Nobody in a position of authority rings a bell and plays a public service announcement right before a generational event takes place which will threaten their own credibility and power.
It is a function of human survival psychology that such existential occurrences are met with denial and rejection right up until the point where even the most stubborn are left with no other choice but reluctant adoption of reality. This is especially true of the old-guard protectors of the status quo before a shift in power. “Event X won’t happen because, well, it just can’t.” It would be prohibitively jarring to digest emotionally for some to even acknowledge the possibility.
Along those lines, here are a couple of gems from Ben Bernanke leading up to the GFC:
“House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.” – October 20, 2005
“At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.” – March 28, 2007
For good measure, we can also add that on June 27 of this year, current lame-duck Fed Chair Janet Yellen said she doesn’t expect another financial crisis in our lifetimes. Of course, there hasn’t been enough time to confirm nor deny her assertion.
Also relevant to note, some generational financial occurrences are more about a rapid change in the composition of wealth and power than an all-out crisis for all. Chair Yellen may end up being not so far off the mark depending on the source of the perspective.
The response to the 2008/2009 GFC, for the most part, not only cemented the same wealth and power structure in place, but it drove an even deeper wedge between benefactors of the current monetary system and those who feel they’ve been left behind by it. It was the response to the GFC chosen by central planners that sparked a backlash wave of global populism rather than the GFC itself.
We see transformational change disrupting the composition of wealth and power very soon in a way it didn’t in 2008/2009. The vehicle for this change will be monetary system centric. Most will deny it until it is already fact.
Due to recency bias, human nature over-relies on the past when predicting the future. Accurate analysis requires removal of this bias in order to analyze future probabilities with an open mind. There is a common misconception in our view shaping mass sentiment right now, that if there are central bank-fueled “bubbles,” they have to pop just like they did in 2008. Many of these people have been short stocks, long volatility, or on the sidelines for years.
There is a stack of unpayable global debt piled up far enough into the clouds that it can only become manageable in the eyes of central planners by torching the value of the currencies in which the debt is denominated. If this assertion is correct, the outcome will be remarkably different from the past few boom and bust cycles. Modeling market outcomes in this context requires an exercise of game theory for how central banks will react to the next downturn in light of the world’s giant debt problem.
Assist FX research has been steadfast in a number of market and economic views throughout 2017. Our core thesis has been that central banks responded to the 2008/2009 financial crisis by engineering an unsustainable global debt orgy to artificially reflate asset prices, and are now trapped in a situation where they can’t let asset prices materially fall without causing their third increasingly devastating bust in 15 years.
This unfortunate trap is exploding wealth inequality and destroying the social contract by providing windfalls for the capital class at the expense of the labor class, manifesting into populist uprisings and a drug addiction epidemic amongst the working class.
Below is a bulleted summary outlining this thesis and how it might have a dramatic impact on the future of the monetary system:
Treating cancer with steroids
- In an effort to thwart the 2008 GFC from fully materializing into a depression, governments and central banks bought time with repeated temporary liquidity pumping operations whose unintended consequences will in our view result in a quasi run on the fiat-based monetary system. These artificial Keynesian demand-side stimulus measures did not permanently heal or rebalance global economies–quite the opposite. They encouraged unsustainable sovereign, corporate, and household debt expansions and an array of dangerous financial imbalances.
- Inflation was pumped into housing and financial assets to an extent not sufficiently reflected in official inflation indexes and are not a representation of sustainable, genuine supply and demand. In other words, the doctor treated the cancer patient with steroids. The patient appears healthier on the outside but the cancer has metastasized into a much larger problem underneath.
- The global monetary system is about to incur unprecedented change, the scale of which few will see coming. The next major financial turbulence will not be a replica of 2008 involving a worldwide deflationary asset crash and traditional risk-on/risk-off market correlations where one can hide out in government-issued cash as a safe haven. The preeminent risk this time around in our view is a run on centralized government fiat currencies such as the US dollar, Chinese yuan, and Japanese yen, as well as on fixed-income assets as a tier-two level risk.
- Unsustainable debt, centralized fiat currencies, fractional reserve banking, inefficient financial middlemen, and artificially low interest rates will be at the center of the next storm.
- The US is looking at an annual budget deficit approaching 4.5% of GDP by FY19, with full employment, a historic bull market in nearly all assets, and no recession. When, not if, a recession does hit again, deficits could balloon to over 10% of GDP, or at least $2.5 trillion per year tacked onto the nation’s credit card.
- This would spur a dangerous feedback loop of higher interest rates, which would worsen deficits, which would then increase rates further, which would then worsen deficits, and so forth. Central bankers have already stated what they plan to do and it is to double down on the same trickle down, asset inflationary solutions that didn’t fix the problem to begin with and contributed to various populist movements globally.
- Ultimately, we see central banks as unable or unwilling to control inflation in the future because doing so would risk a complete implosion of an overleveraged system riddled with excessive debt that will only get worse before it gets better.
- Absent the creation of a complete and utter technology miracle where genuine global economic activity doubles without debt doing the same, we will not be growing out of this debt problem in a healthy way. There are two options: 1.) resume unfinished business from 2008/2009 with a domino wave of defaults on the grandest scale or, 2.) governments can attempt to use financial repression to inflate away the debt with stagflation and collapsing working class standards of living for at least another decade. All signs point to path number two being pursued.
- As the financial repression scenario becomes more apparent, capital will seek increased protection in decentralized, deflationary-by-design digital assets. Not all capital of course–but enough to matter. This process, which some refer to as hyperbitcoinization, has already begun as witnessed by bitcoin and other cryptos in recent months.
- We believe hyperbitcoinization will proceed (alternative private cryptos other than actual bitcoin included) until governments coordinate with an attack on private cryptocurrencies through windfall taxation schemes and partial criminalization. That is when things get interesting and particularly turbulent for the global monetary system as we know it.
- It isn’t clear whether private cryptocurrencies could truly endure a full-out government assault banning and taxing the ecosystem supporting them, but it is true that the government cannot physically stop peer-to-peer crypto payments without shutting down the internet.
- One thing is nearly certain from our perspective: governments will try to blame private cryptocurrencies for the failures of a poorly devised trickle-down inflationary monetary system which spawned their demand.
- Private cryptocurrencies are the greatest trickle-up economics innovation ever created. They redistribute wealth to private risk-taking individuals on a volunteer basis with a more efficient and timely product than that provided by the parasitic banking and central banking middlemen they aim to eventually replace.
- Benefactors of the current crony monetary and economic system have so much to lose that they won’t go down without the fight of a lifetime. This is the story barely beginning to unfold right in front of our eyes. History is being made whether most know it yet or not–we presume the latter. The path is highly uncertain but historic changes are coming to the current construct of monetary system wealth and power.