Messing with money

‘The greatest monetary experiment in history’ is underway. Where is it taking us?
Among the possibilities is an extended, rather muted, stagnant and low-growth outcome, with perhaps a harder landing in some countries. Picture: Michael Nagle/Bloomberg

Many events in history have passed virtually unnoticed in their time, only to prove highly significant a few years later.

We are experiencing a fundamental shift in global finance – an experiment that could profoundly change global economic growth, prosperity, and indeed rewrite many of the economic text books while highlighting the deep flaws of conventional, neo-classical economic thinking. It has largely been missed by the mainstream media, and perhaps even neglected in most of the specialist news platforms.

This is understandable in South Africa, preoccupied as we are with local issues and the elections. The scant attention elsewhere can be attributed to the complexity of monetary issues today – especially because the size and impact of the financial sector have been understated if not virtually ignored in conventional economic models based on linear and equilibrium assumptions and informed by abstracts and aggregates.

Profound effect on our livelihoods

Financial services are fully entrenched globally, and sovereign monetary policies are mostly driven by global events. At the core are the developed Western economies, of which the United States and the dollar are the primary forces. South Africa may not be a significant direct party to these events, but as we saw in 2007/2008, they have a profound effect on our own livelihoods.

It is common cause that global debt has become a key concern for the world economy.

After cutting interest rates to nearly zero following the 2008 global financial crisis, the US Federal Reserve board started raising rates. Following the most recent hike in December 2018, Fed chairman Jerome Powell seemed determined on further tightening. But then Wall Street fell by 20%, and within weeks, Powell spun 180˚ from his rising-interest-rates stance to hint at no interest rate hikes this year and mooting a return to quantitative easing should it be needed.

US President Donald Trump has added his voice to those opposed to any tightening of monetary policy, and the European Central Bank and Japan have shifted their own positions to favour further declines. There is even the prospect of negative interest rates on a broader global scale.

Back where we started

Tyler Durden of Zero Hedge sums it up well: “Ten years after central banks launched the greatest monetary experiment in history, pushing rates to zero or lower in an attempt to reflate away an unsustainable debt load while purchasing $12 trillion in securities to prop up risk assets, we are back where we started with deflation once again emerging as the biggest threat to the world, over $10 trillion in sovereign bonds yielding below 0%, and after a disastrous attempt at renormalising monetary policy, the market is convinced the Fed will cut rates in the next few months.”

Some statistics and graphs are quite startling. See this live graph from the World Bank on broad money as a percentage of GDP.

The first is the massive leap in global money supply as a percentage of GDP: according to World Bank statistics, more than double what it was in the 1970s, and 30% more than the level before the 2008 financial crisis.

Global debt set a new record in 2018

Source: BofA Merrill Lynch Global Investment Strategy, BIS, IIF

The above graph from Zero Hedge’s summary confirms not only the correlation between money supply and credit extension, but the record level of global debt – standing at more than 270% of gross world product last year.

Money velocity weakening

But that is only part of the dilemma: another is the falling level of money velocity (the number of times one unit of currency is used in a transaction in a year). It has fallen in the US from 2.19 to less than 1.5 meaning that despite all the money being printed, it is actually being used less in broad public spending. This clearly reduces demand for goods and services, and is deflationary.

I have touched on only a few of the 20 “stunning” market statistics captured in the Bank of America’s latest Hitchhiker’s Guide to Investment, as unpacked by Tyler Durden.

Most of the conditions they reflect have never been seen before and now leave some questions like:

– If the US economic recovery has been so sound, why go soft on interest rates when there is a clear need to do the opposite?

– What happens when interest rates lose their effectiveness in economic policy?

– Why have the record levels of debt and excessive money supply not led to rampant inflation? There are some authoritative voices that believe they will – soon, and globally. In the meantime, inflation has been restricted to asset prices such as stocks, bonds and property. Less than 20% is deployed in productive capacity. It means that cheap money is not trickling down to the man in the street, but is restricted and being used mainly for short-term risk assets by corporate entities and the super rich, continuing to exacerbate wealth and income inequalities.

– And finally, among all the questions that remain in these new uncharted waters in global finance is the one most difficult to answer: what will the outcome be, and when?

Where are we headed?

I was one who believed it would head for a resounding crash, led by a falling dollar against the background of lower trust in the US economy and concerted efforts at ‘de-dollarisation’ by other major players such as China and Russia, and their continuing building of gold reserves.

