I've expressed my disapproval for bailouts elsewhere but it's not just related to the current pandemic. We will (mostly) recover (physically) from the coronavirus.
But... This is something I'm actually worried about. Does anyone else worry about 'printing money' and monetizing debt?


'Helicopter Money': This Is The True Geopolitical Game-Changer

As the US and the UK, to stem Covid-19 infections, adopt a close-to-wartime approach, with intrusive levels of intervention into social life, these governments – as the corollary to lockdown – are proposing massive bail-outs. At first brush, this may seem both sensible and appropriate. But wait. Bailing out what? Well, financial markets of course, but then… just about everything: Boeing, the US Shale-oil industry, airlines, the tourist industry, and (in the US) every citizen – through posting them a $1,000, or a $2,000 check, this week – or, as is mooted in DC – perhaps one every month. Great! Just like Christmas.

The markets crashed: $½ Trillion in ‘liquidity’ here; $1.5 Tn there – and there – and there. An alphabet soup of lending facilities — pretty soon you are talking ‘real money’. The alphabet soup cloaks the collective size of liquidity available to banks. And likewise for individuals? 210 million US adults X $1,000, X 12 or 18 (months), is a staggering sum of money — closer to $4 Tn, or 18% of US GDP. Likewise, UK Chancellor Rishi Sunak pledged £330bn, or 15% of GDP, to support the economy, on top of a three-month mortgage payment holiday and a slew of tax deferments, and to do, as well, “whatever it takes”.

So, how come? How is this money suddenly available – when we have repeatedly been told in the wake of the 2008 crisis that austerity must be the only answer? Well, welcome to the ‘new orthodoxy’ (actually it is not new at all: France tried it in the eighteenth century when it ‘printed’ the Assignats). Call it ‘helicopter money’, or, the so-called ‘Modern Monetary Theory’: The principle is that it is okay to print money – if governments don’t otherwise have it. The point here is that ‘helicopter money’ (money conjured out of nothing: empty units reflecting no underlying real economic value) is a paradigm change. A major paradigm change.

It is the legacy from 2008. That was primarily a banking crisis: Printing money seemed to work out pretty well then, in the view of the élites. The main reason that those ‘experts’ have thought that printing money worked in the wake of 2008 was because the Central Banks were able to reflate the financialised asset bubbles.

“But that wasn’t success, that was failure”, financial guru, Peter Schiff comments. It was a failure because it resulted in even bigger bubbles, and even greater debt – which precisely has set us all up for today’s crisis: For we are going into this crisis naked of any real tools to deal with supply-shock.

In 2008, everybody believed the money ‘printing’ was temporary: Bank balance sheets were all gummed up; and the Fed was going to be able afterwards to normalize interest rates, and shrink its balance sheet. Well, nobody is going to believe that, this time. No, debts will soar – and will be ‘forever’ debts.

Yet for today’s policy-makers, it all seems so reasonable, so plausible: If the Fed floods the financial system with money, interest rates can stay at zero for ever. What’s not to like about this? Certainly, it fits with Trump’s real estate career, built on low interest, easy debt. Governments now may borrow for a hundred years at zero interest; and banks can lend like fury, as the Fed has dropped the requirement for banks to keep any reserves against their loans (i.e. to ‘print’ more easy credit for the favoured).

Better still, governments can just conjure the money out of thin air (by monetizing its debts): It can use these funds to bail out all those businesses and citizens adversely affected by Covid-19, and become heroes. Welcome to the new ‘Orthodoxy’.

What’s the alternative? Well that’s the point. The financialized, monetarist worldview dogmatically pursued through the last decades has left the toolbox with only one tool (more money, more liquidity). They have driven the world into this monetarist cul-de-sac. They will go on doing the same thing (liquidity and bailouts), over and over again, and (per Albert Einstein), always hoping for a different and better result. But it won’t work. It won’t work because the problem is not lack of liquidity. It is that businesses have no business to do – under infection lockdown. We had better understand the consequences to this insanity. That’s all.

This time, the 2008 recipé will not work. The US is going to be hit hard. And Americans are only just waking up to this fact.

This New Orthodoxy is no more than a desperate throw of the dice to keep the western hyper-financialized system aloft. The ‘mobilized-for-war’ narrative is an attempt to justify authoritarian measures, and the false bail-out meme: There was no ‘free money’ during the Wars.

