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It is only now becoming clear to the investing public that the purchasing power of their currencies is declining at an accelerating rate. There is no doubt that yesterday’s announcement that the US CPI rose by 6.2%, compared with the longstanding 2% target, came as a wake-up call to markets.

Along with the other major central banks, the Fed’s reaction is likely to be to double down on interest rate suppression to keep bond yields low and stock valuations intact. The alternative will lead to a major financial, economic and currency shock sooner rather than later.

This article introduces the reader to some of the basic fallacies behind state currencies. It explains the misconceptions policy planners have over interest rates, and how central banks have become contracyclical lenders, replacing commercial banking’s credit creation for non-financial activities.

In effect, narrow money is being used by the major central banks in a vain attempt to shore up government finances and economic activity. The consequences for currency debasement are likely to be more immediate and profound than cyclical bank credit expansion.

Introduction

It is becoming clear that there has been an unofficial agreement between the US Fed, Bank of England, the ECB and probably the Bank of Japan not to raise interest rates. It is confirmed by remarkably similar statements from the former three in recent days. When, as the cliché has it, they are all singing off the same hymn sheet, those of us not party to agreements between our monetary policy planners are right to suspect they are doubling down on a market rigging exercise encompassing all financial markets.

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Waypoints on the road to currency destruction — and how to avoid it

October 30, 2021

Waypoints on the road to currency destruction — and how to avoid it

The few economists who recognise classical human subjectivity see the dangers of a looming currency collapse. It can easily be avoided by halting currency expansion and cutting government spending so that their budgets balance. No democratic government nor any of its agencies have the required mandate or conviction to act, so fiat currencies face ruin.

These are some waypoints to look for on the road to their destruction:

Monetary policy will be challenged by rising prices and stalling economies. Central banks will almost certainly err towards accelerating inflationism in a bid to support economic growth.
The inevitability of rising bond yields and falling equity markets that follows can only be alleviated by increasing QE, not tapering it. Look for official support for financial markets by increased QE.
Central banks will then have to choose between crashing their economies and protecting their currencies or letting their currencies slide. The currency is likely to be deemed less important, until it is too late.
Realising that it is currency going down rather than prices rising, the public reject the currency entirely and it rapidly becomes valueless. Once the process starts there is no hope for the currency.

But before we consider these events, we must address the broader point about what the alternative safety to a fiat collapse is to be: cryptocurrencies led by bitcoin, or metallic money to which people have always returned when state fiat money has failed in the past.
Introduction

When expected events begin to unfold, they can be marked by waypoints. These include predictable government responses, and the confused statements of analysts who are unfamiliar with the circumstances. We see this today in the early stages of an inflation that threatens to become a terminal cancer for fiat currencies.
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A tale of two civilisations

October 24, 2021

A tale of two civilisations

In recent years, America’s unsuccessful attempts at containing China as a rival hegemon has only served to promote Chinese antipathy against American capitalism. China is now retreating into the comfort of her long-established moral values, best described as a mixture of Confucianism and Marxism, while despising American individualism, its careless regard for family values, and encouragement of get-rich-quick financial speculation.

After America’s defeat in Afghanistan, the geopolitical issue is now Taiwan, where things are hotting up in the wake of the AUKUS agreement. Taiwan is important because it produces two-thirds of the world’s computer chips. Meanwhile, the large US banks are complacent concerning Taiwan, preferring to salivate at the money-making prospects of China’s $45 trillion financial services market.

The outcome of the Taiwan issue is likely to be decided by the evolution of economic factors. China is protecting herself against a global credit crisis by restraining its creation, while America is going full MMT. The outcome is likely to be a combined financial market and dollar crisis for America, taking down its Western epigones as well. China has protected herself by cornering the market for physical gold and secretly accumulating as much as 20,000-30,000 tonnes in national reserves.

If the dollar fails, which without a radical change in monetary policy it is set to do, with its gold-backing China expects to not only survive but be able to consolidate Taiwan into its territory with little or no opposition.

