The stock markets are being shaken these days, indexes are in the red, and months of gains have disappeared in a few sessions... Are we witnessing a temporary correction or is this a deeper and lasting crisis? It’s too early to tell, and we’re not going to play the guessing game. However, if we step back a little, we can acknowledge a deeply changing financial landscape, a historical changeover: it has to do with interest rates.
It seems that the era of low rates, zero or negative, is coming to an end and that rates will start going up. The long-term interests rates (10 years) – the benchmark for the bond market – are rising in the United States and Germany after having reached a low in mid-2016. Since then rates are increasing, confirming the turn. Notably, the velocity of money in the U.S. has stopped decreasing since its high of 1997, which could confirm a return to inflation.
One has to be aware that we are now experiencing a reversal of a “secular” trend. Indeed the interest rates in the United States and the rest of the world have kept declining regularly since the start of the ‘80s. And, prior to that, they had kept rising progressively since the start of the ‘50s until their peak in 1981, when then-Fed Chairman Paul Volker had raised the base rate to nearly 20% in order to kill inflation. The long U.S. rate is akin to “tectonic moves” of the world’s economy, and it is starting to reverse.
Also, inflation hasn’t stopped declining since the ‘80s. At one point, central banks were even afraid of deflation, but the trend is reversing, little by little for now. Commodities are poised to go higher, so are American wages, and consumer prices might be on an upward trajectory. Most professionals working in the financial markets only know an environment of lower interest rates and near-zero inflation... they’re in for quite a surprise!
Getting away from zero rates – brought about by an exceptional and aberrant situation – could be seen as a good thing but, in the meantime, public and private debt has exploded. All the accumulated debt in the world now totals $226 trillion (€192 trillion), a record amount the equivalent of three times the yearly economic activity on the planet (exactly 324% of world GDP), according to a study from the Institute of International Finance. The debt, which may have been sustainable with zero rates, will be less and less sustainable in the future. Large businesses, banks and countries are at risk of failing or defaulting, as we’d observed last September by mentioning the deep worries of the “central banks’ bank”, the BIS.
“We are having both a stock market bubble and a bond market bubble”, just said Alan Greenspan, former Fed Chairman, to Bloomberg. And this is all because of zero rates. But the wind has started to turn, and there might be stormy weather for a while... Based on its intrinsic value – not on debt – and still the best protection against inflation, though it has been snubbed a little recently, physical gold is being remembered by investors – and they would be wise to jump at the opportunity.
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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.