The Gold Report: At the subscriber investment summit in Toronto in March 2015, you had a talk titled “Life in a Zero Yield World.” What is wrong with that world?
Eric Coffin: A zero yield world is the result of four or five years of central banks essentially buying the hell out of the bond market, which is what the European Central Bank (ECB) is doing right now. And buying those bonds, also known as quantitative easing (QE), drives down yields. QE has helped the U.S. and will probably help the European economies but it creates a lot of distortions. We tend to see a lot of money driven into high-risk areas, like heavily leveraged commodity and exchange-traded funds (ETF) bets and things like art and collectibles, because there are these large money pools that can raise capital at close to zero rates, and that tends to make people take greater risks. How that ends remains to be seen, but central bankers realize that they need to start weaning economies off of QE because when you generate that much risk capital and start creating that many distortions, it quite often doesn’t end well.
TGR: Can these economies successfully be weaned off QE?
EC: Maybe. On one side there is the “wealth effect,” which is the positive impact on the economy from people seeing their portfolios get larger. And that was always part of the plan. Most economists describe the wealth effect as a side effect of QE, but I don’t think policy makers at the U.S. Federal Reserve or the ECB think that way. The problem with the wealth effect is it mainly benefits—you guessed it—the already wealthy. I think that is why it hasn’t generated higher growth yet or higher inflation except in “one percenter playgrounds” like the fine art market. The …read more