Why Global Financial Markets Are Doomed

Global central banks led by the Fed have painted themselves into a corner, as their two levers of control, interest rates and currencies, are apparently now seen as ineffective for fostering economic recovery and financial stability. Higher interest rates and an appreciating US dollar could cause severe stock and bond market corrections (by reducing earnings and price/earning multiples for the former and increasing debt payments for the latter). Debt-burdened global governments and private companies especially in emerging markets and the oil-ravaged energy sector could be particularly hard hit and even face bankruptcy in many cases. All of that would exert strong deflationary pressure on a global economy struggling to grow since 2009.

Lower interest rates and a depreciating US dollar could fare even worse, as they could thwart central banks’ ability to have any meaningful control over the financial markets and could pose an existential threat to the fiat currencies of their respective sovereignties. Gold and other precious metals could replace those paper currencies in that scenario. A weaker dollar would also likely boost prices of global commodities generally, including oil, industrial metals, food and other important production inputs, thereby creating the potential for runaway, even hyper, inflation.

The fact that a decisive move in either direction for interest rates and currencies could lead to economic calamity probably explains the Fed’s tentative, peripatetic and at times schizophrenic outlook and policies. It also explains the public’s assumed and publicized disdain for gold and precious metals, even though many nations have been privately, quietly expanding and securing their gold reserves recently. If the price of gold is “allowed” to increase it would signal a de facto loss of faith in paper currencies and in central bank authority and influence.

Central bank zero interest rate policies provided buoyancy and stability during the 2008 crisis, but have done little to propel economies forward in recent years. Additionally, mounting geopolitical risks, financial bubbles, and emerging technologies suggest that the current holding pattern cannot be sustained much longer.