Everybody is Trying to Postpone the Inevitable-Axel Merk…”For me, it’s a slam dunk. We are going to get inflation.”

Monday, February 9, 2015
By Paul Martin

By Greg Hunter
February 9, 2015

Money manager Axel Merk says, “I am very concerned about Russia. I am very concerned about what is happening with Ukraine. The problems we have there and in Europe, and in Japan and in the U.S., are we cannot balance our budgets. Ukraine would not be in the situation it is in if it could, if it were able to balance its books. That’s just the symptom and it exhibits differently. We see how it plays out one way in Greece and in Ukraine another way. In Japan, we are trying Abe economics. In the U.S., we have a feel good growth strategy, but ultimately we have the same issue everywhere. Yes, I am very worried about it because the Great Depression ended in World War II. Extremism is on the rise when you have this dragged out– period. Everybody is trying to postpone the inevitable. People get fed up with austerity, and they start to blame everybody else but themselves.”

So, is the world broke? Merk contends, “Much of it is, and the best short term policy would be a good long term policy. I happen to be of the view that you should not be policing that the banks don’t do stupid moves. What you should be policing is that the stupid move of a bank cannot wreck the financial system as a whole. It you wanted to do that, you’d have to do a few simple rules. You’d have to post collateral for levered transactions. You’d have to mark to market accounting and a few other little things, and you are pretty much done with it.” And if you believe in capitalism, then should you believe in bankruptcy? Merk says, “Of course, the problem is we designed a system where bankruptcy would cause a financial meltdown, and that is what we have to get away from. It’s not that bankruptcy is bad; it’s the contagion that is bad. The way you avoid it is by posting collateral in levered transactions. In all these derivatives, people would have to post collateral with mark to market accounting, and they would be discouraged from taking such extreme positions. That is the problem, and we get into this with super loose monetary policy.

On the deflation or inflation question, Merk predicts, “For me, it’s a slam dunk. We are going to get inflation. There are negative real interest rates in the developed world as far as the eye can see. Just about every country has negative real interest rates, and we have financial repression everywhere. I think we cannot afford positive real interest rates over an extended period. Just think about the U.S. with the entitlement wave coming against us. We got strong incentives in place to have negative real rates when the government has too much debt and when consumers have too much debt. The reason why we have this battle with inflation and deflation is we are clearly facing a deflationary bust, and central banks are fighting against it. If we didn’t have central banks, I’d be fully onboard with deflation, but because we cannot have bankruptcies, we will inflate our way around it. . . . Ultimately, inflation is going to first come up in the U.S., and that inflation is going to be exported to other countries.”

Merk, who manages around $400 million in assets, goes on to say, “I am very concerned about bonds and equities, both of them at the same time. Now, clearly when you print enough money, bonds and equities go up, but the problem is everything goes up in tandem. People need to look at alternatives. The easiest one is gold, but gold is not risk free. . . . There is no risk free asset to hide in, and I think that is the key here. . . .When the Fed even tries to exit, asset prices are going to plunge down, so you got to try to hide somewhere.”

Join Greg Hunter as he goes One-on-One with Axel Merk of Merk Investments.

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