When the world’s major central bankers get together, as they did at the Fed conference in Washington this weekend, ironies abound. Off to the side was Turkey’s government that had just floated a plan to get its people to turn in their physical gold in exchange for “certificates,” a first if still voluntary step in what may become a process of gold confiscation. In the background: the Fed, which in January had promised to keep interest rates at record lows through 2014, come hell or high water, after having purchased $2.3 trillion in bonds. In the foreground: the money printers of Japan and Europe.
“If low interest rates induce investment projects that are only profitable at such interest-rate levels, this could have an adverse impact on productivity and growth…,”said Masaaki Shirakawa, Governor of the Bank of Japan, the champion of deficit monetization and ultra-low interest rates.
He was worried, he said, about “side effects” such as rising commodity prices—a non sequitur after he’d announced in mid-February that the BOJ would plow another ¥10 trillion ($128 billion) into asset purchases, having already done three waves of asset purchases in 2011. And then we learned that board members fretted that this might be considered monetization of Japan’s deficit. Um, yes.
Not to be outdone, Jean-Claude Trichet, ex-President of the ECB, did his own fretting. Under him, the ECB had purchased crappy Eurozone sovereign bonds despite a treaty that prohibits it. And now he worried that these bond purchases by central banks have become part of a new “permanent regime,” and that it could create “behavioral contagion”—something that has already happened. “I think we have to reflect on that,” he said belatedly.
Back to Turkey: it found a different solution for its own out-of-control budget deficit. Like that of Japan, the US, and other countries, Turkey’s deficit, at 10% of GDP, has become part of the “permanent regime.” But rather than deal with it the hard and honest way—cut spending and increase tax collections—Turkey is grasping for alternatives. Hence the plan to bamboozle its citizens into handing over their hidden stashes of physical gold in return for what would certainly be pretty certificates. And as an additional incentive, gold-deposit accounts would earn interest.
When I was in Turkey in 1997, pocket money was a wad of Turkish lira that included 1,000,000-lira notes. Even beggars could be millionaires. And those who spent their last million on gold (jewelry was a favorite) would never forget how smart that decision was. Not only would the price of gold, at the time around $300 per ounce, start rising again, but also the value of the lira would dissipate into hyperinflation.
On January 1, 2005, the government revalued the currency at 1,000,000 lira to 1 New Turkish lira and issued new banknotes and coins. Then, on January 1, 2009, the government again put new banknotes and coins in circulation but without New in the name. They looked different, and omitting New would certainly inspire confidence and help people forget the fiasco of the old lira.
Inflation in February was 10.4%. Yield on the two-year bond is near 10%. And last year, the lira plummeted 20% against the dollar. No wonder Turks don’t trust their paper money, regardless of how the government dresses it up. So they doubled their purchases of physical gold in 2011, according to the World Gold Council. Their savings rate is at a 30-year low. They’re borrowing and spending lira, and they’re buying gold for safekeeping in their homes. A lot of it. $150 – $300 billion, according to government estimates—savings that are not part of the “savings rate.”
If the government got its hands on, say, $200 billion of its people’s gold, it could transfer it into the international market and kick the deficit can down the road. And if push came to shove, it could do with the certificates what Greece did with its bonds. Which makes people wonder who the advisor on the project was. Goldman Sachs?
But Turks saw what happened next door: “We owed it to our children and grandchildren to rid them of the burden of this debt,” said Greek Finance Minister Evangelos Venizelos after the bond swap, a default that had whacked private sector investors with a 72% loss. While everyone other than the bondholders was applauding, Greece’s economic horror show continued in its relentless manner. For that whole debacle, read….. “A harder Default To Come.”