Friday, June 10, 2016

Former BOE Chief Mervyn King: Talks Risks in the Global Economy

A hat tip to Willem Middelkoop (OMFIF Advisory Board) for pointing us to a new article by the former head of the Bank of England, Mervyn King. The article appears in a World Gold Council publication for June 2016 (see the pdf link at top of page to download the June report). Willem reviews the article here on his own blog

Below are a few selected quotes of interest from the new article by Mervyn King and then some added comments.

“If we had too much spending and too much borrowing before the crisis and we have even more spending and borrowing now, then we’re moving further and further away from the point that we’ve got to get back to. So monetary policy is not only meeting diminishing returns, but it’s making the ultimate adjustment even bigger. It’s taking us in the wrong direction,”

. . . . . .

“Monetary policy has reached its limits,” he says. “If you repeatedly bring down interest rates to try and persuade people to spend today rather than tomorrow, it works for a while. But they become increasingly resistant to being asked to spend their resources now rather than save for the future. And the longer domestic spending is in excess of potential output, the more you have to borrow from the rest of the world to finance it. Eventually people wake up to the fact that this is unsustainable and then you get a sharp adjustment downwards.“

. . . . 

“If we don’t quite know what the future holds, there is little point in getting carried away by very fancy mathematical calculations of optimal portfolios. Don’t rely on past data to be a good guide. Try to think through what mix of assets gives you the best chance of surviving some big event. That must mean including assets that are negatively correlated or uncorrelated in your portfolio, he says.

. . . .

“And I am very struck by the fact that over many many years, central banks, governments and individuals have always, despite the protestations of economists, held some gold in their portfolio. Obviously, there is no high running return, but when unexpected things happen, particularly when governments rise and fall, then gold is a means of payment that everyone is always prepared to accept. And I think that’s why even central banks have always had a role in their portfolios for gold,” he adds. In recent years, many central banks in Asia and South America have been increasing the amount of gold in their portfolios. King believes this is a sensible approach. “I can understand why they feel that some proportion of their portfolio needs to be in gold.”

My added comments: Whenever we get public comments on this topic by former high ranking officials in the financial system, we need to pay attention. In this case we have the former head of the Bank of England saying that present monetary policy is unsustainable and will not solve the basic problems in the present global financial system. He goes on to add that people should "try to think through what mix of assets gives you the best chance of surviving some big event." After that he talks about how gold has historically done that and how central banks view it as an important reserve asset and hedge. That is pretty much what Jim Rickards, Willem Middelkoop, many other analysts and this blog have been saying for some time, so it's important confirmation from a highly credible source.

Added notes: Here is another relevant article on this that may be of interest to readers and Kitco also covers this here

In addition, a reader here tipped me that on his blog 'The Money Trap', Robert Pringle takes note of this new article by Mervyn King which has clearly raised some eyebrows. Mr. Pringle founded and was also an Executive Director for The Group of 30. In his blog article, Mr. Pringle focuses on the comment by Mervyn King that the US could potentially renege on its debt obligations with China if a major conflict arose in the future between the US and China. He concludes with this comment:

"But for Mervyn King to say that there are circumstances in which the US could annul its debts is astonishing. Mervyn King’s alarmist warning goes far beyond scenarios outlined in his recent book “The End of Alchemy”

Additional note: A thank you to Willem Middelkoop for his kind comments on his twitter feed. I will add that Willem often points me to important articles and research papers that help me cover the topic this blog is all about (potential monetary system change). Readers here benefit from his help.

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