The old joke goes “when you are in a hole stop digging.” This is not a luxury for the U.S. or Europe when it comes to piling up national debts or printing money. It isn’t an option for the world economy either.
There might be light at the end of the Covid tunnel but that twinkle of hope is still a long way away, by which time the hole in the finances of the global economy will be so large most are still unprepared to yet think about the consequences.
The bond market, which used to be considered vigilante when it came to monetary policy, is stirring to the prospect, but under the new mechanism of monetary policy will “no doubt” be bludgeoned with sacks of still wet cash back into coma again.
The bludgeon is simple and effective. The bond market wants more interest for its risk of inflation or its indigestion on too much supply, the central bank simply buys bonds from the market driving up the price and driving down the interest rate. What it buys it with might not be straight cash, but whatever it uses is heading toward cash so its little different from printing $20 bills.
That cash travels, and thank goodness because if it didn’t the financial, fiscal and monetary hole being dug by governments would not exist and we would be sat in a different smoking crater of a collapsed global economy. Global economic collapses don’t generally end well and surely no one wants landscape painters leading us in an existential fight to the death again.
So rather than a rerun of the 1930s or 1790s again, a deep pit of debt in much more palatable. Taking the U.S. as an example, it has roughly a 130% debt to GDP ratio right now. You can split hairs but it’s best to think in scale rather than points. This is heading to 150%, which might be a high estimate or perhaps a low one if things don’t go swimmingly.
At this point predicting the future comes down to setting the level where a government and economy can be comfortable with this debt load. That level was 100%; various economists suggest it can be way higher, and Japan’s is 236% (though it has mitigating circumstances insomuch as the money is not lent to it by the world, unlike the U.S., but instead is lent to it by its own meek citizens.)
So if the equilibrium point is the old 100% number, then the value of those debts must be either inflated away or real GDP grown must do the rebalance. At an optimistic 3% growth that would take too long to happen so inflation must do the job, especially as emboldened politicians will by then be addicted to handouts to the populous. Did I say handouts? Sorry, I meant stimulus.
You could be forgiven in thinking that if 150% debt to GDP was sustainable then politicians will only push that envelope harder so the outcome is set as being inflation in that instance as well.
So squishing all these variables around, it seems conservative to imagine 30% inflation in the next five years. Six percent a year can be fudged down to look less with all those glorious tech baubles getting more powerful and cheaper by the month. Assets, on the other hand, won’t be fobbed off and will simply rise by the real rate and perhaps rise further to compensate for the risk of yet more of the same ahead.
I think this is the target for the next few years but I would be surprised if this can be gotten away with. My guess is 50%-100% with 200% if things go awry again and the sky’s the limit—a small but real possibility if the goal of normality by mid-2022 is not mainly realized.
Without doubt bitcoin has levitated in large part because of this inflation fear, at least $20,000 of its rise can be laid at that door. In my mind that is indicative of a 100%-200% inflation prediction.
You do have to believe in the computing power of a market to think that, but if you believe markets are good at pricing and you roll in factors like the halvening, it makes sense that you conject bitcoin is calling a strong surge of inflation in the next few years.
That pricing is in, so unless there is a new stimulus plan to top the latest, inflation should already be priced in. The crypto market is now worth about $2 trillion. That is a heavy lump to levitate, so I’m not bullish.
But what about gold?
Gold is in the dumps because jewelry demand is way down and anyone wanting to run for a haven asset that is not technologically challenged is going to plump for the easy access, storage and thin spreads of bitcoin over the clunkiness of precious metals.
However, that could change quickly.
Gold jewelry demand will come back with normality and that will produce a tail wind. A correction in crypto will cause a cascade of gold buying as the herd dashes for the exit.
So the play to me is to watch bitcoin and buy gold if it crashes. If it heavily crashes it will of course be time to start acquiring bitcoin for the long term, but for the short- and middle-term gold is the cheap inflation hedge asset. It will depend on your choice of weapons. Some will like the physical metal, some stocks, some exchange-traded funds, others options and some, like myself, crypto gold trackers like PAX Gold (PAXG), of which I have a stash.
For those who like a kicker, the precious metal of choice is platinum. They don’t make much and it’s going to be core to the hydrogen economy, the next phase of the zero-emission economy drive. Even if the deflationists are right, platinum is going to do well because the world is set on a course for powering itself with renewables, and the best way to store energy for when the wind doesn’t blow or the sun isn’t shining is to split water into oxygen and hydrogen and turn it all back into water with the help of platinum catalysts.
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Clem Chambers is the CEO of private investors website ADVFN.com and author of 101 Ways to Pick Stock Market Winners and Trading Cryptocurrencies: A Beginner’s Guide.
Chambers won Journalist of the Year in the Business Market Commentary category in the State Street U.K. Institutional Press Awards in 2018.
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I am the CEO of stocks and investment website ADVFN . As well as running Europe and South America’s leading financial market website I am a prolific financial writer. I