The World is on the Edge of an Inflationary Black Hole

The World is on the Edge of an Inflationary Black Hole, by Egon von Greyerz. I’ve met Egon and was struck by how sensible he was and how well-informed about money matters. Swiss chap, though originally Swedish.

The world economy is now at its most dangerous point in history. In virtually every major country or region, there are problems of a magnitude which individually could trigger a collapse of the financial system. Because of the interconnectivity of the system, when the first domino starts falling, there is zero possibility to stop all the other unstable dominoes from crashing one after the other in quick succession.

The world is now staring down a deflationary black hole that is on the verge of sucking into it all global debt of $250 trillion plus unfunded liabilities and derivatives of another $2 quadrillion or so. That would be the end of the financial system as we know it. Governments and central bankers around the world are of course totally aware of this and are standing with their fingers ready to push the button for the biggest money printing bonanza that the world has ever experienced.

Deutsche Bank is worse than Lehman was in 2008.

Deutsche Bank, which is one of the biggest in the world, is valued at less than 1% of its asset value and it has derivatives which are standing at 20 times German GDP. The share price is telling us that DB is bust. And so are Greek banks, Italian as well as Spanish, Portuguese and French banks and many more.

Deutsche has now become front page news and its survival is now in jeopardy. It has total assets of EUR 1.9 trillion but a deposit base of only EUR 450 billion. This means that DB is totally dependent on short term loans to finance its massive balance sheet. That is extremely dangerous and the reason for Lehman’s demise. The pressure on DB is likely to increase in coming weeks.

Deutsche Bank vs Lehman

ECB money printing of €80 billion a month or €1 trillion per year is having no effect. Central banks are now pushing on a string. The bail out of Italy’s fourth largest bank Monte dei Paschi is failing. Germany is totally against the ECB stepping in and the Italian government doesn’t want to bail in the depositors. That would be a political disaster. Non-performing loans in Italy are 20% of assets and growing. It confirms my view that no debts, bank or sovereign will ever be repaid.

Egon is right about this, IMHO.

The news from around the world is just getting worse by the day. Japan’s Yen 80 trillion ($0.8T) printing programme is having no effect. Kuroda (Governor of BoJ) is totally lost. He is currently buying all the bonds that the Bank of Japan is issuing. The BoJ is a top 10 shareholder in 90% of Japanese stocks.

In other words, the Japanese central bank is already “printing” lots of money for the Japanese government and propping up the stock market (and that’s still not lowering the value of the yen compared to other paper currencies!).

Coming money printing will greatly exceed Weimar and Zimbabwe

Thus we are standing on the edge of a black hole that very easily could cause a deflationary implosion of all financial assets and all debt. No government is talking about this and no central banker dares to mention the seriousness of the present situation. The smallest final snowflake that can push the world over the edge and start the deflationary avalanche. It is really surprising that central banks dare to hold back on the biggest printing programme ever for so long. Because they only need to be a few seconds late and they will not be able to stop the collapse.

Let’s assume that central bank will intervene in time and print first tens of trillions and eventually hundreds or even quadrillions of dollars, euros, yen etc. We will then see a hyperinflationary period which will be bigger than both the Weimar Republic or Zimbabwe for the simple reason that the figures involved now are so much greater.

A reminder of the context:

Evans - debt to gdp ratio, 2015

Throughout the western world, the big bubble in money manufacture started in 1982 and leveled off in the GFC, when governments had to step in to prevent collapse. This bubble was not a product of the market, but of government meddling with interest rates and loosening rules about creating new money.

Government action in lowering interest rates and a bit of printing since 2008 have kept the money supply from imploding back to its usual, much lower level — which would be very deflationary (the Great Depression would look like a picnic). Even more government interference in the market was required to prevent the inevitable consequence of its previous meddling.

Modern money is someone’s else debt, so the problem appears as if the world is also awash in debt. Governments hate deflation, so they will almost certainly try to print their way out of the crisis. It’s simply a matter of time — sooner or later a trigger like what appears to be happening with Deutsche Bank will kick it off.

By the way, we just had a record quarter at GoldNerds.