The financial nightmare scenario

The financial nightmare scenario, by Egon von Greyerz.

The dollar index peaked at 103 in March this year and has since then fallen 10% to 93 today. As the dollar continues to decline, US inflation will pick up. So far the official US inflation rate is just above zero. Anyone buying food or paying insurance for example knows that this is not a true figure.

All the money printed is not reaching the consumer but instead staying with banks and other major institutions to shore up their balance sheets. Very little reaches the real economy.

The graph below shows the rise in the US Money Zero Maturity stock – MZM. This is the broadest measure of liquid money. It was $4.3 trillion in 2000 and is now $21 trillion. Only since March 2020 it has increased by a massive $4 trillion.

No inflation, huh?

Central banks are today managing to artificially suppress interest rates and in the short term defy the laws of supply and demand. High demand for credit should in a free market lead to high interest rates and thus taper demand for credit. But in a world controlled and manipulated by central banks, the laws of nature are temporarily set aside. This leads to false markets and false prices.

The likely course of events in the next few years are as follows [edited]:

  • Accelerating deficits and debts
  • Unlimited money printing to save banks, a failing financial system, and failing companies
  • Ever higher subsidies for furloughed and unemployed
  • Universal Basic Income (UBI) introduced in most Western nations
    UBI means that everyone is paid a basic wage whether they work or not. This will lead to ever fewer people working
  • Higher unemployment means more printing
  • More printing leads to more currency debasement
  • Central banks lose control of rates as long end of bond market sells off. High long rates push short rates up.
  • Rates reach 5% then quickly 10% and on to 15-20% at least
  • At 10% rates, the interest cost on global debt of $275 trillion would be $27t, 34% of global GDP – totally unsustainable
  • So much more money printing required
  • Banks start falling including the $1.5 to $2 quadrillion derivatives market
  • Money printing reaches $ quadrillions leading to hyperinflation
  • The financial system collapses together with major parts of industry and society
  • Social unrest, civil wars, cyber wars and major conflict will be rampant
  • Political systems fail as governments lose control leading to anarchy

Obviously governments and central banks will desperately try to introduce resets, new digital currencies, do a bit of hocus pocus with debt to pretend it has disappeared. …

But their bluff will be called. The effects of any measure governments take will only be temporary as the world realises that it really is bankrupt.

I sincerely hope that all the above is really a nightmare in the form of a dream and will never take place. Because if it does, the world is back to the Dark Ages or the Dark Years …

If the world retraces a century of evolution or more, it is clearly in for at least 50 years of very hard times. But except for the initial shock and readjustment, life will go on for most people but at a different level. Obviously living standards will decline substantially. So will security.

At some point after they’ve become worth a lot less, the paper currencies will disappear… “poof!”.

Paper currencies have been tried many time since the Chinese original in the 1300s. The average lifespan of a paper currency is about 50 years. Our current paper currencies started in 1971, when they broke their last link to gold.