Along with George Orwell’s 1984, Aldous Huxley’s dystopian novel Brave New World depicted the extent to which future governments would attempt to dominate society. But increasingly the warnings from Orwell’s and Huxley’s novels are not being heeded, and in fact many question whether the powers that be aren’t using those books as an instruction manual instead. Perhaps most disturbingly, it’s Orwell and Huxley’s native UK that is leading the charge into the new reality.
In response to the COVID-19 coronavirus crisis, the UK government is planning to spend hundreds of billions of pounds in stimulus measures. And in that effort it is now being aided and abetted by the Bank of England (BOE). In a move that has dangerous implications for the future, the BOE has vowed to finance the government’s short-term borrowing. That means that, instead of having to go to bond markets for financing, the UK government will have its debt directly monetized by the BOE.
That trend towards direct monetization is a dangerous one for governments and central banks. The only reason people trust central banks to issue their currency is because they believe that there are limits to how much money the central banks will create, i.e. they believe that central banks won’t create money ad infinitum. But if, as we’ve seen in the US and now the UK, central banks agree to monetize billions or even trillions of dollars of new government debt, there are no longer any limits as to how much money central banks can create.
While the BOE’s latest move is being billed as short-term and temporary, that’s a bit of wishful thinking. As the old saying goes, there’s nothing as permanent as a temporary government program. Besides, once the COVID-19 crisis goes by the boards, there’s still the reality of an economic recession that has to be dealt with, a recession that will be worsened by the worldwide lockdowns that have decimated economies. With the reality of recession looming, there’s no doubt the UK government will attempt to take advantage of the BOE’s largesse and continue its arrangement to monetize debt even further.
Now that the BOE has succumbed to the temptation of outright debt monetization, will it be that long before the Federal Reserve does the same thing in the US? Can you as an investor trust that the Fed won’t directly monetize debt and, more importantly, can your investments withstand such an eventuality?
The risk of debt monetization, inflation, and even hyperinflation, is becoming more real by the day. Investors who don’t protect their assets by investing in gold, silver, or other hedges risk losing big once the effects of all this new debt creation make their way through the economy. Even when economies begin opening up again, they won’t be opening up into a growth phase, they’ll be opening up into a recession. Protect your retirement savings with gold and silver before it’s too late.