Introduction

On the one hand we have America and on the other we have China. As civilisations, America is discarding its moral values and social structures while China is determined to stick with its Confucian and Marxist roots. America is inclined to recognise no other civilisations as being civilised, while China’s leadership has seen America’s version and is rejecting it…
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Economic Theory and Long-Wave Cycles

October 8, 2021

ECONOMIC THEORY AND LONG-WAVE CYCLES

Investors and others are confused by the early stages of accelerating price inflation. One misleading belief is in cycles of industrial production, such as Kondratieff’s waves. The Kondratieff cycle began to emerge in financial commentaries during the inflationary 1970s, along with other wacky theories. We should reject them as an explanation for rising prices today.

This article explains why the only cycle that matters is of bank credit, from which all other cyclical observations should be made. But that is not enough, because on their own cycles of bank credit do not destroy currencies — that is the consequence of central bank policies and the expansion of base money.

The relationship between base money and changes in a currency’s purchasing power is not mechanical. It merely sets the scene. What matters is widespread public perceptions of how much spending liquidity is personally needed. It is by altering the ratio of currency-to-hand to anticipated needs that purchasing power is radically altered, and in the earliest stages of a hyperinflation of prices it leads to imbalances between supply and demand, resulting in the panic buying for essentials becoming evident today.

Panics over energy and other necessities are only the start of it. Unless it is checked by halting the expansion of currency and credit, current dislocations will slide rapidly into a wider flight from currency into real goods — a crack-up boom.

Introduction

For eighteen months, the world has seen a boom in commodity prices, which has inevitably led to speculation about a new Kondratieff, or K-wave. Google it, and we see it described as a long cycle of economic activity in capitalist economies lasting 40—60 years. It marks periods of evolution and correction driven by technological innovation.[i]

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The Great Game moves on

September 26, 2021

The Great Game moves on

Following America’s withdrawal from Afghanistan, her focus has switched to the Pacific with the establishment of a joint Australian and UK naval partnership.

The founder of modern geopolitical theory, Halford Mackinder, had something to say about this in his last paper, written for the Council on Foreign Relations in 1943. Mackinder anticipated this development, though the actors and their roles at that time were different. In particular, he foresaw the economic emergence of China and India and the importance of the Pacific region.

This article discusses the current situation in Mackinder’s context, taking in the consequences of green energy, the importance of trade in the Pacific region, and China’s current deflationary strategy relative to that of declining western powers aggressively pursuing asset inflation.

There is little doubt that the world is rebalancing as Mackinder described nearly eighty years ago. To appreciate it we must look beyond the West’s current economic and monetary difficulties and the loss of its hegemony over Asia, and particularly note the improving conditions of the Asia’s most populous nations.

Introduction

Following NATO’s defeat in the heart of Asia, and with Afghanistan now under the Taliban’s rule, the Chinese/Russian axis now controls the Asian continental mass. Asian nations not directly related to its joint hegemony (not being members, associates, or dialog partners of the Shanghai Cooperation Organisation) are increasingly dependent upon it for trade and technology. Sub-Saharan Africa is in its sphere of influence. The reality for America is that the total population in or associated with the SCO is 57% of the world population. And America’s grip on its European allies is slipping.
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The funny-money game

September 18, 2021

The funny-money game

The sense of general unease that I detect among those I meet and discuss economics and financial matters with is increasing —with good reason. Clearly, what everyone calls inflation, rising prices or more accurately currency debasement, will lead to higher interest rates, threatening markets which are unmistakably in bubble territory.

The consequences of rising prices and interest rates are still being badly underestimated.

In this article I get to the source of the inflation problem, which is the monetary debasement of the dollar and other major currencies. An important part of the problem is that mathematical economists have lost sight of what their beloved statistics represent —none more so than with GDP.

I explain why GDP is simply the total of accumulating currency and credit which is wrongly taken reflect economic progress – there being no such thing as economic growth. Once that point is grasped, the significance of this basic error becomes clear, and the fiat currency paradigm is revealed for what it is: a funny-money game that will go horribly wrong.

There is only one escape from it, and that is to own the one form of money that is no one’s counterparty risk; the one form of money that always comes to humanity’s rescue when fiat fails.

And that is gold. It is neglected by nearly everyone because it is the anti-bubble. The more that people believe in fiat-denominated assets, the less they believe in gold. That is until their funny-money games implode, inevitably triggered by sharply rising interest rates.
Introduction

Those of us with grey hairs gained in financial markets can, or should, recognise that after fifty years the funny-money game is ending. Accelerated money printing has led to what greenhorn commentators call inflation…
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Eurozone finances have deteriorated

August 28, 2021

Eurozone finances have deteriorated

Despite negative interest rates and money printing by the European Central Bank, which conveniently allowed all Eurozone member governments to fund themselves, having gone nowhere Eurozone nominal GDP is even lower than it was before the Lehman crisis.

