02/24/2017 - The Roundtable Insight – Have Central Banks Reached The “Coffin Corner”?

FRA is joined by Uli Kortsch and Jayant Bhandari in discussing global interest rate trends and growth, along with the likelihood of another recession.

Uli Kortsch is the Founder of both the Monetary Trust Initiative (MTI) and Global Partners Investments (GPI).  Currently most of his time is spent on MTI whose mission is to bring transparency and authentic principles to our monetary system.  He was asked to organize a conference on this topic at the Federal Reserve Bank in Philadelphia, the proceeds of which are now published as a book.  He is a regular speaker at various conferences in different countries. As President of Global Partners Investments and other ventures Mr. Kortsch has worked in over 50 countries, written a bill for Congress, and conferred with approximately 15 national presidents, ministers of finance, and ministers of commerce.  He has served on numerous corporate boards with both for-profit and not-for-profit organizations.

Jayant Bhandari is constantly traveling the world looking for investment opportunities, particularly in the natural resource sector. He advises institutional investors about his finds. Earlier, he worked for six years with US Global Investors (San Antonio, Texas), a boutique natural resource investment firm, and for one year with Casey Research. Before emigrating from India, he started and ran Indian subsidiary operations of two European companies. He still travels multiple times a year to India. He is an MBA from Manchester Business School (UK) and B. Engineering from SGSITS (India). He has written on political, economic and cultural issues for the Liberty magazine, the Mises Institute (USA), Mises Institute (Canada), Casey Research, International Man, Mining Journal, Zero Hedge, Lew Rockwell, the Dollar Vigilante, Fraser Institute, Le Québécois Libre, Mauldin Economics, Northern Miner, Mining Markets etc. He is a contributing editor of the Liberty magazine. He runs a yearly seminar in Vancouver titled Capitalism & Morality.



We’re going to have another recession. Who knows when it will come, but it will come. We’re close to having the longest buildup growth since the last recession, so we’ll have another one fairly soon. The problem is that under our current system, we use interest rates to stimulate the economy. It appears negative so we increase interest rates and make money more expensive, so people stop borrowing. The interest rates globally are so extraordinarily low that in order to stimulate growth during the upcoming recession, there’s not enough movement without going back into negative interest rates. If we do have another recession fairly soon, we’re going to go into negative interest rates.

Most of the savers are older and trying to live off a certain portfolio or expecting a certain kind of income. When you have negative interest rates, the more money you have the more expensive money becomes. You lose money off your money, so the net result is that consumers save more. Instead of negative interest rates stimulating the economy, they actually slowed down even further.

We have an intersection of the interest rate of the economy and the world is able to handle, and where central banks are desperately trying to increase the rate.

If we increase the interest rates, the governments cannot afford their own debt. If we were to pay normal interest rates on US federal debt right now, we would have a deficit of above $1T. We currently have $10T in global debt denominated in USD. As the interest rates go up, those companies can’t afford those either. If you have a crash internationally, we are so linked today that no one will be spared. It’s this coffin corner where you’re damned if you do and damned if you don’t. You’ve got to raise the interest rates, but if you do you’ll crash the economy.

If you look at the last century, western economies mostly grew at a faster rate than the rest of the world. What actually was happening was that the non-western economies had negative real interest rates, and a lot of western economists don’t recognize that. The same disease might’ve entered the western economy society over the last decade or so. We might have over regulated businesses so much that the capital no longer has capacity to generate economic growth. Even negative interest rates might not be enough to help these companies add economic growth to their society. The emerging markets are clearly facing this problem right now, except for East Asia.



We continue to be in such a strongly deflationary environment, but it would be more of the Japanese style of deflationary stagnation versus the stagflation we saw in the 70s and 80s. If you look at the demographics that are changing everywhere, plus IT developments that reduce prices, plus global trade, plus the debt overhang, it’s strongly deflationary.  Every single major crash in over a hundred years has been deflationary, so why are we so concerned about inflation?

Inflation will continue and the government of India is preparing itself to spend a lot of money. Governments are trying to get emerging markets to go cashless so they can destroy their informal economy and move the money to the formal economy. In a lot of these countries, because they’re trying to force people to move their money, they’re reducing the interest rate in the formal economy but actually destroying the growth in the informal economy and that is where economic growth lies in countries like these. The result is that there will be inflation in these emerging markets.

Even in the US, the majority of the growth is in new companies and for the first time in decades the two lines have crossed negatively where if you graph the birth and death of new companies, we’ve gone negative. We are now destroying more companies than we’re creating, and this has never happened before since these statistics were kept.

We’re locked into this Keynesian world view that this is how we do things, but we’re going to face a major crash if we stay with this paradigm, and there’s no way out of it. If we keep on doing what we’re doing, we’ve only got a few years. If we are willing to switch from the Keynesian paradigm to the Fisherian paradigm, we could solve this.

Keynesian economics have become a part of us that it’s almost impossible for institutions and governments to understand that there’s an alternative. In their view, the printing press is a solution to all their problems. All these emerging markets have become very big believers in these things, and this has already led to a huge amount of malinvestment in the west and even more in emerging markets. If you go to Africa and Latin America, private debt levels are much higher as a proportion of their GDP. Those people have taken out massive private loans for consumption, not for investment purposes.


Under Trump and where trade is at, there is a possibility of another Smoot-Hawley. If there’s a sudden decrease in the value of the Yuan relative to the USD, there will be a decrease in trade. The amount of money that’s available to support the Yuan is a lot less than what they’re officially publishing. We would have to be very careful and very wise to not immediately do something stupid like blocking trade. If the Yuan had a significant crash, that would affect the whole Asian bloc.

If the Yuan falls for any reason, it will be extremely harmful to every emerging market. The Yuan is very competitive compared to other smaller manufacturing places, so if it falls for any reason, it will be disastrous for these smaller economies. But it’s so closely linked to the international market as the factory of the world; it operates differently from other currencies. The PBOC’s support mechanism effectively creates a currency board.

When the US acts as a global reserve currency, there has to be a constant leakage of Dollars out, which gives us a negative Current Account standing. If we were to reverse that, there would be an enormous Dollar squeeze globally that will backfire like there’s no tomorrow. The


You’d have to have some real balls to do this, and there’d have to be timing involved, but it’s likely they’re not going to be able to reload the gun in time for the next recession. When you think the height of the Fed rate has been reached, you can buy US Treasuries. You can make a lot of money, but it’s a risky play.

International institutions have recognize that a lot of corporations in the developing world don’t produce as much as they thought they should, and the result has been that these corporations are basically extensions of governments in these countries. There has been pressure on governments to reduce interest rates on these corporations so they can survive. They’re forcing investments to shift from the informal economy to the formal economy, which is leading to a drop in interest rate which is good for the government. But the way they want to structure the monetary might be destroying the informal economy and the livelihoods of a major part of their population.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

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