In the 2008/9 crisis, the public was bemused: The financial world seemed too arcane to grasp fully. Only later, was it appreciated that the banks were being saved by ‘socialising’ their mistakes and losses. These – the losses – were ‘socialised’ i.e. transferred to the public balance sheet, and the public were told to expect austerity – and pared down health and welfare systems, to pay for all these 2008 bail outs.

This time, it is not the banks, but corporations and their ‘junk’ debt, that the Authorities are hoping to preserve in aspic (just as the banks were, earlier). In simple terms, it will allow over-leveraged companies to go into even deeper debt – with those loans now backed by the US Federal government.

But, will a better informed public so readily agree that Boeing deserves a $60 Bn bailout, when all its cash was spent in the last years in buying back its own stock and paying large dividends. It may be argued that if the money simply is printed, austerity cuts may not be required. But printing money dilutes the underlying purchasing potential of the money that had existed before dilution. That is to say, it is the 60% who ultimately will pay the cost – again. The new austerity will be a covert wealth transfer through dilution of peoples’ purchasing potential.

As Schiff notes, monetary inflation “is probably not just the worst-case scenario, it’s probably the most likely scenario… the laws of economics apply here just like they did in the Weimar Republic of Germany, or in Zimbabwe, or in Venezuela. If we pursue the same monetary and fiscal policy they did, we’re going to receive the same monetary outcome they did (hyperinflation)”.

This all may seem a somewhat rarefied argument to some, but the implications (both political and geo-political) are huge. This wartime economic approach – of itself – is not going to bring radical change to our neo-liberalized institutional world, nor reform it. That window was shut after 2008. The reality today is that to ‘touch’ the system now might induce a debt-deflation – a prospect which truly terrifies the Establishment – on top of impending supply-shock recession.

We are locked in through the errors of the Central Bankers: No wonder the Authorities are trying to kindle a war atmosphere in order to say that ‘helicopter money’ is okay. “It’s wartime”. And they will probably order the military out on the streets soon. Saying what is written here, will soon be held to be ‘enemy propaganda’.

The effect of a war-like command economy will not be to sweep society or the economy onto a new course, but rather, will be to re-situate it into the old grooves. Will anyone believe that in this new ‘command economy’ era, the government directed bailouts and the credit lines, will not be channelled principally to the political élites and their allies?

Yet, just as after the sacrifices of two World Wars, there was ‘New Deal’ mood apparent amongst the people. So it was too, in the wake of 2008: There were calls for reform to a system that entrenched the richest one per cent; but instead we got austerity, and a return to business as usual. Policy was deliberately designed to prop up the old system, and make it function as before. Reform denied.

Today, people are fully focused on managing their lives under virus lockdown, but the political pendulum has been swinging markedly (so-called populist politics) against what is widely perceived as a politically and economically ‘rigged system’.

The question then is, firstly, will US monetary actions succeed? Will they succeed in saving the financial system, ‘as it used to be’? Well, take the call for helicopter money: the term refers to giving money directly to individuals as if dropping cash on everybody out of a helicopter. But Schiff points out, that when Milton Friedman (the father of monetarist economics) coined the term, he intended it as a joke:

“He was using it as an example of what not to do – about why Keynesian monetary stimulus doesn’t work. He said it’s a crazy, stupid idea … Because dropping money from helicopters doesn’t do anything. It’s just inflation. It just makes prices go up”.

And, secondly, will this approach – which anyway is not working, as markets continue to implode – provoke a more concerted opposition to financial excess and inequality, in all its various forms? Will the demand for reform of the neo-liberal system become unstoppable? Maybe the ‘community spirit’ of suffering the virus together, will not be so tolerant of leaders who have failed to take appropriate steps to staunch infection spread, in a timely fashion?

Here, it is the ‘war’ on Covid-19 – rather than the other ‘war’ to save the economy – that will play a key role in shaping the geo-political future. Enough people have already commentated on the communal, national sentiment being generated by Corona virus. Here in Italy, Italians do feel far more linked empathetically – as if fighting a common enemy (which in a way they are). We all feel for the inhabitants of Lombardy and Bergamo. And, Italians know too, that they are on their own.

