by Egon Von Greyerz, Gold Switzerland: Lethargic summer markets tend to instil a sense of false security. Stocks and property are near all-time highs, interest rates are at 72 year lows and most investors feel richer than ever. Central banks signal strong economies with indications of higher interest rates and tapering of their balance sheets.
CENTRAL BANK CHIEF BEHEADED As I discussed last week’s article about the Fed, we must never trust central banks since they are always hopelessly wrong. Sweden is another example of a central bank which has an appalling record in forecasting the economy. And it is not just any bank since I am talking about the oldest central bank in the world – Sweden’s Riksbank which was established in 1668. But age clearly means nothing when it comes to understanding markets and the economy. Below we see the Riksbank’s forecasting record for the Swedish Repo rate. It is just an appalling record which shows that during the last 7 years they have been hopelessly wrong. Several times a year since 2011 they have forecast rate increases of 1-2% and every year since then, rates have gone lower. In all, they have made 25 incorrect forecasts since 2011. Hopefully their record since 1668 has been more accurate.
Not only have they forecast higher rates but they have consistently lowered rates since 2011 and now have negative interest rates since 2015. It is quite amazing that a central bank makes 25 forecasts of higher rates but instead lowers the Repo rate 10 times. Rates have been manipulated lower to make the Swedish currency weaker in order to stimulate exports. These low rates have created a massive housing bubble in Sweden. Swedish consumer borrowing including mortgages are among the highest in Europe and any significant increase in interest rates will create a major problem in the Swedish economy and financial system, much worse than the early 1990s. As I have discussed before, the 35-year interest cycle has turned up and whether central banks like it or not, rates in the next few years will be much higher. Selling of long term bonds by nervous investors is what will drive rates higher. This will also pull the shorter rates up.
In the 17th and 18th centuries the Riksbank ran out of silver due to very high war debts. The bank resorted to paper money which quickly failed. They then again minted copper money which was not trusted by the Swedes with the consequence that the head of the Riksbank was beheaded in 1719. In the last 104 years since the creation of the Fed, most central bank heads have failed massively. So far there has been no beheading of a central bank chief in modern times but when the financial system fails in the next few years, many bankers will feel very vulnerable.
NEW SUBPRIME CRISES LOOMING Whether a central bank is the oldest in the world or just one hundred years like the Fed, the problem is the same. All central banks make hopelessly inaccurate forecasts. As a result, they interfere with the normal economic cycle which has natural highs and lows of relatively small amplitude. It is this natural cycle which is totally destroyed by central banks’ manipulation. In their total lack of understanding of the laws of supply and demand, central bankers think they have divine powers. They believe that low interest rates and printed money creates economic prosperity whilst the opposite is the case. The only thing that this type of manipulation achieves is massive booms and busts that ruin the fabric of the economy. We have now had one of the longest artificial booms in history, so next is a bust that will totally change the world for a very long period. This time, the financial repression which temporarily delayed the inevitable disaster during the 2006-9 financial crisis will not work. Money printing will create hyperinflation and all attempts to lower the already low rates will fail. Central banks will be totally powerless in stopping the biggest financial crisis in history.
I have often discussed the global debt mountain which has grown exponentially for many years to reach around $2.5 quadrillion including derivatives and unfunded liabilities.
US mortgage debt or subprime debt was the major factor during the last crisis. Well, the Fed or the US government has learnt nothing. The subprime crisis in the US was minutes away from causing a global financial collapse. But US Household Debt has just surpassed the 2008 peak and is now at $12.7 trillion.
As interest rates rise and house prices collapse, the next mortgage debt crisis will be much bigger than the 2006-9 one. Eventually house prices could decline by 75-90% in real terms. The coming crisis will also involve two new subprime crises, namely Student, and Auto loans. Students not finding jobs will not repay their debts and many jobless car buyers will stop paying off their car loans. Collapsing second hand car prices will exacerbate the problem. So now is an excellent time to hold back on a house or car purchase. There will be real bargains in the next few years.
Whilst there is still euphoria in investment markets, investors have very little fear and very little understanding that the asset bubbles which have been created in the last few decades have nothing to do with real prosperity but are only based on debt, printed money and artificially low rates.