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The Age of the Boneheads

Welcome to the Bonehead era.

In South Korea, opposition politicians are shaving their heads. They’re doing this as a political protest. That’s one, literal, form of boneheadism.

We should be far more concerned by a spate of metaphorical boneheaded-ness among central bankers right now, including those of South Korea. The South Koreans are planning for 2020 a record-busting government budget, in an effort to stimulate the economy.

South Korea has operated a conservative, tight fiscal discipline for more than two decades, so the kind of fiscal largesse planned for next year is highly unusual, particularly given the country’s enviable economic performance. The South Korean finance ministry forecast economic growth of 2.6% for 2020, a projection made prior to the announced budget splurge for next year.

In Europe, economic growth of 2.6%/year can only be dreamt of. Never mind, lots of lovely Won will soon be sloshing around one of Asia’s previously best-managed economies.

South Korea is a straw in the wind.

For many economists South Korea’s kind of fiscal stimulus, or public spending of money that governments may/may not have, is a much-needed measure in Europe, where the only tool being used is Quantitative Easing (QE), whereby the European Central Bank (ECB) prints money to buy government securities, and hope that this encourages lending and investment.

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Despite QE being tried during 2015 to 2018, during which time the ECB spent €1.3 billion a minute, this policy failed to boost the Eurozone’s economy. Nevertheless the ECB has taken further leave of its senses and announced the resumption of QE. Mario Draghi, the ECB’s president for a few more weeks, also announced a cut to the ECB’s main interest rate to minus 0.5%, which is a bit like throwing petrol on a bonfire to put it out.

Negative interest rates first made their appearance in the Eurozone in June 2014, with the aim of putting some pep into the comatose economy. This is getting dire; the ECB has no more weapons to fire. As JP Morgan Asset Management has predicted, a global recession is now almost inescapable, and Europe will have another eight years of negative interest rates. As one observer has commented, “When this misadventure in monetary policy ends, as both math and history says it must, it will be messy, uncontrolled, and very painful for holders of just about every sort of financial instrument out there (stocks, bonds, derivatives, etc.).”

As for USA, where government-by-shouting is the order of the day, President Trump gave his opinion on 11 September, using his favoured capital letters. He tweeted that the “Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term…A once in a lifetime opportunity that we are missing because of ‘Boneheads’”. The expectation is that the US Federal Reserve will indeed cut rates – but not put them into negative territory, thus angering the President even further.

As those who regularly read this newsletter will know, we have a vested interest in the message “buy gold”. We recommend obtaining a Glint Mastercard, and investing some of your wealth in gold on the card, which is the cheapest way there is of obtaining physically allocated (i.e. it’s yours and yours alone) gold. But beyond that vested interest we are becoming increasingly concerned about the economic and financial boneheaded-ness that surrounds us right now. It seems to us that that the solutions being suggested to bring about economic growth greater than close-to-zero are, frankly, likely to make matters much worse over the longer term. With a world that is today carrying an estimated 50% more government, personal and corporate debt than in 2008, the risks are concomitantly greater of a serious recession. We would be doing readers a disservice if we said anything other than – don’t be a bonehead; buy gold now, for goodness’ sake.

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