FINANCIAL REPRESSION STARTS SHOWING ITS UGLY HEAD

Mountain Vision -

2013 is proving to be a hallmark year in the ongoing saga which is called “economic recovery.” If anything has started to become blatant, it is undoubtedly the distortion in money, markets and metals.

During the first years after the financial crisis of 2008, the markets reacted in line with what one would expect from additional liquidity: stocks recovered from the crash, interest rates were pushed down, most commodities have gone up, and precious metals were the best performers. Most currencies have been whipsawing.

Although a range of interventions with exotic names have been invented by the creative directors of Western central banks, our belief is that the full effects of those measures have only started to manifest themselves in 2013. With the end of the year in sight, this year will go into history marked by a historic crash in precious metals, an epic surge in interest rates, US equities all time highs and European and Japanese stock markets surging the wall of worry. Courtesy of the central banking liquidity injections, interest rate manipulations, and, most likely, repeated efforts by the Protection Plunge Team (PPT).

We would like to draw the attention to the importance of interest rate distortion. Not only is the length of the suppression out of proportion, to such an extent that Jim Rickards is totally convinced it is the proof of an economic depression. Besides, there is also a big risk on destructive effects on the economy. During a recent presentation at the Casey Summit in October, Don Coxe compared the interest rate suppression with a wounded soldier. In the army, in the early days, dying soldiers were given heroin. It was the only solution to ignore the pain. However, the crucial part was the timing of withdrawing the heroin. Withdrawing either too fast or too late could have catastrophic results. Knowing when exactly to switch to pain stilling morphine was crucial.

Similarly, zero percent interest rates could be considered financial heroin. The US Fed Chairman experienced it the hard way when his announcement of a potential withdrawal had immediate and destructive effects in June.

Financial repression in 2013

Given the track record of central planners in forecasting (or lack thereof), one could expect that the world is about to experience the destructive effects of financial heroin withdrawal. But what is at risk if things do not work out as engineered by central planners? The short answer, in our view, is financial repression. The following examples provide sufficiently evidence.

Financial repression has truly shown its face in 2013. The year started with an epic event: a bail-in of major banks in Cyprus which laid the foundation of a bail-in template (recently released by the BIS).

Poland saw a major restructuring of its private pension funds; the funds were nationalized overnight. One could call it “pension fund confiscation.”

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