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The Return of Easy Money

By LINDON, Utah - September 10, 2019 No Comments

The Fed has now shifted into rate-cutting mode, and gold prices are responding strongly. Debtors want to pay as little interest as possible, and governments are no different. They'll use any excuse they can to pay lower rates. It might be the growing banking crisis in China, Brexit, or something else entirely. Make no mistake about it. Easy money is back. 

This year already brought the first Fed rate cut since 2008, and it looks like the start of a new trend. The only debate within the Fed is about how much to reduce rates. Another quarter percentage point cut is being taken for granted by the markets, and rates could fall another half a point or more. Last year, the Fed proved that the money market can occasionally win. Having done that, they are now looking for new reasons to debase the currency. It isn't hard to find them. 

As the trade war with China heats up, the Chinese banking system is coming under increasing pressure. The communist government in China bailed out one bank after another this year, and China even took over Baoshang Bank in May. China's increasing involvement in the U.S. banking system makes its problems the Fed's problems.  

It also looks like Britain is heading for an election that promises to be an establishment nightmare. If the Conservatives win, Prime Minister Boris Johnson has vowed to take Britain out of the European Union. Opposition leader Jeremy Corbyn wants to increase Britain's already high tax rates and redistribute wealth. Regardless of the outcome, the Fed will have an excuse to panic and cut rates again.

Getting even 1.6% from U.S. government bonds could soon be nothing but a memory. Former Fed Chair Alan Greenspan recently warned, "It's only a matter of time," before negative interest rates spread to America. In Germany and Japan, many bonds now have negative yields. These bonds are literally guaranteed to lose money. The yield on ten-year Greek government bonds was just 1.59% in early September. The new government in Greece is more responsible, but that doesn't change the fact that Greece defaulted less than five years ago.

Physical gold that you hold yourself can never default or go bankrupt. In the past, government bonds backed by gold had to pay interest rates to compensate investors for their default risk. Critics often complain that gold doesn't pay any interest or dividends. Getting no interest at all is clearly better than negative interest rates. What is more, I couldn't believe it myself until I checked, but the paper dollar is down more than 97% against gold since America abandoned the gold standard. On a gold basis, government bonds are becoming junk bonds that don't pay dividends. It should not be surprising that the gold price went up 18% during the first eight months of this year. With the return of easy money, that may only be the beginning.