into the future.
What do you think of [the] call that interest rates and the dollar (and the Dow) are headed much higher during the next couple of years and gold will stay flat at best?
Then the strong dollar will create major havoc on the world economy causing an updated plaza type of accord to weaken it, there by sending gold to about 5k?
If I heard you right recently, you have mentioned that rates here may be receding in the near future until we maybe end up with an ECB type of sub zero rate situation?
Chris in Seattle.
Here was my response:
Thanks for the email.
My theory on what I think will happen is based on low interest rates being a prerequisite. My concern about higher interest rates is that many countries around the world will no longer be able to service the debt and that will be catastrophic. That would be totally catastrophic. [There will be no accord as the system would just unravel.]
Before we see rising interest rates we will see the central banks around the world conjure up monetary policy to ensure that interest rates stay low. With this said, a necessary ingredient of the central bank’s ability to keep interest rates low, especially on the longer end, is the New World Order agenda of open borders factors of labor and production. This will allow deflationary forces to be imported to the high-cost countries, while the high-cost nations export their inflationary forces.
As long as factors of production and labor can be arbitraged between nations, this scheme can continue and inflation on a global scale can remain subdued. As long as CPI numbers around the world stay within reason like we see now, the Federal Reserve and other central banks will continue to pump out unconventional monetary policy and will be able to keep interest rates low. Unconventional policy will no longer work if inflation rates around the world begin to rise in earnest.
Even open borders has its limits. As the developing nations begin to increase their standards of living, their price levels begin to rise and it becomes more costly to produce in their nations. I wonder how long the arbitrage between high cost and low-cost nations can continue. Eventually it will wear off.
Countries like the United States can no longer afford to bring businesses back and production to within its borders, because that would be inflationary. With all the debt outstanding and the treasuries outstanding the United States needs to offshore its production to keep its inflation from moving higher. So I see a regime of stable to falling interest rates and that will ensure the scheme can continue.
The only wildcard is inflation. Because once inflation rises the schemes no longer can continue. If interest rates begin to rise too much on the US treasuries we can see the dollar begin to waver as U.S. government’s interest payments may become a primary concern. But as long as inflation stays low and the economies around the world remain weak the central banks can conjure up more unconventional policy, keep interest rates low, and continue this current system.
Keep in mind this one important point, there are massive deflationary forces that are created by having large amounts of debt on a balance sheet. As a higher percentage of income goes to debt servicing there is less money left over to bid prices up. So, the irony of deficit spending is that there are deflationary forces that help to ameliorate the monetary printing.
Personally I see it continuing for a while. I don’t think we’ll see the stock averages move higher with interest rates moving higher. Higher interest rates would be a symptom of something fundamentally and terminally wrong and I hope we don’t see that anytime soon.
As for gold, I really can’t make any long-term predictions for when a bull market will begin once again. We had a bull market going into 1980 and paused for over 20 years, then we had another bull market begin 2003 [and top out in 2011]. I hope we don’t have to wait as long to get another parabolic rise.
The most likely scenario for gold and a new rise will be if the scenario I just previously mentioned begins to unwind. If we see this current system begin to unwind then gold will rise. But if the banks can continue unconventional monetary policy for as long as the eye can see, I don’t see a reason why gold will begin to rise and break out into a new bull market.
In this case, I see risk-taking continue to climb, I see the asset markets continue to rise, I see cap rates on real estate continue to fall, and I see interest rates remaining subdued.
As you an see from my response this is my whole gestalt investment thesis. I am more confident of my thesis bearing fruit, because the central banks will get the blame if the system folds under. The banks will do their best to not be blamed.