This feeling of Euro sauve qui peut (every country to its own) is palpable, and not confined to those just outside the EU borders, such as when the Serbian President (reacting bitterly to news that the EU had imposed an export ban on equipment such as masks and gowns to protect medical workers), said: “International solidarity does not exist. European solidarity does not exist”, to which most Italians would have responded ‘hear, hear’. The only help for Italy arrived from China.

It is the return of the nation-state. Covid-19 will change the course of Italian politics, as well as determine – in a significant way – the future of the EU. Let us be clear: The US and the UK can only make those offers of gushing liquidity and bail-outs – because they ‘print’ money. They control their own money-supply, their deficits – and to a much lesser extent, have some scope over interest rates. EU states do not. And arguments over EU financial mitigation for Covid-19 will ‘rack’ EU institutions and unity – perhaps to breaking-point.

And this more general attitude of sauve qui peut and lack of empathy is probably felt nowhere more deeply than in China. The more so, even than Italy. China has been denigrated, particularly in America, in a way that many Chinese feel borders on racism. Pepe Escobar has written:

“Among the myriad, earth-shattering geopolitical effects of coronavirus, one is already graphically evident. China has re-positioned itself. For the first time since the start of Deng Xiaoping’s reforms in 1978, Beijing openly regards the US as a threat, as stated a month ago by Foreign Minister Wang Yi at the Munich Security Conference during the peak of the fight against coronavirus.

“Beijing is carefully, incrementally shaping the narrative that, from the beginning of the coronovirus attack, the leadership knew it was under a hybrid war attack. Xi’s terminology is a major clue. He said, on the record, that this was war. And, as a counter-attack, a “people’s war” had to be launched.”

Europe and America will be facing a very different Chinese-Russian axis in the wake of the Coronavirus. The gloves are off. And Europe will be the first to feel the effect: No more Euro prevarication. That is to say, no more ‘one foot in; one foot out’ in relations with China (on Huawei 5G – as just one example).

Russia and China well understand: Helicopter money, and unparalleled ‘printed’ bail-outs, this is the game-changer. For now, the US dollar is soaring on demand from states who see their own currencies crashing, but who have borrowed in dollars – and see those dollar loans becoming shockingly more costly, day-by-day.

But, the G7 Central Banks finally will have to fight the inflation monster that will be unleashed by their ‘helicopter theories’. Confidence in the dollar will decline, as more and more dollar helicopter ‘drops’ are made. Interest rates will rise, and western junk debt will become toxic, and untenable at higher rates.

In a word, the world will come to see the US as much less powerful and less competent than appearances have projected it. Its lacunae will stare out.

Is the time approaching for that global monetary re-set, as the dollar loses its shine?

https://www.zerohedge.com/geop...litical-game-changer

Maybe a couple of semi-related thoughts.

Keynes had a strategic meeting with FDR during the depression. Later Keynes reportedly commented "FDR is a brilliant politician, but he knows nothing of economics". And reportedly FDR commented "Keynes is a brilliant economist, but he knows nothing of politics". The reality is politics and economics are quite tightly dovetailed, movements in one will induce movements in the other.

John Adams reportedly commented "there are two ways to conquer a nation, the first is by the sword, the second is by debt".

The gov't spending this kind of $$$ will create notable economic and political turbulence. My concern is that many will not see the cause/effect connection, will blame the wrong things, and take actions that will make things worse, not better.

Another concern is that with gov't largess in spending public money, many will slack off in personal financial responsibility, become more demanding. A safety net becomes a hammock which then becomes a straight jacket.

This message has been edited. Last edited by: Scoutmaster,

quote:

The gov't spending this kind of $$$ will create notable economic and political turbulence. My concern is that many will not see the cause/effect connection, will blame the wrong things, and take actions that will make things worse, not better.

Scoutmaster: Thanks, I'm glad I'm not alone in thinking so. There will be a price to pay, we just don't know when or how.

'Cliff's Notes' for ordinary folks:

"Helicopter money is a reference to an idea made popular by the American economist Milton Friedman in 1969.

In the now famous paper “The Optimum Quantity of Money”, Friedman included the following parable:
Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community.
Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”

The basic principle is that if a central bank wants to raise inflation and output in an economy that is running substantially below potential, one of the most effective tools would be simply to give everyone direct money transfers.

