Money for Nothing: A World of Easy Payments and Easy Money

Easy, easy money for nothin

Dire Straits

It was a beautiful Sunday in Melbourne.

A father and son had been enjoying a great day outdoors before quickly stopping at the market to pick up supplies for their afternoon barbie.

Now they are standing in front of me, at the queue to pay. In one hand the small boy is clutching a football, in the other, his father’s hand.

Most kids want to be like their dad, and do what dad’s do. We suspect this boy is no different.

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I want to pay’ he says.

Sure’. The father hands him the card and the boy grabs it with an unsteady hand.

He tries to reach the machine, but it’s too high for him.

His father gently picks him up.

Much like a flying super hero, the boy leans over, stretches his hand and taps the screen. He briefly looks at me and smiles.


There. See how easy it is to pay in today’s world son?

It sure is.

Today’s world is one of easy payments and easy money.

There isn’t much of a need to think about what money is in today’s world. It’s plastic…a number on the screen…a tap and go.

And in the last decade we have had a flood of easy money.

Back in 2008, major central banks got together and pumped a lot of cash into the system to ensure there was enough liquidity.

They lowered interest rates and, as you can see below, added trillions of US dollars — yep with a ‘t’ to their balance sheets.

MAJOR Central Banks: Total Assets - 31-08-19

Source: Yardeni Research

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As you can see, the Fed has been recently decreasing the size of their balance sheet as part of their quantitative tightening program to normalise the economy before the next crisis hits.

Or at least, that was the plan.

After markets saw a huge drop last December, the Fed was quick to do a 180 in their policy this year.

We’ve gone from quickly raising rates to now seeing rate cuts. Even though the stock market is still at record highs and unemployment is at record lows.

What happens now?

Investors expect central banks to keep on pumping easy money into the system, and it looks like they may get their wish.

How much money will the next crisis take? 20 trillion…50…100?

We don’t know.

Can all this easy money help us get out of the next one?

Maybe…maybe not.

Truth is that we’ve had a decade of unconventional monetary experiments, and all this money hasn’t really brought us much growth. We have barely seen a recovery, as wages stagnated and asset prices inflated.

Risks are mounting with all this easy money.

Interest rates are already at record lows. In the next crisis, how much lower can they go?

We already have negative interest rates in some areas of the world, and trillions of bonds paying negative yields. The logic is that bonds are some of the safest assets, and people will still buy them, even at negative yields.

We’ve also written about how negative rates have hit people that are hoarding cash.

But in this situation, gold is also gaining ground.

Gold has no yield and it costs money to store, yet it’s looking more appealing in a future with negative rates and low inflation.

If you have to pay to store your cash in the bank, why not pay to store gold too?

Gold has already been appreciating against the major currencies, as you can see below.

Gold Price Chart - 31-08-19

Source: Bloomberg

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Australian gold investors have also seen some extra gains as the Australian dollar has depreciated against the US dollar at the same time.

Gold has been appreciating on the prospect of negative interest rates, on fears that the trade war is escalating.

Yet also because central banks have gone on a gold bender to increase and diversify their reserves. Central banks bought more gold in 2018 than in any year since 1971, and have continued their gold shopping spree into 2019.

According to Goldhub, central banks bought 374.1 tonnes in the first half of the year. ETF gold holdings are also increasing.

If you are interested in finding out more about gold, you can check out Greg’s research. Greg identifies another reason why this could be only the beginning for rising gold prices.

Also, happening this year in Sydney in late October, there is the Gold and Alternative Investments Conference.

I have attended the event before and honestly, I got so much value from the knowledge of the speakers. The event brings together precious metal experts from all over the world, including my colleague Shae Russell from The Daily Reckoning Australia.

To be clear, this isn’t a Port Phillip Publishing event and we are not getting any compensation for mentioning it here.

I will be attending this year so make sure you say hello if you are there.

There are a lot of risks building with years of easy money policies. Investing in physical assets like gold could be a good way to protect and diversify your wealth.


Selva Freigedo Signature

Selva Freigedo,
Editor, The Rum Rebellion

PS: Greg Canavan’s Top Two ASX Gold Stocks for 2019. Download your free report now.

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

The Rum Rebellion