Silver, Financial Repression, and Economic Recovery

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Earlier this week, noted economist Carmen Reinhart posited once again that western economies are enduring another period of financial repression. In the simplest sense, financial repression means savers are subjected to additional taxation in the form of negative real interest rates (meaning you are losing money on your bank deposits after accounting for inflation.) The last period of negative real interest rates occurred in the wake of huge public sector deficits after World War II. In Reinhart’s opinion, government-mandated negative real interest rates persisted from 1945 to 1980. This was a thirty-five year war on savers.

I found the timing of this article interesting, since so many people in the financial world are touting some sort of economic recovery, especially here in the United States. I have to admit things are going well on Wall Street: broader stock indexes have, in many cases, finally broken above levels not seen since before the collapse of Lehman in 2008. I would point out that in a qualitative sense, the word “recovery” feels out of place in a country where I doubt we can return to the world before 2007.

Still, I am a good sport and willing to play along with the idea that the economy is on some sort of a rebound. (At least until the end of the world in December, mind you.) So what does this “recovery” mean for people looking for places to put their hard earned savings? After all, the appearance of Reinhart’s article on financial repression sort of throws a bit of cold water on anyone who equates recovery with the positive real rates of the 1980s and 1990s. Reinhart is implying that the heavy hands of the state and central banks are fiddling with the scales, manipulating the truth about the damage inflation can do to real economic growth, as well as to real investment returns.

Well, as you might have guessed, tangible assets, including commodities, but also things like collectibles, were among the top performers during the period from 1945-1980. According to Benjamin Burton and Joyce Jacobsen, collectibles such as rare art, wine, stamps, and numismatics put in solid real returns during the last period of financial repression (often 5-10% per annum), though you will note the difficulty entailed in systematically documenting the performance of all collectibles, as well as the wide range of returns seen in this article. (See Burton and Jacobsen, “Measuring Return on Investments in Collectibles,” Journal of Economic Perspectives, 13:4, 205-208).

Among the best of the best of tangible investments during the last period of financial repression, however, was (you guessed it) silver bullion. Admittedly, the silver market was not fully liberalized until about 1963 (meaning that average people could not take advantage of the free market price for the metal until that point.) Be that as it may, the price of silver from 1945 to 1980 jumped nearly 100 times, from about 50 cents an ounce to nearly 50 dollars.

Silver bullion, even more than gold, has two jet packs strapped to its back. One is investment demand, but the other is industrial demand. (This might even include the possibility of countries deciding to increase their now-depleted stockpiles of the metal, in addition to corporations trying to get their hands on silver.)

You would assume that in a real economic recovery, industrial demand for silver would be strong, thus sending its price higher. I think sometimes gold and silver bugs do themselves a disservice by focusing only on currency collapse or some other unfortunate reason to invest in the silver market. What I call the discourse of collapse has limited utility when trying to convince other people to put some money in silver. It also leaves the impression that silver will only rise amidst a shattered American (or global) economy. But this just isn’t true. At the end of the day, none of us can know with certainty the shape of things to come. I personally think the western world is in worse fiscal shape than in the period from 1945 to 1980, but I am neither omniscient nor omnipotent. What I do know is that silver can fire on more than one engine. Even in the event of a recovery, there are plenty of reasons for the white metal to move higher. Maybe not tomorrow, but with time.

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