In theory, people would see this as a permanent one-off expansion of the amount of money in circulation and would then start to spend more freely, increasing broader economic activity and pushing inflation back up to the central bank’s target. "

https://www.weforum.org/agenda...is-helicopter-money/

Edited to add quotation marks.

This message has been edited. Last edited by: RichardC,

quote:

Originally posted by RichardC:...
In theory, people would see this as a permanent one-off expansion of the amount of money in circulation and would then start to spend more freely, increasing broader economic activity and pushing inflation back up to the central bank’s target..

In economics, theory and practice (ie, reality) can be quite different.

March 27, 2020
Coronavirus Is Not Even Close to America's Biggest Problem
By Bryce Buchanan

The COVID-19 pandemic can be used to illustrate two problems that are both more destructive than the virus. The problems relate to how Americans view the role of government in their lives and to the belief that government money can always fix problems.

Let's look at the money issue first. The immediate reaction of our government to the virus threat was to spend massive amounts of money. The latest news is that politicians plan to "boost" the economy with nearly two trillion dollars in spending and loans. "The package is coming in at about 10% of GDP. It's very large," says Larry Kudlow. For a plan of this size to sound like a good idea, you need to ignore some important economic facts.

Our country has unbelievable levels of debt, and our debt is rising rapidly. The numbers are staggering. The debt clock shows U.S. debt at $23 trillion (nearly 110% of the GDP) and unfunded liabilities of $77 trillion. That's a conservative estimate. Boston University economist Laurence Kotlikoff, an expert on the national debt, says, "The true size of our fiscal problem is $222 trillion...20 times bigger than the official debt." He says, "The government has gone out of its way to run up a Ponzi scheme and keep evidence of that off the books by using language to make it appear that we have a small debt."

We are on the Titanic, headed for the debt iceberg. In brief moments of clear vision, we see the iceberg and know we must change course to avoid disaster. But a self-imposed fog allows us to pretend things are fine. Do not look away. Look directly at this problem. It's real. Things that are unsustainable cannot be sustained. Reality always bats last.

There is also an important moral dimension to new spending programs. The government has spent all of its income and much more, so we should think of new spending programs as simply more debt being piled onto our children and grandchildren. The required first sentence of any new spending bill should be, "Our current consumption is more important to us than any burden we will place on future generations, therefore let's place this much more debt on them."

It is immoral to ignore the burden of the deficit on future generations. We are digging a hole for them that they will never get out of. Government debt is a government claim on future incomes. It is an unpaid tax bill.

You can make the case that big deficit spending is warranted to protect current and future citizens in a time of war. Some level of spending is warranted in the fight against this virus. But look at the big picture of government expansion over the last several decades as the administrative state grew and the deficit exploded. Does it make you a caring person if you propose "free health care" for everyone, including illegal aliens? No, it makes you a dangerous fool.

In the socialist dream world, there will never be a day of reckoning for government debt. Stephanie Kelton, an economic adviser to Bernie Sanders, said, "If you control your own currency and you have bills that are coming due, it means you can always afford to pay the bills on time. You can never go broke; you can never be forced into bankruptcy."

Governments that have tried this approach have ended up with money that looks like this 50-trillion-dollar bill from Zimbabwe. It's real paper money. But this $50 trillion wouldn't buy much. In Venezuela, the inflation rate is around 53 million percent. That means everything costs more every day. And with socialist destruction of the economy, there are far fewer things to buy. This kind of money does help with the toilet paper shortage, though.

Governments can create money, but creating money does not create wealth. Wealth comes from productivity. Putting ink on small pieces of paper does not make wealth. You can visualize this fact quite easily. Imagine that our government officials keep businesses closed "to protect us from the virus," but they send everyone large checks every month. Our benevolent leaders made sure we had lots of money, so we are all taken care of, right?

Without productive people, the true engine of wealth, Atlas would shrug, and the world would fall into its natural state, which is poverty. Anything that destroys productivity also destroys prosperity. That is why socialism has never worked and never will. The socialist utopian delusion is that people like Bernie and Alexandria Ocasio-Cortez can manage taxing and spending in such a way that everything people really need will be free. Alarming numbers of young people have this delusion.

