Central Banks to the Rescue?

Yesterday, the UK’s left-leaning newspaper The Guardian ran a story exploring what negative interest rates would mean for UK consumers. The article noted how although the Bank of England had voted to keep interest rates in nominal positive territory at 0.1%, negative rates in the near future were highly likely, due to the precarious state of the economy.

In simple terms, negative interest rates will reward borrowers, and charge savers.

The idea is that negative interest rates encourage borrowing and spending. They are basically a kind of last-resort weapon for central banks to use to get banks and people to borrow and spend the money they raise, either through selling bonds or by good old printing.

Negative interest rates are becoming more of a certainty, given the size and scale of the stimulus packages being passed by governments, from the US to the UK and EU. In Japan, they have already been negative for quite some time.

Going Global

In the UK, the Conservative government’s stimulus measures since the onset of the Covid-19 crisis now amount to nearly US$1 trillion – which is a scale that is unprecedented for the country, not least by the traditionally fiscally-conservative Conservatives.

In the US, Congress is currently locked in fractious debate over the size and scope of the planned US stimulus package. Republicans want a package that is a little over US$1 trillion, while Democrats want a package that is around US$3.4 trillion. Whatever transpires, the figure is going to be eye-watering.

The stalemate is following a similar pattern, and its outcome will likely follow a similar path too: the debate, drama and ultimate compromise demonstrated by the EU.

Political Theatres

On July 21st, following a highly-publicized political ‘thriller’ and four-day marathon negotiations, the European Commission passed a combined €1.82 trillion stimulus deal to much fanfare and celebration.

The deal combines €390 billion in grants and €360 billion in loans, collectively known as ‘Next Generation EU’, and over €1 trillion in a 7-year ‘Multiannual Financial Framework (MFF)’ spending budget. The funds add to a €540 billion “Safety net for workers, businesses and member states” that had already been passed by the EU Commission following the onset of the Covid-19 crisis.

The approval of the new fund package had faced stiff opposition from the so-called ‘Frugal Four’, made up of The Netherlands, Sweden, Austria and Denmark. Those countries had argued that providing what were essentially no-strings grants to poorer countries in the bloc was the wrong approach, and had advocated in favour of a heavier use of conditional loans to individual member states instead.

The possibility that the negotiations might unravel echoed widely in international media, with the bill portrayed as something akin to a litmus test for the ultimate survival of the European Union as we know it.

However, the differences were eventually overcome, allowing figures such as France’s Emmanuel Macron and Germany’s Angela Merkel to declare a large victory for the European project. And despite its apparent urgency and the gravity of the apparent disagreements, Finland’s former Prime Minister Alexander Stubb commented that he had:

“Never seen a budget negotiation being finished basically half a year before it was supposed to be finished. I’ve never seen a €750 billion recovery package balanced between loans and grants being agreed, basically, within two months.”

Essentially all European leaders have now expressed satisfaction with the deal, which is considered to be pivotal for Europe to pursue its ‘Green New Deal’ and ‘Digital Transformation’ projects over the next seven years.

What is especially unprecedented about the deal is the fact that much of the cash will be distributed as grants that will not need to be repaid by member states. It will not convert into national debt.

So where is all this money going to come from?

EU leaders have been touting the issuance of EU Central Bank bonds as a source of the funds, but it goes without saying that much of it will need to be ‘printed’ – or created digitally – by the EU Central Bank.

The ‘printing’ is already in full swing.

In a widely-circulated statement a few days ago, Pantera Capital CEO Daniel Morehead noted how the US Fed had printed more money in the last month (US$864 billion) than it had in the two centuries after its independence in 1776. Morehead made the comment in order to back up his view that people should be putting their money into Bitcoin instead, as these types of cash injections could only bring on inflation in the long run.

Indeed, it’s precisely these huge cash injections that large Central Banks are making / considering across the world that are one of the major factors contributing to the booming price of gold – which is now at an all time high – as well as the recent boosts Bitcoin and Ethereum have been experiencing.

People and institutions all over the planet are becoming increasingly skeptical about the prospects of cash holding its value in the future. As we wrote in a previous article a few months ago, there is an ongoing war on cash, and these huge liquidity injections are looking more and more like the latest sorties being fired in that war, clearing the way for negative interest rates, and the phasing out and ultimate eradication of physical cash that that will be required in order for Central Banks’ plans to invigorate the economy to actually work.

While gold is now at an all-time high, it is quite doubtful it’s going to go down anytime soon, and we still maintain that it’s never a bad idea to buy some if you can.

The various ways you can do that are outlined in our Gold Report for our paid members. Our upcoming Covid-19 Report will also outline our views on cryptocurrencies and other assets that will be worth owning in the volatile, unpredictable times to come.

By Daniel Lucas, Q Wealth Report Editor

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