Interview: Russell Napier Predicted "The Fiscal Put"
Structural Inflation (Anti-Goldilocks) and How it Will Play Out
Many investors today still pretend that we’re in the system that we had from 1980 to 2020. We’re not. We’re going through fundamental, lasting changes on many levels- Russell Napier.
GoldFix Comment: Russell Napier is not an inflation Cassandra. He experienced the Asian Financial Crisis 25 years ago (a deflationary crisis) first hand in Hong Kong, and wrote for years about the global deflationary power. We note he is expounding on a concept identified in a March post Structural Stagflation and further noted in a post entitled stocks to own for the next 10 years.
Napier’s elaborations and explanations are we think very informative and put finer points on what many GoldFix readers already suspect. Enjoy
3200 words- 12 minute read
Summary:
Market strategist and historian Russell Napier warns of a 15- to 20-year phase of structurally elevated inflation and financial repression. He shares his views on how investors should prepare for this new world.
Interview:
In summer of 2020, you predicted that inflation was coming back and that we were looking at a prolonged period of financial repression. We currently experience 8+% inflation in Europe and the US. What’s your assessment today?
My forecast is unchanged: This is structural in nature, not cyclical. We are experiencing a fundamental shift in the inner workings of most Western economies. In the past four decades, we have become used to the idea that our economies are guided by free markets. But we are in the process of moving to a system where a large part of the allocation of resources is not left to markets anymore. Mind you, I’m not talking about a command economy or about Marxism, but about an economy where the government plays a significant role in the allocation of capital. The French would call this system «dirigiste». This is nothing new, as it was the system that prevailed from 1939 to 1979. We have just forgotten how it works, because most economists are trained in free market economics, not in history.
Why is this shift happening?
The main reason is that our debt levels have simply grown too high. Total private and public sector debt in the US is at 290% of GDP. It’s at a whopping 371% in France and above 250% in many other Western economies, including Japan. The Great Recession of 2008 has already made clear to us that this level of debt was way too high.
How so?
Back in 2008, the world economy came to the brink of a deflationary debt liquidation, where the entire system was at risk crashing down. We’ve known that for years. We can’t stand normal, necessary recessions anymore without fearing a collapse of the system. So the level of debt – private and public – to GDP has to come down, and the easiest way to do that is by increasing the growth rate of nominal GDP. That was the way it was done in the decades after World War II.
What has triggered this process now?
My structural argument is that the power to control the creation of money has moved from central banks to governments. By issuing state guarantees on bank credit during the Covid crisis, governments have effectively taken over the levers to control the creation of money. Of course, the pushback to my prediction was that this was only a temporary emergency measure to combat the effects of the pandemic. But now we have another emergency, with the war in Ukraine and the energy crisis that comes with it.
You mean there is always going to be another emergency?
Exactly, which means governments won’t retreat from these policies. Just to give you some statistics on bank loans to corporates within the European Union since February 2020: Out of all the new loans in Germany, 40% are guaranteed by the government. In France, it’s 70% of all new loans, and in Italy it’s over 100%, because they migrate old maturing credit to new, government-guaranteed schemes. Just recently, Germany has come up with a huge new guarantee scheme to cover the effects of the energy crisis. This is the new normal. For the government, credit guarantees are like the magic money tree: the closest thing to free money. They don’t have to issue more government debt, they don’t need to raise taxes, they just issue credit guarantees to the commercial banks.
And by controlling the growth of credit, governments gain an easy way to control and steer the economy?