Right after the financial crisis hit and the Federal Reserve started printing money with no end in sight, many of the media talking heads and even some very influential economists claimed that central banks were out of ammunition.
There was nothing left they could do to stem the tides of deflation, they said. Central banks had no more weapons left.
I tried to set them straight, but to no avail. I told everyone I could, in no uncertain terms, that the central banks of the world — including the European Central Bank — had many more weapons left at their disposal.
Chief among them, I said, were the following:
A. They could reduce the bank reserve ratio, the amount of funds that must be held in the bank’s vault (or at the central bank on behalf of the bank) on deposit by banks. Currently, for U.S. banks with more than $79.5 million of customer deposits, that requirement is 10 percent.
B. They could demand that banks buy assets, like equities, real estate and more. And …
C. They could punish banks by charging them a negative interest rate for depositing funds they’re’ not lending out to the economy with the central bank.
If you’re a bank, for instance, with $100 million in customer deposits that you’re not making use of (lending out) and instead you parked that money with the central bank for so-called safe-keeping …
|We are going to see a renewed bull market in commodities, especially gold, silver and select mining shares.|
Then the central bank would charge you for holding that money. You’d get no interest on that money, but instead, take a haircut for depositing that idle cash with the central bank.
The U.S. Fed has not yet employed any of the above three additional weapons it has at its disposal. Simply because the U.S. economy, as weak as it is, is surviving such that it’s actually off life support, and the Fed is now tapering its money printing operations.
However, as I have pointed out all along, the real disaster facing the world is not the U.S. but Europe.
Its economy is dying. It is collapsing in the nightmarish consequences of horrendous policy decisions … the most ill-advised of which was the implementation of the euro … not to mention the euro region’s mountain of debts that are going bad.
Europe is in a depression. A deflationary depression that will only get worse. Where 123 million people — one out of every six — now live in poverty … where total unemployment is above 20 percent in many countries … and where youth unemployment is greater than 60 percent.
Which is precisely why the European Central Bank (ECB), headed by Mario Draghi, last week rolled out Weapon C above …
And is now charging any European bank that wishes to deposit funds with the ECB a negative interest rate, or penalty, of MINUS 0.10 percent.
Mark my words: Draghi’s negative deposit rate won’t matter one iota when it comes to Europe’s depression. Europe’s depression will only end when the euro breaks apart at the seams and each country is allowed to take back its native currency, devalue it and stoke the flames of inflation.
Until then, Europe will continue to sink deeper and deeper into depression. And the longer Europe’s policymakers try to stick to the hair-brained single currency, the worse the social chaos in Europe will become, as the war cycles I have been telling you about ramp up ever higher.
Mark my words now a second time: Before this great financial crisis ever comes to a close, you will see our very own Federal Reserve also implement negative deposit rates to try and get commercial banks to lend money into the economy.
That’s a year or two off based on my research, but negative rates will come to the U.S. Federal Reserve. I have absolutely no doubt about it.
So what do negative central bank rates mean for the markets?
That’s the heart of the matter for us investors. I see three chief consequences:
First, since negative rates have hit Europe first, we should now see the euro’s demise accelerate. Why? There are many reasons, but chief among them is that there is nothing to prevent European banks from taking their excess funds and depositing them into banks in other countries where they can indeed get a better return, instead of being penalized.
That’s going to depress the euro, and cause other stronger currencies to rally: Asian currencies, and especially the U.S. dollar — which is now clearly in bull mode — a forecast I have made that is now unfolding very quickly.
Second, but on a longer-term basis, we will see the U.S. equity markets fulfill my forecast of much higher prices to come, with the Dow Industrials eventually heading toward the 32,000 level.
As I’ve spelled out in previous columns and in detail in issues of my Real Wealth Report, there are several forces that are going to drive the U.S. equity markets much higher over the longer-term. Negative rates in Europe is now one of them.
Third, we are going to see a renewed bull market in commodities, especially gold, silver and select mining shares.
There are two simple reasons:
1. Europe’s negative central bank interest rate — the first time ever that a central bank has had to take such a drastic measure — also sends a loud and clear signal that Europe’s economy is in worse shape than most people realize … and that the euro is on its death bed.
That means savvy European money is now going to take a fresh look at tangible assets — commodities — again, especially gold and silver.
In addition …
2. It’s a huge boon to mining shares, just like it was in the 1930s, when Europe last went bankrupt, and mining shares such as Homestake Mining soared from $65 a share in 1929 to nearly $373 in 1933 — a 474 percent gain in just four years …
And where Dome Mining soared from $6 to $39.50, a 558 percent gain.
Thing is, this time around, the gains in mining shares will likely be far greater, even greater than they were in the first phase of gold’s bull market from 2000 to 2011.
The two chief reasons:
1. Due to gold’s three-year bear market, many mining shares were completely destroyed. As a result, there are now only a handful of mining shares that savvy investors would want to buy.
That means a rush to buy the best of the best, which will rocket their share prices higher, multiplying investors’ money many times over.
2. As the war cycles continue to ramp higher and the world enters an almost unprecedented period of social chaos, the flood of money into commodities and mining shares will become ever greater.
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