Central Bank Revolution II:

By Ben Davies & Company at Hinde Capital

February 26 (King World News) - In the “Central Bank Revolution I,” we depicted how a new mode of monetary policy has been adopted by developed world central banks.  Their new policy adoption is more of the same – that inflationist drug of bank reserve creation, only this time with heightened potency.

In this piece, the “Central Bank Revolution II - Chasing the Dragon,” we illustrate how the effects of central bank monetary policy, today, have already distorted the term structure so monstrously that assets have been driven to yields more akin to those of holding money.  The yield grab has extended into riskier and riskier assets and structures, resulting in a diminished return profile that is not compensated for by the falling credit quality, and the heightened duration risk.  The stage has been set for capital losses, as once again investors indulge in levered products, with suspect collateral value, and invest in plain vanilla assets with no margin of safety....

Continue reading the Ben Davies Hinde Capital piece below...


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“There is no value in the market place which is engineered by state control of the monetary structure.  Investors have begun to treat asset classes as 'money-like', ie relatively riskless.  Central banks have engineered this reality.  They appear to be implementing portfolio channel theory with success.  This is where central banks drive long end rates lower in a hope to encourage investors to seek higher returns in other risk assets – primarily equity markets.  The aim is to drive equity prices higher creating a wealth effect that will encourage consumption and in turn encourage businesses to invest in more capital production in response to this demand.

For now all central banks have achieved is greater speculation in financial markets.  We believe that real output will not be forthcoming because of the continued overhang of stale credit, and only prices will rise, except this time it will be in price of goods and services which could arrest too an aggressive mover higher in equity markets even though they look ‘cheap’ in real terms.

The greatest economic fight of the 21st century is at hand.  Do policymakers continue to encourage credit creation or do they resign themselves to an inevitable collapse of the current monetary system?  Either way it will happen.  If they inflate now they will only succeed in postponing economic collapse which will ultimately come about as a boycott of sovereign bonds, which incidentally will render the banking sector, capitalised by such bonds, technically bankrupt.  The only debate then is do we experience a deflationary collapse first, followed by more stimulus and then hyperinflation followed always by an economic collapse which is deflationary.

It would appear then that we have two types of crisis but only one outcome.  Central banks invariably cause inflation as they plug the often unbridgeable fiscal gap.  The desire to close this gap by both the exchequer and the central banks leads policymakers to overplay their hand, with aggressive monetization of government debt leading to much higher nominal prices.  Policymakers are clearly embarked on this course of action, injecting more opiates into economic addicts, in a veiled hope that both can reach the state of Nirvana achieved in ‘wealth’ before the Great Financial Crisis manifested itself in 2008.

The private sector has welcomed such infusions as they have not had to extinguish debt by writing it down, paying it down or even defaulting.  The impact of escalated central bank largesse will arrest the de-leveraging process for a time, but with state coffers so impoverished, the banks that are so thinly capitalised by state debt are highly exposed to any new shock to the system.  There is no margin of safety for both banks and sovereigns.

Nations and their citizens have become so stimulus dependent and reliant on ultra-loose monetary policy that any withdrawal will be terminal for them.  A very real solution and likely the least disruptive in terms of social cohesion in the world, is to back all the bank reserves created with an asset such as gold. An asset that is not corruptible in its intrinsic worth as it cannot be printed.

Policymakers may well be vying this potential in the developed world but if they are not it is clear the new ‘Cold War’ is the ‘Gold War’ whereby China, Russia and some emerging economies have begun the slow migration to gold backed currencies and bilateral trade agreements excluding the West.

“As the international community attempts to take on these challenges, gold waits in the wings. For the first time in many years, gold stands well prepared to move once more towards the centre-stage. This could be the start of an immensely important phase in the history of world money.” OMFIF

Unfortunately so imbued are Central banks with their success at maintaining something akin to the status quo and with the addicts clamouring for more, so they can fully regain their wealth status, they have been emboldened to do more. Unfortunately each new injection of drugs appears to have a diminishing impact.

Credit Dies, Money Flies

Ben Davies attested to the potential for the free market monetisation of gold.  He termed the outcome a Monetary Singularity:

“The collapse of an old monetary system and its social order will momentarily may well give way to anarchic and chaotic behaviour. But I believe there are two sides of a coin that make it a unit. A singular event such as anarchy will be mirrored by order. One money will be dead the other alive. These are but flip sides of the same coin.

We will witness what I term a Monetary Singularity - a unique event. This is the point where technology and gold merge. Technology will enable the transactional use of gold as money in the world.

To date technological evolution by the paradigm known as the World Wide Web has begun to help create awareness of the diminishing value of paper money.

The growth rate of this awareness will become exponential and equal and opposite to the exponential demise of the fiat currency system. The more awareness grows the faster the discarding of paper money occurs. I consider this a positive feedback loop because this takes us nearer to the day we can begin a sound monetary system dictated by the free market fundamentals of supply and demand of money. And not those of the artificial supply set by government, which destabilises the 'slope' of value of money.

The inverse function of this paper demise is the commensurate rise in the gold price, as we have depicted. This process of destruction will seem almost imperceptible, but when we hit the "knee of the curve" in monetary failure and gold succession, the perception will seem immediate.”

****Below are 3 more charts which can be seen in this extraordinary piece that Davies & Company at Hinde Capital have put together.  The entire piece, including all of the brilliant charts, can be viewed by CLICKING HERE.

The entire piece, including all of the brilliant charts, can be viewed by CLICKING HERE.

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

The powerful audio interview with Ben Davies is also available now and you can listen to it by CLICKING HERE. 

The interviews with Rick Rule, Ben Davies, Andrew Maguire, Marc Faber, James Turk, Bill Fleckenstein, Egon von Greyerz and Felix Zulauf are available now.  Also, be sure to listen to the other recent KWN interviews which included John Hathaway, Eric Sprott, Art Cashin, MEP Nigel Farage, and Michael Belkin by CLICKING HERE.

Eric King

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© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast,

rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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