The History of Money Wars, Part II - Vivek Kaul's Diary
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The History of Money Wars, Part II

Jul 29, 2016

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Welcome to part two in our history/forecast of the money wars. If you missed day one, you can read it here. The task is simple: what can you do about the great crack-up in the world's money system? How do you, your portfolio, your retirement, and your family avoid becoming collateral damage?

I showed you how, once sound money was subverted in Austria, an advanced civilisation descended into unimagined barbarism. But that was Europe. Now I want to talk about Britain and whether, in a nation known for its common sense and its rejection of radical political leanings, such a thing could happen.

But first, let's not pretend there isn't a real world out there with important things happening! Negative interest rates are on their way to British banking customers. A key member of the Bank of England's Monetary Policy Committee switches to the "dove" camp and signals lower rates ahead. And in Japan - where all the best monetary innovations/perversions come from - 2 August looms as a key date. Why? Read on to find out.

You pay to save

NatWest - whose parent is the Royal Bank of Scotland - may become the first British bank to charge customers for saving, according to reports all over the media this morning. The proposed policy could affect over 850,000 business customers. The note from the bank to customers said: "Global interest rates remain at very low levels and in some markets are currently negative. Dependent on future market conditions, this could result in us charging interest on credit balances."

You can sigh if you like. And if you don't have a credit balance in your savings account, it's not going to affect you anyway. But if they can do it to business customers, they can do it to you. It's probably just a matter of time. "All is proceeding as I have foreseen," as the Emperor said in Return of the Jedi.

But let's not quote Stars Wars movies. Let's just point out this - the imposition of negative interest rates and a cashless society is exactly what Tim Price warned about nearly a year ago. What was it Gandhi said? "First they ignore you. Then they laugh at you. Then they fight you. Then you win."

Actually it wasn't Gandhi! It was union leader Nicholas Klein speaking to the Amalgamated Clothing Workers of America conference in in Baltimore in 1914, according to the internet. Klein, rousing the hall to great heights, said that "First they ignore you. Then they ridicule you. And then they attack you and want to burn you. And then they build monuments to you."

Same sentiment. More violence. Different words. Same result. Winning.

But while I'm on the subject of attacks, circle Thursday 4 August on your calendar. That's the next scheduled meeting of the Bank of England's Monetary Policy Committee. According to futures markets, the chance of a rate cut just went up. Does that mean the BoE is worried about a recession in the third quarter?

Hold that thought. The markets have reacted to the news that the BoE could cut rates and/or increase its stimulus program as soon as early August. The change in course comes after last Friday's survey of business sentiment was weaker than expected. According to the Financial Times:

The new stance of Martin Weale, an independent member of the Bank of England's Monetary Policy Committee, all but guarantees that the central bank will announce a package of stimulus measures to fight a post-referendum downturn at its August 4 meeting. One of the nine committee members voted last month to cut rates and three have now said they are minded to do so.

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All of that sounds just fine. But keep in mind the BoE's benchmark rate is already 0.5%. You can cut it. But not much more, unless the bank flags up the possibility of negative rates. Now that would be big news. And if it did happen, and you were only finding out about it as it happened, it would obviously be too late to do anything about it. More on that subject Friday.

In the meantime, all this low level financial warfare simply puts more pressure on savers and pensioners. And it's not clear what other "stimulus' war plan the bank has in mind. If it follows the lead of the Bank of Japan and the European Central Bank, it could expand the scope of its asset purchasing programme to include corporate bonds or exchange-traded funds.

There's no sense in speculating yet. But you don't have to in order to predict the outcome. When central banks buy up government bonds in the secondary market, or corporate bonds, it drives up bond prices and it drives yields down. You can still find yield. But you'll have to look further afield and take more risk. You'll have to leave safety behind.

Looking ahead, look to the East - to Japan. The Bank of Japan's next meeting is 29 July. It's widely expected to increase the pace of monetary expansion (juice the markets). That's been Haruhiko Kuroda's plan for years now. The cabinet meets on 2 August to announce what fiscal stimulus will accompany the monetary boost.