Then there is the question of bad debts, which have been mostly shovelled into the TARGET2 settlement system: otherwise, we would have seen some substantial bank failures by now.

The Eurozone’s largest banks are over-leveraged, and their share prices question their survival. Furthermore, these banks will have to contract their balance sheets to comply with the new Basel 4 regulations covering risk weighted assets, due to be introduced in January 2023.

And lastly, we should consider the political and economic consequences of a collapse of the Eurosystem. It is likely to be triggered by US dollar interest rates rising, causing a global bear market in financial assets. The financial position of highly indebted Eurozone members will become rapidly untenable and the very existence of the euro, the glue that holds it all together, will be threatened.
Introduction

Understandably perhaps, mainstream international economic comment has focused on prospects for the American economy, and those looking for guidance on European economic affairs have had to dig deeper. But since the Lehman crisis, the EU has stagnated relative to the US as the chart of annual GDP in Figure 1 shows.

Clearly, like much of the commentary about it, the EU has been in the doldrums since 2008. There was a series of crises involving Greece, Cyprus, Italy, Portugal, and Spain. And the World Bank’s database has removed the UK from the wider EU’s GDP numbers before Brexit, so that has not contributed to the EU’s underperformance…
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The dollar’s debt trap

August 22, 2021

The dollar’s debt trap

On the fiftieth anniversary of the Nixon Shock, this article explains why fiat currencies have become joined at the hip to financial asset values. And why with increasing inevitability they are about to descend into the next financial crisis together.

I start by defining the currencies we use as money and how they originate. I show why they are no more than the counterpart of assets on central bank and commercial bank balance sheets. Including bonds and other financial issues emanating from the US Government, the individual states, with the private sector and with broad money supply, dollar debt totals roughly $100 trillion, to which we can add shadow banking liabilities realistically estimated at a further $30 trillion.

This gives us an idea of the scale of the threat to asset values and banking posed by higher interest rates, which are now all but certain. The prospect of contracting financial asset values is potentially far worse than in any post-war financial crisis, because the valuation base for them starts at zero and even negative interest rates in the case of Europe and Japan.

I focus on the dollar because it is everyone’s reserve currency and I show why a significant bear market in financial asset values is likely to take down the dollar with it, and therefore, in that event, threatens the survival of all other fiat currencies.

Introduction

Dickensian attitudes to debt (Annual income twenty pounds, annual expenditure twenty pounds ought and six, misery) reflected the discipline of sound money and the threat of the workhouse. It was an attitude to debt that carried on even to the 1960s. But the financial world changed forever in 1971 when post-war monetary stability ended with the Nixon shock, exactly fifty years ago.
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The problem with climate change politics

August 16, 2021

The problem with climate change politics

Climate change bears all the hallmarks of a state-sponsored crisis, useful to shift attention from other political failures. But the absence of financial accountability which characterises government actions also introduces behavioural errors.

The absence of a profit motive in any state action exposes the relationship between governments and their electors to psychological factors. We all know that governments use propaganda and other tools to manage crowd psychology and influence their electorates. What is less understood is that governments themselves are misled by a crowd psychology in its own ranks which contributes to policy failure.

This article does not question the climate change debate itself. Instead, it examines the debate in the context of the psychology driving it. The release of government-sponsored propaganda on climate change in the form of a unanimous IPCC report predicting the end of the world as we know it is the latest example of a political and bureaucratic phenomenon, making the timing of this article apposite.
Introduction

Western economies have moved on from free markets to the point where they hardly exist in the true meaning of the phrase. Yet the state continually claims that it is free markets that fail, not government.

The reason governments fail in economic terms is that economic calculation is never part of their brief, and nor can it be. By economic calculation, we mean taking positive actions aimed at a profitable outcome. To survive and prosper, businesses and individuals must do this all the time — the only exception being when they can rely on the state to underwrite their failures, which is why established businesses encourage statist regulation to place hurdles in the way of upstart competitors. And why at an individual level there is a ready demand for state welfare.
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Suffering a sea-change

May 30, 2021

Suffering a sea-change

There is an established theoretical relationship between bonds and equities which provides a framework for the future performance of financial assets. It would be a mistake to ignore it, ahead of the forthcoming rise in global interest rates.Price inflation is roaring, and so far, central banks are in denial. But it is increasingly difficult to see how monetary policy planners can extend the suppression of interest rates for much longer. There can only be one outcome: markets, that is to say prices determined by non-state actors, will force central banks to capitulate on interest rates in the summer.

