The numbers are terrifying, and their real-world consequences will be even more so. From Daniel Lacalle at dlacalle.com:
According to the IMF, global fiscal support in response to the crisis will be more than 9 trillion US dollars, approximately 12% of world GDP. This premature, clearly rushed, probably excessive, and often misguided chain of so-called stimulus plans will distort public finances in a way in which we have not seen since World War II. The enormous increase in public spending and the fall in output will lead to a global government debt figure close to 105% of GDP.
If we add government and private debt, we are talking about 200 trillion US dollars of debt, a global increase of over 35% of GDP, well above the 20% seen after the 2008 crisis, and all in a single year.
This brutal increase in indebtedness is not going to prevent economies from falling rapidly. The main problem of this global stimulus chain is that it is entirely oriented to support bloated government spending, and artificially low bond yields. That is the reason why such a massive global monetary and fiscal response is not doing much to prevent the collapse in jobs, investment, and growth. Most businesses, small ones with no debt and no assets, are being wiped out.
Most of this new debt has been created to sustain a level of public spending that was designed for a cyclical boom, not a crisis and to help large companies that were already in trouble in 2018 and 2019, the so-called ‘zombie’ companies.
It’s not currently in China’s interest to destroy the dollar (US authorities are doing a fine job of that on their own) but when the final destruction occurs, a Chinese gold-backed yuan could supplant the dollar as the world’s reserve currency. From Alasdair Macleod at goldmoney.com:
This article describes how China can escape the fate of a dollar collapse by tying the yuan to gold. There is little doubt she has access to sufficient gold. Currently, her interest is to preserve the dollar, not destroy it, because it is the principal means of Chinese foreign interests being secured .
Furthermore, a return to sound money requires China to reverse its interventionism under Xi, returning to Deng Xiaoping’s original vision. Sound money can only last if the relationship between the state and the wider economy is properly addressed.
Of all the major economies, China’s is best placed to implement a sound money solution. At the moment it seems unlikely the necessary reforms will be forthcoming; but a general collapse of the global fiat currency regime presents the opportunity for reassessment and change.
In last week’s Insight I examined the position of the US dollar, given the Fed’s current monetary policies, and concluded that the Fed’s dollar is likely to become valueless by the end of this year. The consequences for other major currencies — the euro, yen and pound — are that they are likely to fall with the dollar. This is because they adopt the same monetary policies, the same macroeconomic fallacies, and through the Bank for International Settlements, G7 and G20 meetings agree to continue to be bound by common policies. While the intention is for all to survive by working together, instead it ensures that they all sink together.
Posted in banking, Business, Capitalism, Collapse, Currencies, Debt, Economics, Economy, Geopolitics, Governments
Tagged central bank policies, China, Dollar, Gold-backed yuan, Reserve Currency
The economy was headed down the tubes before the coronavirus and the riots. From Brandon Smith at alt-market.com:
The scapegoating has already started. In almost every sector of the economy that is collapsing, the claim is that “everything was fine until the pandemic happened”. From tumbling web news platforms to small businesses to major corporations, the coronavirus outbreak and the national riots will become the excuse for failure. The establishment will try to rewrite history and many people will go along with it because the truth makes them look bad.
And what is the truth? The truth is that the U.S. economy – and in some ways, the global economy – was already collapsing. The system’s dependency on ultra-low interest rates and central bank stimulus created perhaps the largest debt bubble in history – the Everything Bubble. And that bubble began imploding at the end of 2018, triggered primarily by the Federal Reserve raising rates and dumping its balance sheet into economic weakness, just like it did at the start of the Great Depression. Fed Chair Jerome Powell knew what would happen if this policy was initiated; he even warned about it in the minutes of the October 2012 Federal Open Market Committee, and yet once he became the head of the central bank, he did it anyway.
The economic consequences of lockdown lunacy are going to be far more severe than most people reckon. From David Stockman at internationalman.com:
International Man: Decades of money printing have created enormous distortions in the market. It seems that the coronavirus popped the Everything Bubble. Where do you see the stock market going?
David Stockman: I’d say it’s going in a new direction, and it’s not up year after year, month after month, day after day.
It’s not going to be a world where buying the dip is a no-brainer thing to do.
I think the stock market was insanely valued when the S&P 500 peaked at 3,380 on February 19th.
It has got a long way yet to correct.
Who knows what earnings are going to be?
No one knows how long these lockdowns will last.
You look at the news flow every day, and it’s like a massive political arm-wrestling match between the White House and the Democratic governors and mayors.
I’m sure in their minds, these local and state politicians, think they’re serving the public good and protecting the safety and lives of their citizens. But, the fact is, back in the unstated regions of their brains, they’re focused on taking down the US economy, which was Trump’s only claim to reelection.
The Federal Reserve and its partners-in-crime central banks have damaged the world’s financial and economic system beyond repair. From Sven Henrich at northmantrader.com:
The Fed poisons everything, and I mean everything. From markets, the economy, and I will even go as far as politics. Sounds far fetched? Let me make my case below. But as much as the Fed poisons everything this crisis here again reveals a larger issue: The system is completely broken, it can’t sustain itself without the Fed’s ever more monumental interventions. These interventions are absolutely necessary or the system collapses under its own broken facade. And this conflict, a Fed poisoning the economy’s growth prospects on the one hand, and its needed presence and actions to keep the broken system afloat on the other, has the economy and society on a mission to circle a perpetual drain.