Unless you are new to this planet, or are blind to reality, you understand that government bureaucracies are an inefficient and expensive way to provide anything.

Politicians themselves don't have the ability to "provide" material things. They can only transfer money or borrow money. Said another way, they can take the productive accomplishments of one group and give them to another group, or they can borrow from our children to pay for current consumption. That's it. They buy votes in one of these two ways.

Let's now discuss how Americans view the role of government in their lives and see how it relates to the current crisis. When our nation was young, citizens accepted both the pleasures and the perils of liberty. They enjoyed the right to direct their own lives and accepted the resulting responsibilities. The government was small and far away. The explicit goal of the Founders was to keep it small because the sphere of liberty shrinks as the size of government grows. Self-reliance was considered an important virtue. Children may expect others to take care of them, but adults do not.

People in need were helped by their neighbors. Charity has always been a big part of the American spirit. The goal of charity was to restore people to self-reliance. The lesson in Aesop's fable "The Grasshopper and the Ants" was an integral part of American values. The story shows the wisdom of preparing to take care of yourself in hard times.

In 200 years, Americans have moved a long, long way from self-reliance toward government dependence. President Franklin Roosevelt did more to move the citizens in the direction of government dependency than any other president. Yet look at what he said in 1935, when everyone could see that Roosevelt's big spending programs were not ending the Great Depression. In his State of the Union speech, he said:

The burden on the Federal Government has grown with great rapidity[.] ... The lessons of history, confirmed by the evidence immediately before me, show conclusively that continued dependence upon [government] relief induces a spiritual disintegration fundamentally destructive to the national fiber. To dole our relief in this way is to administer a narcotic, a subtle destroyer of the human spirit. It is inimical to the dictates of a sound policy. It is in violation of the traditions of America[.] ... The Federal Government must and shall quit this business of relief.

Has the "national fiber" been "fundamentally destroyed"? Has self-reliance been replaced by acceptance of dependence? Ask Americans these questions: whose responsibility is it to take care of people when they are old? Whose responsibility is it to take care of children if the father doesn't care about doing it? Who should be responsible for educating children? Who should pay the bills when someone loses his job? I think a very small number of people would say family members or charities should take responsibility. These duties have been taken over by massive, inefficient government bureaucracies.

Early Americans expected the government to leave them alone. Many present-day Americans expect the government to take care of them.

The assumption that the government will take care of your needs is "a narcotic, a subtle destroyer of the human spirit." If you have the childlike attitude that someone (government) should take care of you, it changes how you prepare for future problems. This attitude is why 25% of Americans do not even have a savings account, and 40% say they would have trouble paying an unexpected expense of $400.

Americans are not prepared for trouble, and trouble is here. Americans are Aesop's grasshopper in winter. This will greatly magnify the economic crisis caused by the current shutdown of productive activity. If economic activity is smothered for too long, many businesses will not survive. "Helicopter money" dropped by the government will not fix this problem.

President Trump understands that America's productive engine needs to be switched on as soon as possible. That will help, but the debt explosion and the increasing dependence on government are much more dangerous to our Republic than the Wuhan virus.

Read more: https://www.americanthinker.co...m.html#ixzz6HtvmcJq2

Anatomy Of A Fiat Currency Collapse

This article asserts that infinite money-printing is set to destroy fiat currencies far quicker than might be generally thought. This final act of monetary destruction follows a 98% loss of purchasing power for dollars since the London gold pool failed. And now the Fed and other major central banks are committing to an accelerated, infinite monetary debasement to underwrite their entire private sectors and their governments’ spending, to prop up bond markets and therefore all financial asset prices.

It repeats the mistakes of John Law in France three hundred years ago almost to the letter, but this time on a global scale. History, economic theory and even common sense tell us governments and their central banks will rapidly destroy their currencies. So that we can see how to protect ourselves from this monetary madness, we dig into history for guidance to see who benefited from the Austrian and German hyperinflations of 1922-23, and how fortunes were made and lost.

The way inflation is commonly presented by modern economists, as a rise in the general level of prices, is incorrect. The classical, pre-Keynesian definition is that inflation is an increase in the quantity of money which can be expected to be reflected in higher prices. For consistency and to understand the theory of money and credit we must adhere strictly to the proper definition. The effect on prices is one of a number of consequences, and is not inflation.