But there could – much like we have seen in Japan for decades – be an extended, rather muted, stagnant and low-growth outcome, with perhaps a harder landing in some countries such as Australia and Canada (see Steve Keen’s forecasts).

While the axiom holds true that in the end all debt has to be paid, either by the lender or borrower, it does not say by when, and in a world where you can constantly roll over debt at a cheaper cost, that ‘when’ can be a long way off.

None of the above augers well for the South African economy. All of our assumptions about and planning for a new dawn after the elections will be overwhelmed by global events, as they were 10 years ago.

But there is a third outcome: political; social and civil unrest.

When the dots of stagnation and hopelessness are connected to a monetary monster spawned by a parasitic financial sector, those financial fortresses will simply be torn down.

That, by all accounts, is already well underway.




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This is where Bitcoin steps in, it’s default position is positive (you cannot have negative bitcoin) and it crosses almost every country.

I don’t see the IMF being able to sort this global mess out, South Africa in the short term will need a bailout and stop their wealth confiscation laws.

Good luck with Bitcoin if the global economy crash.Can see you buying food with Bitcoin at P&P.Especially considering that Bitcoin does not exist except in the virtual world.

Thanks Lulu, I’ll take all the luck I can get with Bitcoin and all the other decentralised assets out their including voting and product history.

If you have a bank account guess what you have virtual money, it’s just digits until the bank allows you to take the physical cash.

It’s not an if but rather a when the global economy crashes and then emerges with a new financial order.

I daily see more and more Marla Singers on the street corners … … …

China almost turned over the apple cart of the global financial system..

one got to wonder if the powers just “allowed” a Chinese golden age to uplift so many people last decade, such a spectacular economic play no “free” capitalist country can match..

Too many countries are broke!! America not only has 22 TRILLION in debt BUT they have over 300 Trillion in unfunded liabilities. That means dead ass broke. Zimbabwe printed money and it gave us the 100 Trillion Zim dollar with hyper-inflation. America and the E.U. print money and there’s no hyper-inflation?? Well not yet. China has morphed the international banking system leaving “America’s version.” They have the A.I.I.B. (IMF equivalent) they have the C.I.P.,S.(cross border inter-bank payment system (equals the swift system) & They have been net purchasers of gold for a LONG LONG time and have introduced the Gold backed Yuan petro note. This will begin the demise of the dollar and rise to “backed” money. Just google de-dollarization and see all the countries no longer using the dollar.

That 22 Trillion dollars you mentioned is only the Feds debt!

History tell the story of human wealth happenings. Change will come when all owned is locked up in hands of the few. Handing it out like sweets is a true sign of a end in sight. The machine used for correction will be the old lovely one called war. No other exist. The one coming will be the solution of many problems money and numbers related. Gearing up to this moment is in hands of wealth owners, like always. It works like a natural designed law.

Great article Jerry.
The fact that there is no visible inflation outside of investment assets does not mean that inflation is absent, it is merely hidden from our usual measuring tools.

Take the price of wheat for example. The CBOT price in dollar terms is currently sitting around the same levels as before the GFC of 2008. The “real” price, the inflation adjusted value, the price in ounces of gold, is down by 50 percent since 2008.

If inflation is the growth in the difference between nominal en real prices, then we see a 100 percent increase in the price of wheat in a period of 10 years. That is a serious inflation number.

While we have deflation in real terms, and a crash in the profitability of commodity producers, the man in the street who buys in nominal terms does not enjoy the advantages of lower prices.

This is exactly the results we expect of devaluation of the currency. There is an explosion in the gap between real en nominal prices.

The deflation in real terms is hiding the inflationary effect of devaluation. When there comes an equilibrium between the demand and supply of wheat, the nominal prices will make new highs and inflation will become so visible as to hit us in the face.

I applaud you for explaining some home truths about our current monetary system, which has been severely ‘abused’ since as far back as 1912.

I urge everyone who is concerned about the value of their ‘real’ wealth to learn more from Steve Keene who tells it like it is! Then take some serious action to try and protect some of your wealth!

Give us a hint as to what this “serious action” might be please. Physical gold has been mentioned; what else?

Anything you can think of that has no third party risk. I cant think of much beyond PM’s myself.

Some comments: Fiat money can only be created through an act of borrowing. Debt is monetised. The money to repay the interest is never created. The debt will thus always exceed the money supply. Under the current fiat regime, the debt can never be repaid as the money to do so does not exist. It is like a game of musical chairs- someone cannot repay their debt. Someone else has to borrow more so others can service and repay their debt. This is what gives fiat “value”.

