Managed Implosion of Financial Assets? By Mike Savage.
Last week I made a point that 89% of all global assets had a negative return in US dollar terms in 2018. As far as I know this has not happened in the last 100 years. Part of the reason for this would be the strength of the US dollar and the weakness of the global economy. …
Central banks have being buying assets using newly manufactured money since the GFC, as emergency stimulation of the economy. How do they stop, without tipping over the apple cart?
As I write this we are in a place where it appears to me we are seeing a managed implosion of asset prices. …
Once you go down the money creation and buying of assets path, each and every action has to be larger to get the same result. That basically means “inflate or die”. This means more and more credit creation forever. Of course, this can’t go on forever because all of the debt has to be serviced. So the question comes up “How do we stop?” There are a few answers.
#1 Just stop. This would likely lead to the greatest crash the world has ever seen, because this is the first truly worldwide bubble where virtually all countries or their central banks are creating currencies out of thin air and buying assets like stocks and bonds. Once this faux demand is removed the stock markets would likely race back to a fair value (probably multiples lower) and bond prices would likely plummet as yields would rise because the demand would be non-existent at current rates. This would also likely lead to a lack of confidence in virtually all paper assets. In my opinion, this is the least likely outcome because it would admit defeat and it would be obvious that the cause was all of the false pricing to start with.
#2 Just keep going until the end. This would likely lead to very high inflation and a lack of purchasing power for just about everyone. This is the most likely outcome as we look back at history and see that this is what happened in Germany in the 1920s, Brazil many times, Argentina many times, USA a couple of times — most notable the Continental which the British counterfeited to make it lose value so we couldn’t continue the war. …
#3 Find a scapegoat and default. My opinion on this is that this is the way to go. Those who “printed” the “money” and bought assets should get full value for what they bought — NOTHING. This way, the public will likely be hurt but not decimated as we would be in either a deflationary or inflationary depression. …
Default versus carrying on: Iceland versus Greece.
They both defaulted at the same time — 10 years ago.
The Greeks are now deeper in debt and selling off national assets by playing the carry the debt with more debt game. The ECB and others issue more debt to pay interest on existing debt. Of course, once the interest is paid all that is left is more debt.
In contrast Iceland defaulted on their debt, threw the bankers in jail, and moved on. Of course, they had a couple of lean years but today they have had a thriving economy with little debt and have been raising capital in international markets for the past 5 years.
Who is better off?
I believe that the stagnation we are seeing in the world economy is due to a leveling off of the artificial stimulus rather than stopping altogether. If the central banks follow through with their plans to withdraw stimulus there will likely be continued weakness in all paper assets. My guess is that, at some point, the pain will become real and then we will see what they do — it could be almost anything.
The financial reckoning implied by the GFC has been put off for a decade, but the situation has still not been resolved. It appears to have got worse if anything in the meantime.
An awful lot of people currently own assets that are not going to be worth as much as they expect in the future — when they go to exchange them for real goods and services (i.e. pay for regular stuff). There are too many promises of future value. Not all those promises can be kept, and the political system will decide which ones are honored and which ones disposed of. This will cause upheaval, just as the GFC stimulated the rise of the Tea Party and similar which morphed into Trump, the Five Star movement, etc.
Central planning in finance created this situation. A free market in interest rates would never have allowed this diabolic situation to arise. It’s now been ten years of emergency low interest rates — with derisory interest rates for savers — and still we haven’t dealt with the problem.