The effect of an increase in the quantity of money and credit in circulation on prices is dependent on the aggregate human response. In a nation of savers, an increase in the money quantity is likely to add to savers’ bank balances instead of it all being spent, in which case the route to circulation favours lending for the purpose of industrial investment. Product innovation, more efficient production and competitive prices result; and a price countertrend is introduced, whereby many prices will tend to fall, despite the increase in the money-quantity.

We see this effect in electronic and other goods emanating from savings-driven economies in East Asia, notably Japan and China. But in economies where savings have been discouraged, particularly in America and the UK, there is less investment in production and a greater emphasis on imported goods. Immediate consumption dominates, and increased quantities of money in consumers’ hands inevitably lead to a rise in the general price level of commonly demanded consumer goods.

In a world-wide fiat currency collapse, different savings characteristics between nations can be expected to lead to variations in the speed and timing of the decline of purchasing power between different currencies. We address this point later in this article and the consequences thereof. But a more immediate difficulty for observers is the habit of unquestionably accepting government measures of the general level of prices and incorrectly calling it inflation.

Don’t trust government inflation statistics

The general level of prices is one of those economic concepts that cannot be measured. The policy of targeting a general level of prices through broad-based indices such as the CPI is thereby fatally flawed. The fundamental and incorrect assumption behind the concept of a consumer price index is that future demand does not vary from the historic, in other words the economy evenly rotates, and economic progress is banished from our thoughts.

Furthermore, the broader the index, the more that extraneous factors, such as import substitution undermines the statistical concept of indexing domestic consumer prices. Together with the state’s desire to reduce the apparent rate by using methods such as hedonics and product substitution, it explains why a CPI can rise at an average annual rate of just under 2% seemingly in perpetuity, while a more targeted index that focuses on everyday items, such as the Chapwood index comprised of 500 constant items, has returned an approximate 10% annual rate of price inflation for a number of years. And if you remove the distortions introduced by government statisticians over the last forty years as demonstrated by Shadowstats, you get a similar 10% approximation.

What matters more than statistics is the effect on ordinary people. In their lack of knowledge about the consequences of changes in the quantities of money and bank credit, by default they see money as a constant, an objective factor in their transactions, with all the price changes emanating from the goods and services being bought or sold. They put rising prices down to profiteering, and when they fall, particularly for goods where product innovation is a strong influence, it is either explained by cheap foreign labour or just taken for granted. There is no public understanding of how inflation undermines the money side in transactions, nor, for that matter, how inflation transfers real savings and earning power from the individual to the state, which is the unstated objective of modern monetary policies.

It is ignorance of the role of money in this regard that permits governments to finance a significant and growing portion of their spending without resorting to unpopular taxation. Government debt issuance, which masquerades as a promise to repay the money borrowed, is mostly inflationary, sourced through monetary and bank credit expansion, that is when savers do not increase their savings. And in the desire to promote current consumption, American and British nationals in particular have been encouraged to spend all their income on consumer goods instead of adding to their savings.

The recycling of capital from trade deficits into government and other securities is inflationary as well. When foreign businesses in the import trade or their governments buy a state’s government debt, the origin of their currency purchased can almost always be traced back to domestic credit expansion. American trade deficits since 1992, having accumulated to $12 trillion matches foreign ownership of the sum of US Treasuries, asset-backed securities and short-term debt almost precisely.

Given proclamations by central bankers that they are about to hyperinflate, ignorance of monetary matters becomes an expensive condition. When trying to understand money, credit and how they flow, the vast majority of people find themselves in an Alice in Wonderland confusion where nothing makes sense. They are setting themselves up to lose everything they possess.
The first phase of inflation is ending

For most people the persuasive argument is empirical evidence, assuming they are prepared to look for it. We all understand that over time, our dollars, pounds and euros buy less. But despite the evidence, almost no one is really aware of the extent their fiat currencies have declined.



I make no apologies for having used the chart in Figure 1 before, but it is necessary to ram the point home. Since the dollar was devalued from $35 in the late 1960s, measured against gold the dollar has retained only 2.2% of its 1969 purchasing power. Admittedly, one would expect gold’s purchasing power to gently rise over time, which has been the experience under gold standards, exaggerating the dollar’s decline.

