Today a legend who is connected in China at the highest levels predicted the price of gold is going to hit new all-time highs.

Negative Interest Rates, Yield Negative Returns
By John Ing, Maison Placements
(King World News) – Once upon a time, saving for a rainy day meant setting aside money so that bills could be paid if one loses a job or needed for retirement. Money was even kept in mattresses because banks were considered unsafe. Today it is different. After experimenting with three rounds of quantitative easing, central banks have bought up most of the available bonds with newly printed money. Central banks from Europe and Japan have embarked on their next big experiment, negative interest rates as more than 30 central banks around the world cut interest rates this year. Negative interest rates distort markets. Swiss bankers, UBS and Credit Suisse introduced negative rates on large deposits where their wealthy clients must pay for the privilege of leaving their funds with the bank. In fact, desperate for yield, investors are buying 30-year bonds, despite the prospect of losing money at the end of term.

One concern is that the negative yields are climbing at the rate of some $3 trillion a month, growing to $17 trillion, an historic high, and soon to be joined by the United States. The rich are getting poorer. Holders of bonds today, if held to maturity are guaranteed to lose money. Another worry is that pension funds who depend on interest returns are aghast as central banks threaten to lower interest rates even more.

So what to do? If you are going to be charged to keep money in the bank, investors will buy other assets to preserve capital. To be sure, aging populations and negative yields will collide as capital allocation is distorted as debt becomes too unmanageable. Over the short term, money has been chasing overvalued stocks with a view that return on capital is better than nothing. Sometimes nothing is better than losing…

To be sure the distortion of negative yields across the globe also hurt the central banks whose portfolios hold part of the one third of global bonds that carry negative yields. More significant is that negative yields also undermine the pension funds, banks and other savers who are the very cornerstone of the capital markets and cannot exist with negative IOUs. And Wall Street has yet to figure out how to price risk on the trillions of dollars of esoteric financial instruments because negative yields do not work in their mathematical models. The financial system has thus become not only overly exposed but also unsustainable as weaker companies, unprofitable or leveraged players pile up more “interest free” debt. Debt cannot keep rising while interest rates keep falling. Eventually, central banks will reach a negative rate floor when cash in the system runs out or when depositors withdraw funds as they decline to pay fees to lend to those institutions. Ironically, negative interest rates have done little to boost economic growth. Central banks have become irrelevant.

Of more concern is that there is simply no reason to keep money in the bank. Taken to the absurdity, the deposit base of banks will inevitably shrink as depositors stuff their savings into mattresses or alternatives, which reduces the banks’ original mandate, that is to make loans. Without capital for loans, loans aren’t made. But more important, negative interest rates reduces confidence in fiat currencies. History shows that when money ceases to be a store of value, investors simply find other ways to protect themselves.

Debt Does Matter
Investors and central bankers are puzzled that despite abandoning monetary orthodoxy and rounds and rounds of quantitative easing, we have declining interest rates, and inflation is nowhere to be seen. The problem is that many overlook that there is inflation, in stock prices, classic cars, precious metals, and the bond market. Money markets are behaving differently and the risk of inflation as well as central bank solvency has increased with the repo market in disarray as a sudden spike in interest rates for repurchase agreements, set the capital markets spinning.

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We believe that the markets should be looking for stagflation, as a result of the huge increase in debt. Traditional economic theory is that debt monetization is a phenomenon when governments issue debt to finance spending and the central bank itself buys that debt in secondary markets, thus increasing money supply. Yet central banks are not targeting money supply but instead inflation and unemployment, which are laggard statistics and noteworthy is that unemployment

is at the lowest level in 50 years, considered full employment today. We believe that the debt monetization has come at a cost of higher debt loads. Most sovereign debt are yielding negative returns with a shift from “risk-free” returns to “return-free” risk. But, in today’s environment of declining interest rates, what remains constant is that the interest payments, are taking an increasingly larger percentage of government revenues. Those fixed interest payments on debt are deflationary and one of the reasons why there is less money going into the system which ironically was one of the factors, that exacerbated the Great Depression. Debt does matter…..More Here