New Monetary Policy: Blow Up In Central Planners’ Faces?

The price of gold continues to oscillate between $1,370 and $1,400 per troy ounce, still unable to break higher, but also finding significant support a good 4% above the April minimum. Similarly silver seems to be holding above its recent low of $20.10 per ounce.

The ineffectiveness of Japan’s monetary experiments in sparking even nominal economic growth seems to be driving investors and policymakers to desperation in the land of the rising sun. We shall have to see whether “Abenomics” proponents are really ready to pull out all the stops. They did say “unlimited liquidity”. But they are pushing on an open door, and will fall flat on their faces (eventually). There is no happy ending to Japan’s debt situation – same as countless other countries.

In Europe, where Mario Draghi’s “whatever it takes” also seemed to imply an open bar approach to liquidity, those actually most likely to foot the bill have quite reasonably started to try to put some kind of limit on the tab. Given that the entire euro-periphery bond and stock rally started on almost the exact date that Draghi uttered those words (26 July 2012) and that the entire “miraculous recovery” was entirely predicated on the promise of unlimited free money, we can expect the German Constitutional Court’s words on the ECB’s bond buying to spark a panic.

The situation is actually a lot worse than it was in July 2012, because none of the affected countries have actually used the time bought by the ECB to lower their debt levels and balance their budgets. Not only that, but they have jawboned their banks into loading up on sovereign debt, making them extremely vulnerable to another run-up in yields. If the Greek default had a cascading effect on Cyprus, just wait until Italian or Spanish sovereign debt takes a haircut. No major European bank will be safe, and neither will the teenage euro.

How to protect yourself from this default, currency and overall systemic risk? Simple: save in money that is independent from the political and banking systems. It is the only insurance against experimental monetary policy, especially as history shows how these experiments tend to go.