The U.S. monetary and fiscal authorities are shoveling trillions of dollars into the U.S. economy to prevent a collapse of the economy and the financial system. Will this money be repaid or otherwise withdrawn from the system? If not, what consequences can we anticipate?
We know under TARP the loans and preference share funding provided to various companies in 2008/9 was largely repaid. We expect most large companies will repay the loans they receive this time also, but the terms will be very easy and they will be made easier if needed. Money for state governments, hospitals and other emergency health-related expenditures is not coming back. Most of the money to smaller companies will likely be in the form of grants if they keep employees on salary. Money directly to individuals will not be repaid.
When loans are repaid, the newly created cash is terminated but most of the trillions from the Fed and Treasury will remain in the system. We therefore expect to see an abrupt increase in money supply and that's already evident (see below). Whatever happens, nothing will be allowed to reduce dollar liquidity or bank reserves. Attempts to reduce the Fed balance sheet in 2018 went very badly and will not be repeated. Also, in the U.S. there is no trust that the programs will not be abused and we expect they will be abused, angering ordinary citizens who are likely to feel that the least worthy have benefited most.
In the Weimar Republic, the strains put on the financial system were too extreme...especially the war reparations on top of all the expenditures required to recover from the First World War. Their currency, once the strongest in Europe, became worthless. And now we have talk of fighting the coronavirus as if it is a war. The effects may be thought of as similar...too much demanded from the central authorities and met in the same way, by extreme money printing.
Will U.S. fiscal and monetary policies destroy confidence in the dollar? We think this is likely. Eventually, too many demands are met with too many dollars, investors begin to avoid holding the currency and we begin to see backwardation in the dollar and gold futures. That will be a very negative sign for the conventional monetary system and a spectacular boost to gold. Meanwhile, the Fed has certainly figured out how to jam money supply higher. Is this sort of growth possible on an ongoing basis without loss of confidence in the currency and a large increase in inflation? We don't think so.
This article is the collaboration of Rudi Fronk and Jim Anthony, cofounders of Seabridge Gold, and reflects the thinking that has helped make them successful gold investors. Rudi is the current Chairman and CEO of Seabridge and Jim is one of its largest shareholders.
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