I am writing this commentary on New Year’s Eve. In 2019 the Central Banks of the world, led by the US Federal Reserve, proved beyond all doubt that we have passed the point of no return in our current economic system.
The Federal Reserve is the world’s primary central bank and in charge of the world’s only global currency. It cuts interest rates when there is a recession and prints money when there is an emergency. Previous to 2019 it was attempting to reverse interest rate cuts and its quantitative easing (money printing) policies. This was all seen as a move back to ‘normal economics’.
However in a time of growing GDP, record low unemployment and a soaring stock market the Fed cut interest rates 3 times and recommenced money printing in 2019. Clearly the normal laws of economics are not working when the Fed treats a healthy economy as though it is lying on a stretcher in the emergency room.
It is widely understood that global central banks moved to save the financial system from collapse in 2008/09 by cutting interest rates and pushing new money into the economy via purchases of capital assets and the bailout of banks etc. It was generally viewed as a needed emergency response.
However what is less well understood is that the palliatives applied since 2008 have increased. In aggregate global central banks have been adding to the money supply and suppressing interest rates since 2008.
Many commentators liken it to an application of ever stronger drugs to a dying patient. There appears to be no turning back from a constant addition of new money to the system. Our entire economic system has entered a black hole.
The defining feature of a black hole is the appearance of an event horizon—a boundary through which nothing, not even light, can escape. The event horizon is like a prison wall, once you pass through there is no turning back. Furthermore, beyond the event horizon the laws of physics as we currently know them breakdown.
The final destination in a black hole is called a singularity where everything gets crushed. For example if the earth entered a black hole it would be crushed to literally the size of a marble. For the purposes of our economy analogy we might say that the singularity is when our currencies purchasing values are equal to zero.
Our international currency system, (competing Fiat currencies), is broken. Fiat currency is state-issued money – Dollars, Euros etc. As state decreed legal tender Fiat currency has some value but it always ends up worthless in the end. There are no exceptions in the history of civilization to this. Frankly put, the purchasing value of our present fiat currencies will be equal to zero at some point in the future. Be careful not to confuse the Dollars, Pounds and Francs of today with the Dollars, Pounds and Francs of yesteryear. Old Dollars Pounds and Francs were nothing more than bearer notes for gold and silver.
Economics Doesnt Work Anymore
Civilization cannot exist without the ability to save. Our hunter-gatherer antecedents only settled when they learned how to store and save. Savings are the bedrock of an economy and its society. Inflation makes it harder to save. But negative interest rates make it impossible to save. Clearly the normal laws of economics are not working when savers are charged to save and borrowers are paid to borrow!
Remember there was no emergency or global crisis in 2019. We have just passed the point of no return – the Event Horizon. Our final destination is a singularity when paper wealth will be crushed to virtually zero.
Conventional investors that are not thinking about or preparing for a currency collapse will probably lose the most. Unconventional investors that are prepared to act will lose the least and some will actually grow their real wealth many times over.
Not thinking like everybody else is effortful and uncomfortable. But comfort is for crowds and winning big is a lonely endeavour.