What Happens When Keynes Destroys All Global Savings?

T-BondBefore 1971 when President Nixon declared “We are all Keynesians now,” Americans still believed that savings, from which legitimate or “real” capital is derived, was a virtue. But being the politician he was, Nixon did not want voters to think he or fellow Republicans could be limited by natural laws when it came to providing whatever the voters’ and military tycoons’ hearts desired, in exchange for votes. And so, in 1971, when he detached gold from money, Nixon accepted the big lie of Keynesian economics, namely that you can deficit spend and print finance your way to eternal prosperity. With this one policy, Nixon fostered not only the falsehood that you can spend your way to prosperity, but that capital itself could be created out of thin air through the printing press.

Like little children believing in Santa Claus and the tooth fairy, a global acceptance of the Keynesian religion was born and adopted. The U.S. benefitted most, because as victors of World War II, it had the strongest economy and military in the world. And with a hangover of the benefits of a more honest monetary and capitalist system, it was able to defeat its primary global competition, the Soviet Union. But ultimately, big lies that defy natural laws are defeated. For many years, the U.S. could continue to spend more than it saved as long as net export countries like Japan and then later China were willing to save a major portion of their income and buy U.S. Treasuries with their savings. I always wondered what would happen when the day arrived that foreign countries were unwilling or unable to fund excessive consumption of Americans.

Well, folks, it looks like that day has now arrived. The chart above shows a very disturbing trend of net sales of U.S. Treasuries by foreigners. Not only did foreign holdings decline by a record monthly amount of 48.1 billion in December 2015, but it marked the first time in 15 years that net central bank dishoarding of U.S. Treasuries took place in three consecutive months. Included in the chart above right are private purchases from abroad amounting to $12.2 billion. But what the 02-16-16 Zero Hedge report noted was that $41 billion of the total 48.1 billion of dishoarding came from China, the last of the countries that have enabled Americans to live beyond their means without interest rates shooting upward toward the moon.

I have recently suggested that the only reason the Fed raised rates by ¼% last month was because the Fed did not want to be the only buyer of U.S. Treasury debt and that the only way it could now avoid falling into that trap was to move toward market driven rates. With each lie Pinocchio told, his nose grew longer and longer until eventually it could no longer be hidden. With each QE lie told by the Fed and other central banks around the world, it seems a point has now been reached when future QE cannot be carried out without the public realizing they have been deceived all along.

So the Fed is between a rock and a hard place. It is responsible for full employment which calls for declining rates. But if it continues to decrease rates, it will eventually have to purchase 100% of the Federal debt. Yet, if it moves rates back toward market levels, it faces a threat of continued price declines and massive global bankruptcies. Either way, we face a world of increasingly unstable fiat currencies and markets. While no one of sane mind could ever cheer for such an outcome in order to see the value of their gold holdings increase, can there be any doubt that the Fed’s conundrum is extremely bullish for the yellow metal?

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.