Saturday, March 25th, 2017 MST

Cheap money: get used to it

Central planners and their minions rarely–if ever–admit the failures of their programs.  In fact, they rationalize and even support their continuations when the schemes fail, laying blame on “the markets” or someone else’s inability to recognize the brilliance of their interventionist schemes.  Martin Wolf, the Financial Times chief economics commentator, recently lamented the lack of global aggregate demand for failure of low interest rates around the world to reinvigorate economic activity to pre-2007 levels.

Wolf presented circular reasoning for still lower interest rates.  He asserts that “Before the wave of post-2007 crises hit the world economy, this deficiency was met by unsustainable credit booms in a number of economies.”  Then he reasons that such policies are still needed because of the chronic deficiency of global aggregate demand.

As Wolf sees it, loose money is needed to solve the problems caused by loose money.
 
His lament is filled with support for quantitative easing, citing lower interest rates for governments, noting how much they “saved” because of the artificially lowered interest rates.  Banks also benefited (surprise!) because interest margins increased.

Wolf admitted there are losers because of central bank imposed lower interest rates, such as pension plans and insurance companies that offer guaranteed returns.  However, he chastised private investors for not being more aggressive, even saying that cautious investors “. . . no longer serve a useful economic purpose. What is needed instead are genuinely risk-taking investors.”

He concluded with “In their (private investors) absence, governments need to use their balance sheets to build productive assets. There is little sign that they (private investors) will. If so, central banks will be driven towards cheap money. Get used to it: this will endure.”

Further, Wolf has joined the throng of advocates of higher inflation, equating it to growth.  This position is as flawed as any central planner’s scheme.  However,  such thinking is prevalent, which means that  inflation lies in our future for years to come.  Soon, fears of deflation will disappear as inflation becomes the norm.  Invest accordingly.  Serious investors have to consider gold and silver as significant parts of their investment portfolios.

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