But critics of the approach of measuring fiat currencies against gold should note that measured by broad money (M3) only 3.8% of the dollar’s 1969 purchasing power remains, and when the increase in bank reserves not in circulation is taken into account, the figure falls to 3.2%, much closer to that indicated by comparison with gold. The inclusion of bank reserves, reflected in the fiat money quantity, is illustrated in Figure 2, and shows that the increase in the money quantity has recently become vertical.

The rapid monetary expansion before 1 March (the most recent available underlying statistics), was before the US lockdown and has continued since. So far, this has been only Phase 1 of the decline of fiat currencies, the warm-up act for a total currency collapse, which we will call Phase 2. It is increasingly certain with every passing day that we are now embarking on that second phase, which is now the focus of this article.
The second phase – currency destruction

With the general public and virtually all the financial establishment ignorant of or blind to the inflationary situation, central banks have chosen this moment to announce unlimited monetary expansion to buy off the consequences of the coronavirus. They have committed to the virtual nationalisation of their economies, to be paid for by debauching their currencies. The process depends on public ignorance of the consequences. In all the announcements of government support for their economies and of their central banks’ monetary role, there has been virtually nothing said or written about the consequences of the monetary inflation involved.

Indeed, the only thing more astounding than the ignorance of the general public over monetary matters is the apparent ignorance of the politicians and central bankers charged with implementing monetary policy. But the brakes are now off, the chasm beckons, and the purchasing powers of fiat currencies are set to run downhill at a rapidly accelerating pace. We are now about to embark on Phase 2, when it dawns on the public that with respect to prices money is collapsing and will soon become worthless.

The process of a developing collapse of a fiat currency usually starts with foreigners reducing their exposure to it. In the case of Austria and Germany in 1922-1923, foreigners sold the crown and the paper mark respectively for dollars freely convertible into gold. In John Law’s day, it was astute speculators who could sense a failing project and whose selling of his Mississippi venture and Law’s unbacked livres for foreign currencies and specie overwhelmed Law’s plans. Today, both cross-border strategic positions and portfolio investment are stalling and threatening to reverse. Ahead of the event it is impossible to judge their sequencing; but the dollar having the role of reserve currency appears to be most exposed to foreign liquidation, with foreigners holding equities, boned, deposits and cash totalling some $25 trillion, significantly more than America’s GDP.

To address their escalating liabilities at home, foreign governments and businesses will require financial resources currently invested in US securities to be repatriated. Foreign central banks have their own economies to rescue. Businesses everywhere are suddenly facing mounting losses and have no alternative but to reduce their dollar exposure. Foreign portfolio managers are being spooked by a developing worldwide bear market and seem certain to liquidate their US holdings and their dollar positions in the coming months.

Diminishing cross-border trade and the shock of the coronavirus have fundamentally undermined demand for dollars. This is not to be confused with demand for dollar liquidity, which some say will support the dollar. Liquidity is required in all currencies, which will be satisfied by liquidation of financial assets. The ensuing collapse of financial asset values and foreign liquidation of dollars is increasingly likely because all classes of foreign investors have, until now, enjoyed the security of investing in the world’s reserve currency, while Americans have generally avoided owning foreign currencies. It is only a matter of time before this imbalance begins to undermine the dollar, and then consequences will follow.

The dollar problem has arisen partly because interest rates are too low. The comparison is not to be made against negative rates in other currencies, but in the context of the domestic US economy. From rising food prices, deteriorating government finances and falling stock prices, other factors will flow. Bond yields, which cannot fall by much, will begin to rise as the government deficit increases, particularly with foreign buyers for US Treasuries being absent. Inevitably, the Fed will then come under pressure from markets to raise interest rates. In the face of an economic slump this will be resisted, and the exchange rate will fall. As the banker of last resort for the US government, the deteriorating economy, and for the rest of the world, the Fed will not only be financing everything but forced into buying bonds the foreigners and others sell as well.

On both Wall Street and Main Street, Americans are bound to become increasingly aware of the inflationary consequences. The problem for the Fed is that there is no Plan B alternative to financing by means of inflation of money and credit, particularly in an election year.