Hardly noticed, China is deliberately putting the brakes on its economy, which will cause an inflationary dollar to collapse, unless the US defends it by putting up interest rates. Deliberate? Almost certainly, as part of its strategy, China is taking the financial war with the US into the foreign exchanges.

Bond yields will rise, with the US Treasury 10-year bond leaving a 2% yield far behind. Equity markets will sense the danger, and it might turn out that the month of May marks a peak in financial asset values — following cryptocurrencies into substantial bear markets.
Introduction

There is an old stock market adage that you should sell in May and go away. It has already proved its worth in the case of cryptocurrencies, with Bitcoin more than halving at one point, and Ethereum losing 57% between 10—19 May. A sea-change in cryptocurrencies’ market sentiment has taken place.

As for equities, it could also turn out that 10 May, which so far has marked the S&P 500 Index’s high point, will mark the beginning of their decline. But it’s too soon to tell…

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Whatever happened to that “imminent” banking crisis?

April 25, 2021

Whatever happened to that “imminent” banking crisis?

In the aftermath of the 2008 financial crisis, many of us in the hedge fund industry expected continuing fallouts from the unresolved imbalances that were papered over with monetary and fiscal stimuli by governments and central banks. These measures failed to address, let alone resolve the systemic causes of the crisis. One of their consequences was a further weakening of large western banks, particularly the European ones. A new banking crisis was widely anticipated. Last June, Alasdair Macleod wrote that the “Next significant event therefore will almost certainly be the failure of a G-SIB if not in America, then elsewhere.” [G-SIB = global systemically important bank]. In my recollection, Deutsche Bank for one, has been on a death watch at least since 2016, but the list of banks that should have collapsed already is long and full of household names.

Indeed, things looked very bleak when the Coronavirus pandemic struck and they deteriorated sharply from there. Yet, the banking system is limping along and no crisis has yet materialized. How to explain this? Last September I gave an interview on Renegade Inc. and went out on a limb with a hypothesis that only dawned on me about that time. Namely, I grew up in former Yugoslavia in the socialist regime under a one party system (Communist party, of course). The world I grew up in was pretty much one chronic crisis of stagflation which ultimately led to hyperinflation. My ‘eureka!’ moment happened when I realized that in spite of that state of affairs, we never had a banking crisis! No major bank failed and we had no bank runs at any point.

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Inflation watch: Beware the ides of March

March 14, 2021

Inflation watch: Beware the ides of March

President Biden has now had his $1.9 trillion stimulus package passed into law, and it will not be the last in the current fiscal year. Covid is not over and is sure to resurge with new variants next winter.But even assuming that is not the case, we still have to contend with the aftermath of the pre-covid conditions, whereby banks had run out of balance sheet capacity combined with trade tariffs predominantly aimed at China. These conditions were a doppelganger for late-1929, and between 8 February and 20 March the S&P500 index faithfully tracked a similar course to that of October 1929.

As far as possible, this article quantifies inflationary financing of government spending from March to September last year, and already sees evidence on the CBO’s own figures of that exceptional covid response being exceeded in the first half of the current fiscal year just ending. It points to something which no one has really foreseen, that the rate of monetary inflation has increased beyond the banking system’s capacity to accommodate it.

Even if the US manages to emerge from lockdowns in the coming months, the legacy of the turn in the credit cycle, trade tariffs and supply chain disruption threatens a full-scale depression. There can be no doubt monetary inflation will accelerate, and we are beginning to see the consequences in rising bond yields.
Introduction

It is nearly a year since the Fed on 23 March 2020 responded to stock market pressures and cut its funds rate to the zero bound and followed that three days later by increasing quantitative easing to $120bn every month. A further $300bn credit was to be directed at businesses, employers and consumers. The Primary Market Corporate Credit Facility and the Secondary Market Corporate Credit Facility allowed the Fed to directly support corporate bond prices for large employers.