Slowing of the velocity of money does not cause deflation. It is the best definition of deflation! The money supply has ballooned, debt has ballooned and prices are falling.

Interest rates are a market phenomenon. The Fed does not really “set” interest rates although they would like you to think they are in control. They get their cue from the bond market. The lower bound of interest rates is set by the marginal bond holder. When interest rates fall too low they junk their overpriced bonds (at a profit). The upper bound is set by the marginal productivity of capital. Marginal capital is sold and the money invested in bonds which puts a brake on interest rates rising further.

The Fed cannot really do that much to influence interest rates apart from buying or selling bonds. This however, has one big limitation which is the principal flaw of QTM (quantity theory of money). They Fed can create new money with bond purchases (as it does) but it has no control over where it flows. During a deflationary collapse it is going to go right back into the bond market (not commodities market) where risk free profits await the speculators who know the Fed has to come to the open market bond market to feed. They can then preempt the Fed selling buying bonds and selling at a profit. This is deflationary as it forces bond rpices up and interest rates down. Bond speculation thus overrides QTM. QTM tries to use linear models to a non linear reality – it is thus a flawed theory.

Debt/GDP is a poor measure. What is important is the marginal productivity of debt. How much extra GDP does one extra dollar debt add? This really measures the “quality” of debt. If the ratio is greater than 1 e.g. say 5, then it means that entrepreneurs are using debt very effectively to create wealth – a good thing. If debt is rising faster than GDP or negative it means you are consuming your capital. Eating your seed corn is bad irrespective of Debt/GDP. Under a pure fiat regime, debt can only grow and grow exponentially it does. The magic of compounding except in this case it is not so magic.

We know fiat money will fail – as it always has. Surprisingly with the deflation first then inflation scenario, the gold price is not a reliable indicator of the coming hyper inflation. There is only one trustworthy metric and this is the gold basis which is simply the difference between the current and near future price of gold. The normal situation is for there to be “contango” i.e. the future price of gold more than the spot price. There is a huge amount of paper gold running around the financial system. Paper promises to pay gold in the future. Gold futures should always trade at a premium to spot gold. When gold goes into permanent backwardation i.e. spot prices are more than future prices we know that these promises are worth the paper they are written on an the time is nigh.

I predict that the wold governments will return to a gold standard in the future simply because the alternative (global financial collapse) is too ghastly to contemplate. This will bid farewell to the welfare state. The first purpose of the gold standard is to regulate interest rates. There is no bond speculation under a gold standard. Finance vultures cannot siphon off industrial capital in a falling interest rate regime. The second purpose is to have an ultimate extinguisher of debt. Gold is money and to extinguish debt using gold one does not have to create more debt. I suspect that China will seek world domination using their gold backed money and industrial domination.

Protect wealth, start buying physical gold be it 9ct plus jewelry or gold coins.

These crooks are going to print hard enough to wake the dead. They’ll print like mad men, print like fly pimps. Print until their eyes bleed.

They will print via the swaps, via bank bailouts and mergers, via fixed Treasury yields, via real honest-to-God negative interest rates, via loans to banks on no collateral, via payroll tax reductions, and in the end via actual fiat paper instruments which they might very well drop in bails from actual  helicopters.

They will not give two figs what anyone thinks.

Here is why.

Because this is the end of it my friend. There is no accounting beyond this point. There will be no history of it. No one to take notes of rates of exchange, or of the graft and violence, nobody to worry about the deficit or the GDP or the national debt of any nation large or small under the blazing sun.

End. Of. It. Does anyone bitch about how Rome totally debased their coinage at the end? Hell no. But whoever did it had enough to hand and grabbed some land with a nice vineyard and sat back and waited for the Middle Ages to start 700 years further on.

And that’s what a singularity is about. Anything that passes through is striped of all meaning. Nothing we think is important now will remain so beyond the event horizon. Nobody will remember, nobody will write about it, nobody will be held to any standard. Ever for evar.

So yeah, they’ll print like the mad crazed terrorists they are. Because they have nothing to lose, and maybe something to gain. Maybe a dollar. Maybe a day. Maybe a slim chance to escape with some of the loot. Whatever the advantage they see in it, for themselves and their elite thieving buddies, they will full-on-full-time do it to advantage.

And when the dust is settled in a generation hence it’s going to have become another unbelievable episode among the ages of men.

End of comments.



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