So how does the Fed poison everything?
Let’s start with the Fed actual process of working towards its stated mission: Full employment and price stability.
How does it do that? Well, for the last 20 years mainly by extremely low interest rates and balance sheet expansion sprinkled with an enormous amount of jawboning. The principle effect: Asset price inflation.
It’s not a side effect, it’s the true mission. The Fed has been managing the economy via asset prices even though Jay Powell again insisted on saying the Fed is not targeting asset prices.
Who knew that conjuring fiat debt from thin air was a heroic act? From Michael Maharrey at schiffgold.com:
According to Owen Ullmann in an op-ed published by USA Today, there are some unsung “heroes” in the battle against the coronavirus pandemic – the brave and courageous bankers at the Federal Reserve.
I think Ulmann misspelled “villains.”
Ulmann writes that the Fed “has taken extraordinary steps to prevent the global economy from crashing into irreversible catastrophe as business around the world grinds to a virtual halt.”
This is like praising the arsonist for trying to put out the fire he set by throwing more gasoline on it.
The Fed certainly has taken extraordinary steps. Just a few days ago, it announced QE infinity. It committed to buy an “unlimited” amount of US Treasury bonds and mortgage-backed securities. It also announced a new program to buy corporate bonds for the first time ever.
In Ulmann’s Keynesian wonderland this is fantastic news.
The Fed can create unlimited amounts of dollars — that’s right, trillions, if required — to ensure that banks have enough funds to make emergency loans to businesses large and small.”
Yes indeed. Printing new money out of thin air so companies, governments and individuals already drowning in debt can borrow more money is the prescription for saving the economy! Free money for everybody!
It doesn’t take much to knock a tottering building over. From Michael Krieger at libertyblitzkrieg.com:
And so castles made of sand fall in the sea, eventually.
– Jimi Hendrix
There’s a widespread belief out there that the U.S. and the global economy in general is on much sounder footing ever since the financial crisis of a decade ago. Unfortunately, this false assumption has resulted in widespread complacency and elevated levels of systemic risk as we enter the early part of the 2020s.
All it takes is a cursory amount of research to discover nothing was “reset” or fixed by the government and central bank response to that crisis. Rather, the entire response was just a gigantic coverup of the crimes and irresponsible behavior that occurred, coupled with a bailout designed to enrich and empower those who needed and deserved it least.
Everything was papered over in order to resuscitate a failed paradigm without reforming anything. Since it was all about pretending nothing was structurally wrong with the system, the response was to build more castles of sand on top of old ones that had unceremoniously crumbled. The whole event was a huge warning sign and opportunity to change course, but it was completely ignored. Enter novel coronavirus.
Nothing’s going to stop the debt tsunami from crashing into shore. From Tyler Durden at zerohedge.com:
Two weeks ago, when looking at the latest CBO forecast which predicted that the cumulative US deficits would increase by $13.1 trillion over the next decade, we highlighted perhaps the most troubling chart in all of finance right now, namely the CBO’s long-term forecast for US debt, which can be described in one word: exponential.
Commenting on this chart rather laconically, we said that “in other words, the MMT that will be launched after the next financial crisis, and which will see the Fed directly monetize US debt issuance from the Treasury until the dollar finally loses its reserve currency status, is now factored in.”
Neither the chart, nor the comment was lost on SocGen’s resident bear Albert Edwards, who after living through a harrowing earthquake during his vacation in Jamaica, chimed in on the chart above, writing in his latest Global Strategy Weekly that “this is a ticking timebomb and the chart… is screaming out for attention. The sources of this debt explosion are well known and documented with, for example, the unfunded liability of an aging population boosting Medicare expenses and the off-budget social security deficit spiralling upwards over the forecast period.”
Slowly but surely, the central bankers and their cronies and minions are edging towards a digital global currency. From Steven Guinness at stevenguinness2.wordpress.com:
Amidst the annual spectacle of the World Economic Forum in Davos, the Bank for International Settlements this week announced that multiple central banks have created a group that will ‘assess potential cases for central bank digital currencies‘.
Here is the press release from the BIS in full:
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Sveriges Riksbank and the Swiss National Bank, together with the Bank for International Settlements (BIS), have created a group to share experiences as they assess the potential cases for central bank digital currency (CBDC) in their home jurisdictions.
The group will assess CBDC use cases; economic, functional and technical design choices, including cross-border interoperability; and the sharing of knowledge on emerging technologies. It will closely coordinate with the relevant institutions and forums – in particular, the Financial Stability Board and the Committee on Payments and Market Infrastructures (CPMI).
The group will be co-chaired by Benoît Cœuré, Head of the BIS Innovation Hub, and Jon Cunliffe, Deputy Governor of the Bank of England and Chair of the CPMI. It will include senior representatives of the participating institutions.