Self-described natural resources bull and co-editor of Disruptive Discoveries Journal (formerly Morning Notes) with his son Chris, Michael Berry is an economist, a former professor, with 25 years of experience investing in the natural resources and life sciences sectors.
In an interview with Mining Markets in late May, Berry, who is a frequent guest lecturer at the Federal Reserve, explains where the U.S. is in its economic recovery, why gold and silver will remain range bound, and what risks and opportunities await investors in the commodity and capital markets.
Mining Markets: Let’s start off with the general state of the U.S. and global economies. Earlier this month, you wrote we are still in an economy that has not and will not achieve escape velocity – or growth – for many months or even several years. What has to happen before a recovery can take hold?
Michael Berry: In most recoveries from a recession historically, you’ve had a 4% to 4.5% economic growth rate. Today we are barely at 2%. In most recoveries, central bankers want to generate inflation to avoid the Japanese deflationary experience: they want rising prices and wages. We’re not seeing any of these at present.
Escape velocity refers to sufficient economic growth in GDP or GNP that you can start to work off some of the debt, put people back to work and generate real growth and wealth in the economy.
You must have real growth in the economy to escape from this debt- induced paralysis that we’re in – that the Japanese have experienced for 25 years. We’re seeing a lot of Federal Reserve currency printing. Under normal circumstances you should see inflation and gold and silver prices increase, but we’re just not seeing the kind of growth and that makes the resource markets attractive. They remain quite stagnant for the most part.
So what do we need to do? Well unfortunately, while the Fed is attempting to carry the load here, official U.S. unemployment is still 6.5%, the Congress and Administration are not proactive fiscally. We have a problem with respect to what the House and the Senate and the Obama Administration are NOT doing, and that is passing into law sound fiscal legislation. One of the potential remedies is to reduce taxes instead of increasing them, but it’s obvious there are going to be tax increases to deal with the entitlement issues that we have in this country. That’s going to restrict growth further.
Until we see a debt deleveraging – and depending on who you talk to, the average deleveraging is eight to ten years following a bust, so you could have another three or four years of slow growth, which will mean that we won’t have strong capital or commodity markets over that time period.
MM: Why hasn’t the Fed policy of quantitative easing worked?
MB: Because it’s monetary policy only – there’s a concept in the Keynesian literature of “pushing on a string.” In other words, eventually printing money is like trying to push on a string – you don’t get any impact from the additional money. If you examine the size of the Federal Reserve’s portfolio, it’s $4.5 trillion now, up from $600 billion in 2007 – that’s a huge increase – of almost seven-and-a-half times. They keep buying bonds of longer duration to keep interest rates low. At some point, they have to sell those bonds. The reason they do that is to keep interest rates low on the belief that, the economy will pick up – and it simply hasn’t happened. We have 0% interest rates at the low end of the yield curve and we have a 10-year bond at 2.5% now and declining.
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