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Alasdair Macleod, Goldmoney, inflation, money printing, fed, us federal reserve, central banks, pandemic, depression

Crazy days for money

February 13, 2021

Crazy days for money

This article anticipates the end of the fiat currency regime and argues why its replacement can only be gold and silver, most likely in the form of fiat money turned into gold substitutes.

It explains why the current fashion for cryptocurrencies, led by bitcoin, are unsuited as future mediums of exchange, and why unsuppressed bitcoin has responded more immediately to the current situation than gold. Furthermore, the US authorities are likely to suppress the bitcoin movement because it is a threat to the dollar and monetary policy.

This article explains why growth in GDP represents growth in the quantity of money and is not representative of activity in the underlying economy. The authorities’ monetary response to the current economic situation is ill-informed, based on a misunderstanding of what GDP represents.

The common belief in the fund management community that rising interest rates are bad for gold exposes a lack of understanding about the consequences of monetary inflation on relative time preferences. Rising interest rates will be with us shortly, and they will burst the bond bubble with negative consequences for all financial assets and the currencies that have inflated them.

In short, we are sitting on a monetary powder-keg, the danger of which is barely understood by policy makers and which could explode at any time.

Introduction

We have entered a period the likes of which we have never seen before. The collapse of the dollar and dollar assets is growing increasingly certain by the day. The money-printing of the dollar designed to inflate assets will end up destroying the dollar. We know this thanks to the John Law precedent three hundred years ago. I last wrote about this two weeks ago, here. In 1720, it was just France and Law’s livre…

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The global reset scam

November 21, 2020

The global reset scam

This article takes a tilt at increasing speculation about statist global resets, and why plans such as those promoted by the World Economic Forum will fail. Central bank digital currencies will simply run out of time.

Instead, the collapse of unbacked fiat currencies will end all supra-national government solutions to their policy failures. Already, there is mounting evidence of money beginning to flee bank accounts into stocks, commodities and even bitcoin. This is an early warning of a rapidly developing monetary collapse.

Moreover, nothing can now stop the collapse of fiat currencies, and with it schemes to control humanity for the convenience and ambitions of government planners. There can only be one statist solution and that is to mobilise gold reserves to back and save their currencies, which in order to succeed will have to be fully convertible into circulating gold coinage. It will also require the role of governments to be reset into a non-welfare, non-interventionist minimalist role, which can only be achieved after a complete collapse of the current fiat-financed system.

Anything less will fail.

The Deep State and The Blob fuel conspiracy theories

Increasingly, people are beginning to realise that their world is undergoing a period of rapid change, with the future of fiat money now uncertain. For most, it is too difficult to even contemplate. But growing uncertainties are driving wild speculation about what those in authority now have in store for the human race in the form of a global reset. It is a time for conspiracy theorists, aided and abetted by our politicians and central bankers who are being increasingly evasive, because events are spiralling out of their control.

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The monetary logic for gold and silver

November 14, 2020

The monetary logic for gold and silver

A considered reflection of current events leads to only one conclusion, and that is accelerating inflation of the dollar’s money supply is firmly on the path to destroying the dollar’s purchasing power — completely.

This article looks at the theoretical and empirical evidence from previous fiat money collapses in order to impart the knowledge necessary for individuals to seek early protection from an annihilation of fiat currencies. It assesses the likely speed of the collapse of fiat money and debates the future of money in a post-fiat world, in which the likely successors are metallic money — gold and silver— and some would say cryptocurrencies.

Early action to lessen the impact of a failure of the fiat regime requires an understanding of the role of money in order to decide what will be the future money when fiat dies. Will we be pricing goods and services in gold or a cryptocurrency? Will gold be priced in bitcoin or bitcoin priced in gold? And if bitcoin is priced in gold, will its function of a store of value still exist?

Introduction

This week saw the news that a vaccine had been found to combat the coronavirus. At least it offers the prospect of humanity ridding itself of the virus in due course, but it will not be enough to rescue the global economy from its deeper problems. Monetary inflation is therefore far from running its course.

The reaction in financial markets to the vaccine news was contradictory: equity markets rallied strongly ignoring rapidly deteriorating fundamentals, and gold slumped on a minor recovery in the dollar’s trade weighted index. Rather than blindly accepting the reasons for outcomes put forward by the financial press we must accept that during these inflationary times that markets are not functioning efficiently.

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