The new 2019 ‘In Gold We Trust Report’ just went live and downloadable.
A now 13-year running annual report on gold and financial markets has become a must-read for anyone deep in the physical precious metal market weeds.
This year’s free report on gold and financial markets is a +330 page analysis full of charts and commentary for ongoing financial matters at hand.
Here is the co-founder of this info-packed document giving us the continuing collapse of trust in virtually all institutions, financial, and monetary matters.
Gold in the Age of Eroding Trust
The Gold Silver Ratio’s near two-decade correlation between a rising US stock market and rising silver versus gold values has severely broken down since around 2013.
The Gold Silver Ratio is now reaching levels near 90, or as high as nearly 26 years ago deep towards the end of the 1980s and 1990s silver bear market. Meanwhile the S&P 500 trades near its record nominal price high. Indeed, there is more going on here to explain this phenomenon.
On page 37 of this year’s ‘In Gold We Trust‘ annual report, the team at Incrementum explains their theories as to what is happening with this developed divergence. As well what the growing trend for MMT if implemented, may mean for financial and precious metals ahead.
Modern Monetary Theory (MMT) – The new darling of the inflationists?!
“Modern Monetary Theory is an argument that would be wonderfully familiar to every sovereign since the invention of debt. It is essentially the argument that significant sovereign debt is a good thing, not a bad thing, and that budget balancing efforts on a national scale do much more harm than good.” – Ben Hunt
Another gateway to an even looser monetary policy is the “Modern Monetary Theory” (MMT), which is finding more and more supporters, especially in the US. According to Wikipedia, “MMT is a heterodox macroeconomic theory that describes currency as a public monopoly for a government and unemployment as the evidence that a currency monopolist is restricting the supply of the financial assets needed to pay taxes and satisfy savings desires. MMT is seen as an evolution of chartalism and is sometimes referred to as neo-chartalism. MMT advocates argue that the government should use fiscal policy to achieve full employment, creating new money to fund government purchases. The primary risk once the economy reaches full employment is inflation, which can be addressed by raising taxes and issuing bonds, to remove excess money ￼￼￼from the system.
MMT states that a government that can create its own money, such as the United States:
• Cannot default on debt denominated in its own currency;
• Can pay for goods, services, and financial assets without a need to collect money in the form of taxes or debt issuance in advance of such purchases;
• Is limited in its money creation and purchases by inflation, which accelerates once the economic resources (i.e., labor and capital) of the economy are utilized at full employment;
• Can control demand-pull inflation by taxation and bond issuance, which remove excess money from circulation, although the political will to do so may not always exist;
• Does not need to compete with the private sector for scarce savings by issuing bonds.”
In short, this means that public debt and budget deficits are not a problem. The central bank or the Treasury could always provide additional liquidity, and a state could therefore never become over-indebted or illiquid in its own currency. As issuers of fiat money, states are, in the opinion of MMT advocates, unlimitedly solvent. As long as real resources such as labor remain outside of the economic process, i.e., are “idle”, they can be activated by the state, creating additional demand with newly issued money.
Google searches for “Modern Monetary Theory” (MMT)
Worldwide – Chart, Data, & Source
See also for the United States – Chart, Data, & Source
MMT postulates that the strict functional distinction between fiscal and monetary policy – the violation of which is reflected, for example, in the actions brought against the ECB’s various extraordinary measures – should be abolished. This approach is a carte blanche for politicians to throw their already modest budget discipline completely overboard. In contrast to helicopter money, MMT enables the state to be permanently financed by the central bank. The theory is not entirely modern, however, because direct financing of the state by means of the printing press was already implemented in the Weimar Republic – and ended catastrophically.
In the USA, which is already in the early campaigning phase for the elections in 2020, these ideas are enjoying great popularity. One example is the idea of a “Green New Deal”, a term deliberately modeled after Franklin D. Roosevelt’s “New Deal”. Others want to finance an unconditional basic income, massive investments in infrastructure or significant tax cuts once budget and debt barriers are abolished by the application of MMT. The tax cuts pushed through by the Trump administration in 2017, for example, are also in line with the basic tenets of MMT.
For back to back decades, whenever the S&P 500 went up and or down, the Gold Silver Ratio would fall or grow larger respectively.
If you study the chart above you can see this trend broke down in 2013.
Since 2011, disinflationary forces have provided a tremendous tailwind to financial assets one more time. The relationship between financial assets and the gold/silver ratio in particular drives this point home, as depicted in the chart above. Since the early 1990s, there has been an astonishing synchronization: A rising stock market usually goes hand in hand with a falling gold/silver ratio, i.e. an outperformance of silver compared to gold. However, in 2012 this correlation broke down.
Our interpretation for this phenomenon is that in previous economic cycles reflation was conventionally achieved by expanding credit. This has a fast impact on the real economy and leads to rising consumer price inflation. This time, reflation was achieved by buying securities, which made monetary assets, in particular, more expensive but did not sustainably fuel consumer price inflation.
In contrast to QE, MMT will have a much more direct effect on the inflation rate. QE has a direct impact only on the yields of the purchased bonds. Second-round effects may be inflationary, provided that economic agents use the lower refinancing costs for additional expenditures. MMT, on the other hand, will increase demand more directly and rapidly through higher budget deficits and will bring inflationary price increases with it. This applies in particular to markets that are at or close to their capacity limits, such as the construction sector.
If implemented, MMT would bring the decade-long bond rally abruptly to an end, and significantly higher yields seem inevitable. More generally, financial assets would tend to suffer, while real assets, as well as gold, should benefit from the surge in inflation.
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