On Negative Rates: (Excerpted from Grergory Mankiw’s Article in New York Times) “The idea of making money earn a negative return is not entirely new. In the late 19th century, the German economist Silvio Gesell argued for a tax on holding money. He was concerned that during times of financial stress, people hoard money rather than lend it. John Maynard Keynes approvingly cited the idea of a carrying tax on money. With banks now holding substantial excess reserves, Gesell’s concern about cash hoarding suddenly seems very modern.
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If all of this seems too outlandish, there is a more prosaic way of obtaining negative interest rates: through inflation. Suppose that, looking ahead, the Fed commits itself to producing significant inflation. In this case, while nominal interest rates could remain at zero, real interest rates — interest rates measured in purchasing power — could become negative. If people were confident that they could repay their zero-interest loans in devalued dollars, they would have significant incentive to borrow and spend.
Having the central bank embrace inflation would shock economists and Fed watchers who view price stability as the foremost goal of monetary policy. But there are worse things than inflation. And guess what? We have them today. A little more inflation might be preferable to rising unemployment or a series of fiscal measures that pile on debt bequeathed to future generations.
Ben S. Bernanke, the Fed chairman, is the perfect person to make this commitment to higher inflation. Mr. Bernanke has long been an advocate of inflation targeting. In the past, advocates of inflation targeting have stressed the need to keep inflation from getting out of hand. But in the current environment, the goal could be to produce enough inflation to ensure that the real interest rate is sufficiently negative.” Full: http://www.nytimes.com/2009/04/19/business/economy/19view.html?_r=1
Does any of this sound familiar? Now Consider these three stories from Zero Hedge – Take Our Dollars, Please!
Dollar Debasement Getting Even More Serious: Everyone Is Now Selling Dollar Bonds – Zero Hedge
Zero Hedge: Germany Issues $4 Billion In Dollar Denominated Bonds
Of course the Chinese now wisely want to aggressively diversify out of US Dollars and their $2 Trillion in fiat money ASAP, But is it too late?
Matterhorn: Gold is Now Underwritten by China and
Big Trouble for King Dollar: China Alarmed by US Money Printing, says Gold is an Alternative
Now let’s check in with the world’s largest bond investor Bill Gross:
Pimco’s Gross Greatly Increases Government Debt Holdings to 5-Year High (ie he sees the value of these increasing which conversely means rates will be going lower)
Pimco’s Gross Says Diversify Dollar Holdings Before Central Banks Do (speaks for itself)
Finally, for a simple and clear explanation why this situation will be getting worse rather than better and why it is beyond any other fix than a trashed US Dollar, let’s visit respected fund manager Eric Sprott can you say “$118 Trillion in obligations”? Sprott September Commentary: Total US Government Obligations At $118.6 Trillion
Not to mention the start of several new trends: 1) Removing Gold Hedges: major Gold producers like Barrick taking off their gold hedges, (A Sign Gold Will Be Going Much Higher, Very Soon: Barrick Gold to Sell $3 Billion in Stock, Buy Back Hedges), 2) Gold Repatriation: Hong Kong repatriating their gold reserves from London,(Hong Kong Recalls Gold Reserves, touts high-security vault, The Race to Gold is On), 3) Major Insurance Companies Aggressively Buying Gold: Northwestern Mutual, a conservative insurance company buying over $400 million dollars in gold, their first buy in 152 years(Northwestern Mutual Makes First Gold Buy in 152 Years, says price could double or increase five-fold).