With the Dow surging and the price of gold still consolidating its 2019 gains, sometimes it is a good idea on a day like today to step back and take a look at the big picture. So today Alasdair Macleod warns King World News readers around the world what to expect as we enter the crisis stage.
Later today KWN will be releasing a remarkable audio interview with Egon von Greyerz. In the meantime…
A Major Turn In The Credit Cycle
October 11 (King World News) – Alasdair Macleod: “Listening to recent commentaries about the repo failures in New York leads one to suppose there is insufficient money in the system. This is not the real issue, as the chart below of the fiat money quantity for the dollar clearly shows.
The complaint that the current precarious position faced by major economies is due to a shortage of money is untrue. The problem is one of escalating expenditures, and anyway, the response to any shortage, as we saw recently with problems in the US repo market, is simply to issue more money. But it is no solution, only making the eventual crisis worse.
Ahead of the next credit crisis, the knowledge that things are not quite right has so far led to a flight to perceived safety: in some countries, investors are even paying to own their government’s debt. In the US, the yield on the 10-year US Treasury bond has declined from 3.2% a year ago to 1.4% today.
As the next credit crisis materialises, perceptions of investment risk are bound to change radically. The imperative to print money at an even faster rate will accompany the trend towards deeper negative interest rates, penalising bank deposits, eliminating residual savers from the system. Consequently, if the Fed makes the mistake of even considering negative interest rates, it will put the whole commodity complex firmly into backwardation from the money side because all commodities are priced in dollars.
What To Expect As We Enter The Crisis Stage
We can take anticipation of lower and more widespread negative rates as guaranteed when the credit cycle enters its crisis stage. Last time, everyone was so relieved that life after Lehman’s death continued that they still regarded government debt as the risk-free yardstick for financial investment. It would be foolish for a central bank to think this trick could be pulled a second time. Just imagine how high the fiat money quantity in our introductory chart would be above that long-term pre-Lehman trend line. And just think of the damage to the purchasing power of the dollar and the other major fiat currencies from interest rate policies that are bound to drive deposits towards widespread encashment.
This time, the coincidence of a credit crisis and rapidly escalating short- and long-term welfare commitments adds a new dimension to the inflation story. Far from rescuing the global economy, the spreading of zero and negative interest rates can be expected to expose the true worth of fiat currencies. Next time is different in another respect: there is a new generation of educated men and women who through cryptocurrencies have learned of the fiat currency fallacy ahead of the event. In the past, nearly everyone learned of it too late. Now, around the world, particularly in America and China millennials could accelerate the ending of fiat money by triggering an early shift out of fiat into cryptos. Bitcoin at a million dollars becomes no longer pure fancy, only don’t forget that a million dollars might not buy you much.
It is not an expected outcome, except by the very few who understand what is happening to money and the built-in escalation of its quantity. These will include growing numbers in the cryptocurrency community and the few who have studied the subject away from the influence of macroeconomists. Hopefully, they will now include readers of this article.
Anticipating A Crack-Up Boom
As the credit crisis drives monetary expansion into overdrive or leads into a hyperinflationary slump, people are bound to begin to discard their national currencies in favour of any goods they think they might need in future. Minimal cash liquidity becomes the desired position. It can rapidly lead into the final short-lived boom that marks the death of an unbacked fiat currency, when it dawns on the general public that their government’s currency might be worthless. As the conviction of it grows, the pace at which it is dumped for anything of use that they can get their hands on increases exponentially. In Germany, it lasted from about May 1923 until the following November when the mark finally expired.
It has long been a theme of survivalist libertarians that this will occur.
So long as the alternative of owning physical gold and silver exists, it is not necessary to stockpile necessities, unless, that is, disruptions to supplies are anticipated. In a slump, the prices of goods will decline measured in sound money. This, after all, was firmly impressed upon Keynesian inflationists by the experience of the early 1930s, when measured in gold substitutes prices of nearly everything fell heavily. When gold and silver became more desirable relative to owning goods, their purchasing power increases while that of fiat currencies declines.
Putting supply considerations to one side, if in the wake of the next credit crisis the economic conditions of the 1930s return, those that use gold and silver as money will see the prices of their consumer staples fall, so there should be no hurry to hoard them.
Later today KWN will be releasing a remarkable audio interview with Egon von Greyerz. In the meantime…
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