A credit crisis is inevitable, so it might be a good idea to understand what’s going to happen. From Alasdair Macleod at alasdairmacleod.com:
Imbalances in the global fiat credit system are enormous and destabilising.
Imbalances in the global fiat credit system are enormous, with foreign ownership of dollars overhanging both foreign exchanges and securities markets. Meanwhile, Keynesian and monetarist hopes that lower interest rates can be implemented to keep things just bubbling along is blinding investors to the real risks.
It is wrongly believed by nearly everyone that lower interest rates are on the way and will stay down. Other than perhaps a minor decline being a self-fulfilling prophecy, in practice the reluctance of banks to lend to businesses will keep rates high. And the redirection of bank credit from productive use to the US Government financing its huge budget deficits by issuing treasury bills is highly inflationary.
This is bound to lead to significantly higher interest rates in time. And higher interest rates will threaten to collapse the entire credit system.
Irving Fisher’s collateral doom-loop, whereby falling collateral values lead to further collateral liquidation could also come into play. Thinly capitalised regulated exchanges will be a weak point, requiring the entire DTC ledger to be corralled into keeping them functioning. Nothing will be safe.
And those who think that they can protect themselves by buying gold ETFs will probably find that the underlying bullion is diverted “in the interests of the state”, leaving them with vacuous paper promises as their only comfort.
No wonder everyone thinks interest rates must come down. If they don’t, the outcome is too horrible to contemplate.
The dollar’s value dynamics
In today’s complex markets, it is difficult for the layman to understand their workings. It has always been about central and commercial bank credit, which must never be confused with money, and which from the dawn of history has been physical metal. Today, we can say it is almost exclusively gold. But that is the medium of exchange of last resort, hoarded by individuals, and in recent decades increasingly by central banks and Asian interests.
