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What's on the Other Side of Austerity?

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And should asset managers count on central bankers repeating the mistakes of the past, or look for actual change?

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While the miraculous growth scenario is appealing, there is really nothing that one can do about making it occur…other than to pray…and policy makers are not likely to go down that path. Therefore, we should assume that policy makers will use the tools at their disposal – the worldly tools like tax policy, regulation, market interventions, and government spending. Sometimes one can look at non-obvious indicators of devaluation – the ones that seem to make no sense. In point in fact, the new $100 bill. Have you seen it? It is colored, like monopoly money. Does that matter? Maybe. Pesos are colored…it's all just fancy paper, and its only value is social confidence. Admittedly, this is non-traditional thinking, but why are the policy makers fabricating our currency to be more decorative? Another anecdote – have you gotten takeout food recently? Now, I'm an accountant by profession, so I have a thing for numbers, and I seem to be the only one in my household who spends change. You see, I give cashiers the actual amount so that our house doesn't fill up with jars of coins. An some places are ideal for exact change, like the grocery store and takeout food, where a tip isn't really expected. One word…freak…that's how I felt at the restaurant when I counted out $0.91 to pay up my bill. People stared at me, they laughed; you see, anything below 1$ doesn't even count, especially when it costs $100 to fill up my F150. Our currency has already been debased. And of course, there are the more concrete examples of monetary devaluation and anti-austerity behavior:
  • Japanese intervention in the markets to increase deficits and drive down the yen while increasing their stock market performance;
  • Janet Yellen at the Federal Reserve espouses the benefits of 2% inflation expectations;
  • The Fed continues to load up on debt instruments and monetize our debt;
  • A poll from "Eurobarometer" identifies that trust in the EU is at an all-time low;
  • Anti-austerity protests in Europe are a common occurrence, they don't even make headlines any more;
  • The BBC reports that "China is likely to continue…easy monetary policies to sustain growth, and would not raise rates or look to limit access to capital";
  • Reserve Bank of India lowered its key interest rate for the second time in three months in an attempt to revive the economy.
So, around the world, there is a push to lower rates and to hope that the rate reduction and the increased deficit spending will drive up growth. And while nominal growth should indeed perk up, we should remember that there is never a 'free lunch.' One potential impact of low interest rates and increased debt and deficits are future drags on economic activity – in other words, if economic growth proves to be fleeting, the debt cannot be paid off without devaluation or outright default on debt. So, let's hope that the growth strategies generate positive and sustainable growth, because we have seen in Europe that default is not acceptable. And that leaves one option – slow motion default by currency devaluation and inflation – and this devaluation should be supportive of the price of gold.

In conclusion, we should all work towards making organic growth happen – do good deeds, be happy and take risks. If we all do this, miracles can happen. In the meanwhile, our investment patterns may be well-served by taking into account that policy makers will most likely repeat the mistakes of the past, albeit in slow motion, and set off a wave of currency wars, competitive devaluations, and inflation – all in an attempt to debase the currencies in which their unsustainable debts are denominated. In such times, investors have been rewarded by holding real assets and commodities… hold them for a while. Don't put all your eggs in one basket, but remember to diversify into real assets and metals – no huge bets, but don't ignore these asset classes.
No positions in stocks mentioned.
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