Monday, July 19, 2021

Russell Napier: «We Are Entering a Time of Financial Repression»

It's hard to know where to come down on Mr. Napier's conclusion but as for the discussion of all the factors in play this is a very worthwhile interview.

One caveat: the use of M2 as an indicator of the growth in liquidity is suspect as there were some technical changes to the number that exaggerate the increase. You can get the same general picture by looking at the Fed's balance sheet:

The M2 numbers should be more reflective of what's actually going on as we move forward.

From The, July 13:

Market strategist Russell Napier talks about why he sees structurally rising inflation coming, why central banks are impotent – and what that means for investors.

Russell Napier caused a stir in the financial world one year ago when he made the call for a regime change: After almost thirty years in which the global economy was characterized by deflation, the market observer thinks that a phase of structurally rising inflation is beginning.

Just like after World War II, Napier believes that governments will pursue a policy of financial repression in which the interest rate level is deliberately kept below the rate of inflation to get rid of the high levels of debt.

The Market NZZ spoke with Napier about his inflation call. In this in-depth conversation, which has been redacted for clarity, he explains which developments will shape the coming years, how investors can prepare for them – plus why trying to forecast the velocity of money is akin to juggling an incontinent squid.

Mr. Napier, it’s been a year since your inflation call. Today, we do see higher headline inflation. Do you take that as proof that you were right?

Yes, but we need to distinguish here. My call is based on money, on the growth rate of broad money, to be precise. My argument rests on the observation of a deep, structural shift taking place. What we see today in terms of published inflation is partially based on supply shortages. These will ultimately be solved.

Most of the discussion circles around the question whether current inflation is transitory or persistent. What tells you that it will be persistent?

First of all, I agree that a lot of the inflation we see today is caused by the supply side, which will adjust. That element of inflation will come down again, hence we can say it’s transitory. I would put one red flag over the supply side issue though, and that is China. Remember, in 1994 China devalued its currency, as I show in my upcoming book «The Asian Financial Crisis 1995-1998», and this triggered a wave of cheap exports from China. For years, we had a massive deflationary wind coming out of China. That isn’t going to happen again for two reasons: One, labour prices in China are up significantly. And two, we are entering a new cold war, which means we won’t be buying as much from China. But let’s leave this issue aside and assume that the supply side will adjust. In the longer term, inflation will be driven by the growth of money in circulation.

How so?

My bottom line is we have an exceptionally high growth in broad money at the moment. The US got to 27% year-on-year growth in M2 at one point. That’s coming down now, given the base effect, but I think M2 growth in the US will settle at around 10%. In Europe, it is about 10%, and even in Japan it’s well above its post bubble-era average. So I think we will settle down with broad money growth at close to 10%, persistent, over several years. The consequence of this kind of broad money growth is an inflation rate above 4%.



First, it’s important to stress that I’m not calling for 10 or 20% of inflation. There are people running around with hyperinflation forecasts, but I think this is unlikely. I’m calling for an inflation rate above 4% for a number of years, and that is based on an analysis of the quantity of money. Have we ever seen a country in history persistently running a broad money growth rate at 10% that didn’t have inflation at 4% or above? The answer is No. Plus, it is fair to assume that there will be spikes in the velocity of money, which means there can be temporary bursts taking inflation above 4%.

What time frame are we looking at?

Over the next ten years, I’d forecast something between 4 and 5,5% in terms of the rate of inflation in the developed world. But mind you: The most important part of my forecast is not the inflation rate per se. It’s that interest rates will not be allowed to reflect that rate of inflation. That is what changes the entire structure of finance. This is the key question: Will interest rates, short and long, be allowed to reflect 4% inflation? My answer is No. This is because we will be entering a period of financial repression, where governments keep interest rates below the rate of inflation, just like after World War II.

What's the base for your forecast of a broad money growth rate of 10%?

The reason that I come up with this number is the revolution that happened last year: Governments got involved in the commercial banking system, by guaranteeing private sector loans. When I look at the latest data, I see bank balance sheets growing at about 10%, which translates into broad money growth of around 10% per annum. People have to understand that it’s not central banks that create most of the money, but commercial banks. So now governments, through their loan guarantees to commercial banks, can create as much money as they like. Out of thin air.....