One could easily accuse the gold bugs and, more globally, the Austrian school pundits, of being systematically pessimistic and of constantly predicting financial crashes to come. Since their beloved gold standard was abandoned, they have been railing relentlessly against the central banks’ money printing and its huge threat on money. Well, of course, one could take pleasure in predicting the Apocalypse, remaining stuck in a posture.
But sometimes these worries are confirmed by analyses coming from different intellectual horizons – let’s enjoy without restraint – and it’s the case with this survey from Natixis Bank’s research service, entitled “Financial Instability is Irreversible”, which corroborates all aspects of the criticism exposed in my writings and in (a few) other columns.
By “financial instability”, they mean excessive indebtedness followed by debt relief crises, bubbles in asset prices followed by their explosion, increasing amount of international flow of capital, generating excessive variability in exchange rates. And all of these convulsions are tied, according to Natixis, to “the excess of monetary creation by the central banks.” Well, thanks for this confirmation.
The monetary base, or “central bank money” – money created directly by a central bank – has gone from 10% of GDP in 2008 to 35% at the end of 2016 in OECD countries! And nothing seems to be able to stop this frenzy which was triggered by the subprime crisis.
When a central bank purchases a financial asset from an economic agent and pays it with money it creates out of thin air, said agent can do what he pleases with the money – buy financial assets (stocks, bonds, credit...) or real estate. This money created without any counterparty then artificially inflates the value of these assets, until they reach a breaking point – sooner or later. The study warns, “The larger the amount of money created by the central banks is, the larger the amount of asset buying/selling builds up, and the stronger financial instability becomes.”
And nothing will stop this headlong rush since, as the study mentions, “in order to reduce financial instability, one would need to reduce the amount of money in circulation, but central banks will never do it because of the risk that a contraction in liquidity could provoke a very serious financial crisis.” Let’s translate what they mean by “very serious financial crisis”: massive bank defaults and loss of confidence in the money itself... the end of the financial system as we know it. Doesn’t one feel better, then, going through less serious crises, even though they keep happening constantly?
The study concludes thus that “the excess of liquidity and the financial instability that comes with it are, thus, irreversible. More financial crises are to come, and one must reflect on how to manage these crises if one cannot think of how to prevent them.” Well, we happen to know quite a bit about financial crisis management, and we know that the best asset for protection is physical gold, of course, as we’ve said many times before. The Natixis study should have mentioned it. Since they haven’t, we’ll give them 19/20.
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Philippe Herlin Finance Researcher / Doctor in Economics
Philippe Herlin is a researcher in finance and a doctor in economics of the Conservatoire National des Arts et Métiers in Paris. A proponent of extreme-risk thinkers like Benoît Mandelbrot and Nassim Taleb, and of the Austrian School of Economics, he will be bringing his own views on the actual crisis, the Eurozone, the public debts and the banking system. Having written a book on gold that has become a reference (L’or, un placement d’avenir, Eyrolles 2012), he wishes to see gold play a growing role in our economies, all the way to its full re-monetization.