Will any of it make a difference? I doubt it. We're all on the road to a sovereign debt depression. But that's for later in the week!

For now, let's wrap this tour of the news with a quote from everyone's favourite European Commission president, Jean-Claude Juncker. The former president of Luxembourg has reprised his role as "the hard man of the EU" with this latest quote about Brexit: "There will be no access to the internal market for those who do not accept the rules - without exception or nuance - that make up the very nature of the internal market system."

Don't underestimate how committed the EU is to its own political project. Britain's rejection of "ever closer union" is an existential threat to the EU. While common sense and self-preservation would suggest a quick trade deal that kept goods and services flowing is in everyone's best interests, let's not forget Europe has centuries of history at exacting punishment and revenge over smaller disputes than Brexit.

The price revolution of the 20th century

Now, and quickly, I want to take you back to the money wars. Remember last week when I wrote to you about Price Revolutions and the Rhythm of History by David Hackett Fischer? You can read the summary here.

The basic idea is that prices and economies and history stay stable for long periods of time. Fischer calls it an "Equilibrium." Productivity grows. Wages grow. Prices are stable, or even fall. Real wealth increases. Then everything changes. Fischer describes the scene:

On Diamond Jubilee Day [June 22] in 1897, eminent Victorians contemplated the future with the same confidence that marked their memories of the past. Peace, progress, and stability were thought to be natural and normal in the world. They were firmly expected to continue.

But it was not to be. The Victorian certainties that London celebrated on Diamond Jubilee Day had already begun to be left behind by events. When we look back on the economic indicators for the year 1897, they reveal to us in retrospect a pattern that was still mercifully invisible to those whose lives it would transform. Beneath the surface of events, the equilibrium of the Victorian era had come quietly to an end.

On the day that the Queen and her subjects commemorated sixty years of stability and peace, a deep change was silently occurring in the structure of change itself. That sunny June morning in 1897, the Western world was entering a new era, which would be filled with horror that the Victorians could scarcely have imagined, much less foretold. This new epoch has continued to our own time. One of its many material manifestations was a long movement that might be called the price-revolution of the 20th century.

Fischer then shows that the price revolution began in small increments, with barely-noticed increases in inflation. Those increases, when they came in property prices and financial assets, appeared to make people wealthier. But the deep change he writes about was a change in the nature of money itself.

That change continues today. And as I wrote last week, the pace of that change has picked up. Technology has redefined money. The use of debt and credit has exploded. Total global credit is now more than 300% of global GDP according to economist Richard Duncan. The stage is set for the revolutionary crisis. Our own age of uncertainty and upheaval has just begun.

It's my claim this week that Britain's decision to leave the EU does, at least, unhitch the UK from the EU's own existential crisis. The EU as a political union, the euro as a common currency, and Europe's banking system itself are all at risk.

Of course you can't make predictions like that with uncertainty. But remember what we're doing here. You make observations. You assemble facts. You look for patterns. And you proceed with inductive reasoning, seeing if they lead to a conclusion that, while not definite, might be probable.

All of that is to say that the conditions are clearly in place for a monetary crisis. It's happened before in history. And it's happened in a recognisable pattern that David Hackett Fischer has described and that Stefan Zweig has chronicled in his memoir The World of Yesterday.

It may seem like ancient history. But as I'll show you tomorrow, the past sometimes is prologue - at least when it comes to the behaviour of crowds. In the next post, I'll show you how the onset of the "revolutionary crisis" results in measures designed to prevent the crisis. Those measures, as you'll see, actually make it worse.

And, for you as an investor and saver, hazardous.

Please note: This article was first published in Capital & Conflict on July 26, 2016.

Dan Denning studied literature and history, moving to Agora Financial in Baltimore fresh out of college. Working alongside Bill Bonner and Addison Wiggin, he became managing editor of Strategic Investments. He then moved via Paris and London to Australia, publishing a book - The Bull Hunter - along the way, and opened Agora's successful office Down Under. He returned to London in 2015 and became the publisher of Fleet Street Publications' financial newsletters.

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