It’s a crazy, mixed-up financial world we find ourselves in these days. It’s a world where inflation is good, a strong currency is bad, and consumers getting a break on prices is terrible economic news. If you remember the good old days when banks needed depositors’ money to make loans, corporations needed the profits from selling stock to build bigger factories, and a strong currency led the world – you’re dating yourself. Today that’s like admitting you listened to Uriah Heep and Deep Purple on 8-track. Over the last forty years our world shrank and banks morphed into hybrid banking-and-investment Goliaths; unrecognizable from what banks used to be. Now the power they wield in the global economy is ominous, as is their lack of dependence on us anymore.
That context is necessary to grasp why lower energy prices in Europe are a negative development. It would seem lower energy prices during a particularly cold winter would be a good thing, but not so according to the European Central Bank (ECB). Lower energy prices in Europe have kicked off deflation, the most deadly of modern economic maladies and the ECB is ready to take strong action to get prices rising again.
Wait, Lower Prices Are Bad?
While it’s hard for those of us on the lower rungs of the economic scale to grasp, price deflation is a bad thing in the new world order. Lower energy prices mean lower prices on a wide range of goods and services. In the old days lower prices would stimulate consumers to start buying, but that doesn’t really work anymore as consumers are actually buying fewer goods these days. When consumers reach the junk saturation point, economic activity slows down and economies contract. That phenomenon first became apparent in China because, let’s face it, China manufactures a lot of the world’s junk.
It Started with Oil, But Soon it’ll be Dollars
All this deflationary contraction started with oil. As oil prices sank they exposed another problem that was there all along: consumer saturation. Consumers need less junk today. Instead of a camera, video recorder, computer, tablet and cell phone, younger consumers are using their phones for all these activities. They’re not buying big houses in the suburbs, preferring urban apartments instead. That means those young, urban consumers are buying fewer cars, less furniture and are having fewer babies, all things that stimulate a lot of economic activity. With oil prices dropping to light the fuse, and consumer saturation supplying the bang, the deflation bomb is blowing up economy after economy around the world.
Central Banks React – as if it Were 1950
Have you ever heard the old witticism, “If you do what you’ve always done, then you get what you’ve always gotten”? That’s the position central banks are in today. The Federal Reserve can’t tell you to go buy a new bass boat, but it can dump massive amounts of dollars into the economy. Then anyone who’s even been thinking about a new bass boat can easily get credit to purchase one if they have a pulse and can remain upright long enough to sign the papers. At this moment, central banks in Europe are pumping massive amounts of cash into their respective economies, hoping it leads to economic activity in the form of increased demand, and prices, for goods and services.
You don’t have to be an economist to see where this deflationary spiral ends. Economies are contracting, and central banks are dumping cash trying to stimulate growth. That inflates the balance sheets of central banks to unprecedented, even irrational levels. What’s worse, it’s not working. Central banks have to dump more and more cash into the economy to get even a tiny bit of growth, which leaves major economies swamped in increasingly worthless cash. As a result, central banks start talking about really crazy ideas like negative interest rates in a last-ditch effort to get that cash flowing again.
If this isn’t enough to shock you into the reality of how important it is to preserve a percentage of your wealth in liquid hard assets like high quality physical gold and silver, then nothing will. There is no scenario where this global deflationary spiral ends well; no scenario where these massive mountains of cash don’t end up being worthless. If you have wealth to protect, or retirement ahead that you’re saving for, you have to find a safe haven for dollars that will soon become empty shells, devoid of value or buying power.
Trevor Gerszt, America’s Gold IRA Expert, is founder and CEO of Goldco Precious Metals, a privately held retirement services firm in Los Angeles specializing in wealth and asset protection. Trevor also holds a position on the Los Angeles Board of the Better Business Bureau.