Get Ready for “Unencumbered” Interest Rate Policy
A promise is a comfort for a fool. ~Proverb
Janet Yellen’s recent speech at Jackson Hole, Wyoming, was eagerly awaited, and a complete non-event. The headlines were dominated by breathless accounts of Janet Yellen’s speech at a Federal Reserve conference in Jackson Hole.
The robot scanners read the speech first; it took a while for humans like me to catch-up. But I’ve since had the chance to digest it. What was striking about the speech was how ordinary it was. As I predicted she would, she threw a bone to the hawks (“the case for an increase in the federal funds rate has strengthened”) and then threw another bone to the doves (“as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course”). She also talked about “data dependence,” etc., and then went to lunch.
The conference at which the speech was delivered was titled “Designing Resilient Monetary Policy Frameworks for the Future.” That title at least suggested that some new thinking and new policies might be on display. They weren’t.
Yellen basically said that interest rate cuts, quantitative easing, interest on excess reserves and forward guidance were sufficient to pull the U.S. economy out of a future recession if needed.
In short, Yellen said the Fed’s existing toolkit is adequate, and is unwilling to consider more radical tools or remedies. If you like weak growth, money printing and market manipulation, get ready for more of the same.
She took negative rates off the table (she said they were “impossible”). She also agreed that “helicopter money” (really fiscal policy supported by Fed bond purchases to finance deficits) could be useful, but made it clear that it was up to Congress to implement that and the Fed would not lead the charge.
Investors should ignore Fed noise. But that doesn’t stop markets from overreacting to every syllable of Fedspeak. Gold investors just have to live with day-to-day volatility until the world finally realizes that central banks are impotent and can safely be ignored in favor of global macroeconomic fundamentals.
Does this mean Jackson Hole was a nonevent for gold investors? Not at all. Yellen was not the only one speaking there. Another major speech was by an economist named Marvin Goodfriend, from Carnegie Mellon University. His speech was called The Case for Unencumbering Interest Rate Policy at the Zero Bound.
On its face, the Goodfriend speech was about negative interest rates — and just because Yellen doesn’t like them now doesn’t mean they’re not coming in the future. That negative rate idea has been around for a few years. But Goodfriend’s focus was to promote “unencumbered” negative interest rate policy, which means getting rid of things standing in your way.
Specifically, the No. 1 thing standing in the way of negative rates is cash. If citizens can go to cash, that makes it difficult to impose negative rates on digital bank accounts. That’s also not a new insight. The war on cash has been going on for a while, and prominent economists from Larry Summers to Ken Rogoff have called for an end to cash. Rogoff did so just recently, in a front-page article in the “Review” section of TheWall Street Journal.
What is new in all of this are ideas that Goodfriend presented to the Fed to neutralize the role of cash. His preferred way is just to “abolish paper currency,” as his paper outlines in Section 5A. But then Goodfriend laments that “the public is likely to resist the abolition of paper currency.” He’s right about that.
So Goodfriend comes up with a new concept called the “flexible market-determined deposit price of paper currency.” (Seriously, I’m not making this up; you can find it in Section 5B of his paper.)
In plain English, this means the “money” in your bank account and the “money” in your purse or wallet would be like two different kinds of currency. There would be an exchange rate between the two, just as there is an exchange rate between dollars and euros. The Fed could set this exchange rate at whatever level it wanted and would not be obligated to “defend” that rate at any particular level.
What this means is if you go to the bank and withdraw $1,000, the bank might only give you $980 in cash because of the “exchange rate” between your bank account and cash. Or if you deposit $1,000 in cash, the bank might only credit your bank account $980 because of the same “exchange rate” between your cash and the bank account balance. In short, it’s a way to impose negative interest rates on physical cash.
It’s true that Goodfriend is an academic, not a policymaker. But Yellen and other Fed bigwigs like William Dudley and Stanley Fischer were sitting in the audience. In my experience, this is how things start. Some ivory-tower academic writes about a policy proposal.
A few other ivory-tower academics and beltway think tanks take the idea and run with it. Then one of those academics gets appointed to a policy position. The next thing you know, the policy is in effect.
That’s how I saw SDRs coming years in advance, and that’s how I see the war on cash coming now. That’s why I also see a war on gold…
Curiously, academic policymakers have spent so many years disparaging gold they seem to have forgotten that gold is money. Once the war on cash heats up — and certainly when that war is in full swing, out in the open — people everywhere will turn to gold as an alternative form of money. And then, once policymakers see the massive shift to gold, they will launch a war on gold also.
So my advice to people interested in gold is — get it now while you still can. What are you waiting for?
But it’s not just the government and the banks that are doing everything they can to make it impossible for you to get your own money in the form of cash. Now they have a new partner — big business! It seems that businesses have their own war on cash. They hate handling it and it’s expensive to transport, store and insure. More and more, businesses are refusing to take your cash.
This is just another form of discrimination against the poor who may not have banking accounts or who rely on check cashing services and live paycheck to paycheck. It’s also aimed at you because it forces you into a digital system where your money can be hit with negative interest rates, service fees, account freezes, bail-in charges and other forms of theft.
When pigs are going to be slaughtered, they are first herded into pens for the convenience of the slaughterhouse. When savers are going to be slaughtered, they are herded into digital accounts from which there is no escape.
The war on cash may be a losing battle for you and me, but there is still shelter in physical gold, silver, land and other hard assets.
The key defensive play is to obtain your gold now, while you still can, before the war on gold begins. As this realization sinks in, it will create more demand for physical gold, which is already in short supply. That demand-driven tail wind for physical gold will take gold mining stocks much higher.
These scenarios are more disturbing, and the tempo more rapid, than I imagined just a short time ago.
The time to position yourself in gold and gold miners is now; don’t wait.
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