Modern monetary theories fuel gold above $1700
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Now that the global government response to the COVID-19 pandemic has been to shut down the global economy, the central bank of the world’s reserve currency has dived head first into the ocean of Modern Monetary Theory (MMT) to solve all our financial problems. This economic theory is the same old incantation on how to prosper with other people’s money.
The basic principal of MMT is that the U.S. federal government, through the Federal Reserve, prints as much money as politicians require for whatever purpose. When we get inflation as the consequence of these actions, the solution is to tax the rich to slow it down. But the main ingredient missing from this theory is the question of debt.
Sure, the Fed can just create money to fund the government and it is confined by inflation. This is a true statement if taken by itself, however, you cannot then borrow with no intention of paying down the debt because the accumulative interest payments will end up representing 100% of the debt. MMT will most likely fail for it ignores the elephant in the room, which is having to deal with the debt making it just a theory, not a solution.
This steward of the world’s reserve currency assumes it can borrow without end and never have to account for what they are in the process of doing. The U.S. government, through the Fed, fails to understand this concept as it attempts to regulate pension funds, which requires them to obtain government debt they never intend, or will be able to pay off.
The Keynesian reflationary actions by both the U.S. government and the Fed are leading the way to coming stagflation and in doing so, all lines that are supposed to separate these two organizations are being eliminated as the pretense that the Fed is independent of the government has been dropped.
Moreover, with no mention of raising taxes by policymakers, the MMT programs introduced by the Fed over the past three weeks is for the money to be created out of nothing by the world's largest central bank. Although jobless claim reached over 17 million today from just 281,000 a month ago, the Fed expects a “robust recovery” once the coronavirus is under control with seemingly endless amounts of MMT created programs.
Economists are forecasting a sharp contraction in GDP growth in the April-June quarter. But no worries, as the Fed has our backs by setting up new loan programs this morning and bolstered existing ones in an effort to provide $2.3 trillion in support for the economy essentially shut down due to the coronavirus.
In a statement, Fed Chairman Jerome Powell said the central bank is trying to “provide as much relief and stability as we can” during this period where Americans are staying at home to stop the spread of the pandemic.
Although the Fed cannot legally do any of these programs, the central bank is getting around the existing regulations by creating Special Purpose Vehicles (SPVs) that will do the actual buying and lending. The U.S. government will fund these SPV's with initial capital that the Fed will leverage 10:1, which was previously created out of nothing when the Fed monetized Treasury securities!
This is the first time the Fed is returning to its original design in 1913 – direct lending to the economy and skipping the banks. To alleviate the deflationary pressure during the 2008 financial crisis, the U.S. government poured a trillion dollars into a collective bank bailout via the Troubled Asset Relief Program (TARP). But the banks never lent out the money as they lacked confidence in the future, so TARP only bailed out the banks but not the economy – hence no inflation.
Governments and central banks around the world have thrown massive amounts of money into financial markets to support consumers and the global economy since this crisis began. With these global central bank Keynesian re-introductions of highly accommodative monetary policies having strengthened the long-term investment outlook for gold, the mining sector has formed a “bear trap” bottom discussed in this column a few weeks ago.
The GDX, which is now firmly back above its 50-week moving average, is in the process of breaking out today while the GDXJ and silver has begun to lead the sector. Once this breakout is confirmed, many of the higher-risk juniors will begin to play catch-up as investors seek value down the food chain. I have been accumulating entry positions in best in breed juniors over the past few weeks. If you would like to receive my research, newsletter, portfolio, and trade alerts, please click here for instant access.