As I said in yesterday's post, on point number 5 (Banks), if banks were to be left bankrupt, this whole debt-based system would collapse, with all the distortions and malinvestments being quickly corrected. This would be extremely deflationary, benefiting, therefore, the savers and punishing the debtors, who would see their phony wealth being destroyed. In a nutshell, this would spark off agony among the reckless debtors and speculators and completely change the structure of the economy and society, with epoch-making shifts in industries and institutions. Although it does not seem like it right now, this would be the correct and least painful path the governments and central banks could follow. Unfortunely, they will most likely have a go at saving this system, embarking on bail-outs and producing inflation to reinflate this bubble economy. Unsurprisingly, at least to some, their endeavours will fail, resulting in more havoc and suffering to the whole society.
Let me expand on why that is the case. The governments, central banks and supranational intitutions, in addition to universities' economic departments and financial media, are all riddled with keynesians. The keynesian ideology is one of control and manipulation, as well as being the reason we are stuck with this debt-based system. Had you read the content of this website, you would have already know this. Hence, when the bubble pops at last and the economy starts to heal itself, all the keynesians are able to see is the contracting GDP and rising unemployment figures. This pseudoscience indoctrinats them into believing the economy has a general equilibrium and would it ever deviate from such then governments and central banks must intervene. Thus, the public debt piles up, because of fiscal stimuli, and the currency devalues, on account for expansionary monetary policy. Furthermore, from this framework stems corporativism, a.k.a. crony capitalism. Whenever the system is on the brink of collapse, like in 2008 and at this moment, the politicians, technocrats and central bankers come to the rescue of their cronies by paying for their reckless, immoral and even criminal endeavours. To recap, when economic activity diminishes, fiscal revenue declines and government expenditures shoot up. Consequently, the debt increases, leading to a higher debt-to-GDP ratio, provoking a higher interest rate. This in turn adds to the debt, stiring up a greater debt-to-GDP ratio. When a country cannot cover its debt servicing expenses through its fiscal revenue, a sovereign debt crisis ensues. Then it faces two options: default or monetise the debt which undoubtedly gives rise to a currency crisis. Taking a look at the most traded currencies in the world, the US dollar, the euro, the British pound, the Japanese yen, the Swiss franc and the Canadian dollar may very well be embroiled in their own personalised crises. Since the US, the UK, Japan, Switzerland and Canada are countries with their own central bank, when they reach that unsustainable level of debt, they will opt for monetising the debt. Inversely, the Euro Area is going to face a political crisis owing to the fact that the financially foolish members, i.e. southern Europe, will want the ECB to buy their debt, but the responsible northern Europe will put a stop their efforts. The inevitable desintegration of the EU and the end of the euro experience is to be discussed some other day. Today, it is the turn to write about the destiny of a country which I am certain it is going to be through such crises: the United States of America. The world reserve currency, the US dollar, is without question going to crash. Firstly, the US is going to increase its debt to such an extent it will become unsustainable. Arguably, it may have already passed that threshold, seeing that the debt-to-GDP has surged every year of this expansion, except in 2015 which incidently almost killed the bull. Regardless, the government can default and negotiate with the lenders/bondholders for i) a restructuring or a haircut, or ii) refuse to pay. Either one will bring the dollar standard era to an end. The foreign holdings of US Treasuries, both from the private sector and from governments/central banks, account for about 30% of the national debt (as of December 2019, 6.69 trillion dollars of a total 22.72 trillion dollars). If it chooses the former, the other countries, US rivals and partners alike, will make sure to get rid of the dollar hegemony and its "exorbitant privilege", as Valéry Giscard d'Estaing, who was at the time minister of the Economy and Finance for France, put it. If it picks the latter, the relationships that the US has with its trading partners, and international community as a whole, will severely deteriorate, hindering at least the in and outflows of goods, capital and people to and from the US, and at most bringing about unrestrained war. Alternatively, the Fed will monetise the debt, which it has already been doing since 2009 through various rounds of Quantitative Easing (QE), having started its latest round, QE5, this past week. By doing this, the Fed will be flooding the economy with dollars, though the demand for the greenbacks is going to start falling soon, because all this inflation erodes its value. Yet, more importantly, the investors will finally realise that the expanding Fed balance sheet, i.e. QE, is not a temporarily emergency measure that can be unwinded. Therefore, the world is going to learn any day that this monetary and financial system can only be sustained with ever growing amounts of debt and, ergo, dollars, which means its purchasing power keeps on wearing off. On account of Washington, DC being swamped with keynesians and Big Business lobbyists, they will get the government and the Fed to spend currency like drunken sailors, even if it renders the greenbacks as valuable as Monopoly money. I am betting on this one. In conclusion, whatever it happens next, the dollar will cease to be the reserve currency of the world. Now you may be wondering what will the next reserve currency be? Will it be gold? IMF's Special Drawing Rights? Chinese renminbi? That is what I will be trying to discover on the next post.
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March 2024
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