Central Banks Are In A Lose-Lose Situation: Low-Rate-Policy “Has Rendered The System Profoundly Fragile”

by Tyler Durden
Via Acting-Man.com,

Claudio Grass Interviews Ronald Stoeferle: Central Banks In A Lose-Lose Situation
Claudio Grass is the managing director of Global Gold, a Swiss bullion depository. Acting Man is an affiliate of Global Gold (here is our landing page at Global Gold, where you can get additional information about the service).

Ronald-Peter Stoeferle is a managing partner and investment manager of Incrementum AG. Together with Mark Valek, he manages a global macro fund, which is based on the principles of the Austrian School of Economics. He previously worked for Vienna-based Erste Group Bank where he wrote extensive reports on gold and oil. His benchmark reports titled ‘In Gold we Trust’ have drawn international coverage, inter alia by CNBC, Bloomberg, the Wall Street Journal and the Financial Times. Aside from his work at Incrementum, he is a lecturing member of the Institute of Value based Economics and a lecturer at the Academy of the Vienna Stock Exchange.

A Fragile System
Claudio Grass, Global Gold: Ronald, it is a pleasure to have the opportunity to speak with you. We’ve known each other for a very long time, both on a personal and professional level. Because of our central banks, we find our economies today operating on artificial stimulus and negative interest rates. How would you summarize the consequences of this policy?

Mr. Stoeferle: I have always considered it impossible to create a “self-sustaining” economic expansion by means of the printing press. By so doing, central bankers only succeeded in suppressing symptoms, but the underlying structural problems that created the 2008 financial crisis in the first place, have only gotten worse.

The primary goal, namely to stimulate the economy, has not been achieved. Low interest rates have provided artificial life support for unproductive and highly indebted companies, as well as for states. According to Standard & Poor’s, budget deficits in the euro area would on average be 1-2% of GDP higher, if the average level of interest rates between 2001 – 2008 were applicable today. Under normal market conditions, stock prices rise as a result of a fundamental strength in the economy, but in today’s reality, the rally in asset prices has only deceived market participants about the fundamental weakness of the economy.

The alarming fact is that asset prices will likely collapse if central banks cut the artificial support. High asset prices have become vital to maintaining confidence in the economy, while the majority of stock and real estate investments have been financed by cheap credit. Thus, abandoning the low interest rate policy would likely trigger a severe recession. On the other hand, continuing this policy would distort and corrode the economic structure even more, which would jeopardize the business model of pension funds, insurers and banks, and further inflate the real estate and stock market bubbles. The low interest rate policy has rendered the system profoundly fragile, with central banks virtually in a lose-lose situation.

1-TMS-2 and SPX

US broad true money supply TMS-2 and the S&P 500 Index. It is actually not a coincidence that money supply growth and surging asset prices are going hand in hand – in this case, correlation does actually imply causation. One of the world’s best performing equity markets (in local currency) in recent years was the Venezuelan stock market, which has soared even as the economy (and indeed the entire country) has crumbled to dust. During times of rapid monetary inflation, rising stock prices are not a reflection of the health of the economy – click to enlarge.

Claudio Grass: Do you believe central banks still have other options they could resort to or will this be the end of the road for them?

Mr. Stoeferle: Central banks still have several options for further monetary easing. For instance, they could cut rates deeper into negative territory. However, to create an environment in which banks could pass on negative rates to their customers’ savings accounts, cash would have to be abolished first, in order to avoid bank runs. We are already seeing signs of such intentions. But I cannot imagine these brutal measures being implemented, without stirring up even more unrest, in times when anti-establishment sentiment is already spreading. Moreover, negative interest rates have already been introduced in five currency areas with hardly any positive impacts on growth and inflation.

“Helicopter money” would be a more likely recourse, e.g. cash transfer payments to governments or private households, QE combined with fiscal expansion, or the cancellation of outstanding debt securities, which central banks hold as assets on their balance sheets. Some leading economists argue that helicopter money would be legally feasible and within the mandate of the central banks. It’s very likely that inflation would be triggered in this scenario, but the growth impetus depends on how the money is spent.

The easiest measure to implement would be “Forward Guidance”, which is a communication policy that affects the market participants’ expectations. Theoretically, they could also do open market operations involving gold purchases, which would be a kind of deliberate devaluation of the USD versus gold. What is certain is this: Once the feared recession kicks off, the adoption of further monetary and fiscal policy measures is as sure as night follows day…..More Here

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Central Banks Are In A Lose-Lose Situation: Low-Rate-Policy “Has Rendered The System Profoundly Fragile”