A very subtle change in political discourse occurred in 2020. This will act as an accelerant in the demise on fiat currency and unleash a new kind of crazy in stockmarkets.
Politics and Consequences 2021
The single most important thing that happened in 2020 was political. The profound and yet subtle shift in political perspectives will have immeasurable consequences. Ask yourself, when is the last time you heard a political debate on balancing the budget, national debt, or currency. There is no meaningful political opposition to budget deficits. Furthermore, there is no political opposition to central bank currency creation.
There is almost zero political downside to further budget deficits and central bank currency creation.
I cannot overstate how important this is. In the last financial crisis (2008) we had many political debates and concerns over budget deficits and national debt. These concerns were predicated on currency scarcity – Where will we get the Euros / Dollars etc. to pay down these debts and balance the books again?
The purchasing value of a currency is always related to its perceived scarcity.
This notion of currency scarcity all but vanished in 2020. The political lesson of the 2008/09 financial crisis is that deficits and debts are not important. Only cranks talk about currency debasement. Nothing bad came of the 2008/09 bailouts etc.
With a supporting cast of media pundits, politicians applied the lessons of 2008/09 to Covid Hysteria without even a sideways glance at arcane economic arguments. If we use the USA as an example, the chart below gives us an idea of what has happened throughout the worlds developed (rich) economies in 2020. In the great financial crash of 2008, the FED increased its balance sheet by $1400Bn bailing out the financial industry. The balance sheet splurge in 2020 was $3650Bn.
Bailing out the financial industry and supporting capital markets are essentially the same thing. As the illustration shows, financial insiders with close links to the FED will benefit most. For example, investment firm BlackRock recently landed a contract to buy assets for the FED. The contract allows them to buy from themselves and engage in insider trading, (See page 27 of the SMCCF management agreement available at www.newyorkfed.org).
In the years following 2008, budget deficits continued and by 2014 U.S. national debt doubled and the FED balance sheet doubled. I expect this feat will be repeated.
Our modern democratic political systems will continue to produce more of the same, probably at an accelerated rate. Bond markets have long since become a farce. Negative interest rates are an oxymoron. Deutsche Bank research tells us that 25% of the worlds government and non-government bonds are trading at negative yields. Although stock markets are overvalued in terms of many traditional metrics there could be a lot more ‘crazy’ left in them yet if they are to catch up with bond markets!