By Paul Brodsky
In practical terms, we can’t lower rates below zero and we can’t raise them. What about debt-focused quantitative easing? That won’t work either. An economy can’t be de-levered by issuing new debt or by transferring existing debt to government balance sheets.
And consider this: in the last two years the US monetary base grew over 130% and yet output grew a total of only 7.5%. This compares to 88% growth in overall output over the previous twelve years on a 95% growth rate in base money. The point here is that the efficacy of monetary inflation on output growth has diminished substantially.
So we think there has to be an unconventional way for policy makers to press the economic reset button — something as “preposterous” as breaking the gold exchange standard in 1971.
We think we know what to expect: ultimately the Fed will formally devalue the dollar to gold and then it will conduct monetary policy on the much higher dollar/gold exchange rate, just as it has conducted credit policy with interest rates over the last generation.