After a persistent and unusually protracted period of monetary inflation over the last fifty years, it is increasingly likely the public will finally understand what is happening to prices. They will then begin to realise that it is excessive quantities of money in circulation that is the reason for rising prices, and that they must dispose of currency as quickly as possible for anything they want or can barter in future for something else. Empirical evidence is that this second and final phase of monetary debasement is likely to last only a matter of months.

Once this second phase starts, it is almost impossible to stop it, because the public will have lost faith not just in the currency, but in the government establishment’s monetary and economic policies as well. It ends when an unbacked fiat currency is no longer accepted as money by the public.

Currency dysphasia

In the past, an inflationary collapse has usually affected currencies in isolation; but the modern tendency for governments to coordinate their inflationary stimulations raises a new factor, of strains between currencies collapsing at the same time but at different rates.

The most notable experience of it in modern times was in several European countries following the First World war. The inflations were individual to the nations, but the cause was the same, and Austria’s inflationary collapse ran ahead of Germany’s. A passage from a man who witnessed it, the Austrian writer Stefan Zweig, in his autobiographical The World of Yesterday vividly describes the consequences:

Every hotel in Vienna was filled with these vultures [foreign tourists]; they bought everything from toothbrushes to landed estates, they mopped up private collections and antique shop stocks before their owners, in their distress, woke to how they were being plundered. Humble hotel clerks from Switzerland, stenographers from Holland would put up in the deluxe suites of the Ringstrasse hotels. Incredible as it may seem, I can vouch for it as an eyewitness that Salzburg’s first-rate Hotel de l’Europe was occupied for a period by English unemployed, who, because of Britain's generous dole were able to live more cheaply at that distinguished hostelry than in their slums at home. Whatever was not nailed down disappeared. The tidings of cheap living and cheap goods in Austria spread far and wide; greedy visitors came from Sweden from France; more Italian French Turkish and Romanian was spoken than German in Vienna's business district.

Among the Austrians impoverished in their own communities, the law-abiding starved and those prepared to break food rationing laws thrived. Savers, who had patriotically bought government bonds, lost everything. Germans from across the border, whose currency was yet to enter its final collapse, could swill six litres of Austrian beer for one of German, adding to the foreign revelry in Austria’s misery.

In our contemporary fiat collapse, differences in its rate will create similar openings for an unsettling life arbitrage. In business dealings, any vestiges of decency and compassion are early victims as those with an early understanding of the opportunities provided by a monetary collapse profit from the innocence of the ignorant. But Germany was to suffer the inflationary fate of Austria the following year.

A pair of shoe laces cost more than a shoe had once cost, no, more than a fashionable store with two thousand pairs of shoes had cost before; to repair a broken window more than the whole house had formerly cost, a book more than the printers shop with a hundred presses. For $100 one could buy rows of six-storey houses on Kurfürstendamm and factories were to be had for the old equivalent of a wheelbarrow…

…Towering over all of them was the gigantic figure of the super-profiteer Stinnes expanding his credit and in thus exploiting the mark he bought whatever was for sale, coal mines and ships, factories and stocks, castles and country estates, actually for nothing because every payment, every promise became equal to naught. Soon a quarter of Germany was in his hands and, perversely, the masses who in Germany always became intoxicated at a success that they can see with their eyes, cheered him as a genius.

The story of Hugo Stinnes brings us back to our current situation, how markets will evolve and who will profit.
The fate of financial investments

All the intentions of providing business with credit, helicoptered money, replacing lost taxes and ensuring government is financed, can be pared down to a single policy objective: the support of financial asset values. If the markets fail, all else fails.

In today’s fiat currency world, the principal asset from which all others take their valuation is government debt. But that has run out of road, with US Treasury debt yielding less than one per cent for all but the longest maturities, and in Europe, Switzerland and Japan unnatural negative rates are common. Foreign ownership of US Treasuries and other financial assets, which has long been the counterpart of trade deficits and portfolio inflows, is now greater than the US’s GDP and will almost certainly become a source of funds for foreign governments, businesses and investment portfolios in difficulty themselves.

Commercial banks are in a mood to contract their balance sheets, initially due to liquidity constraints and now increasingly driven by abject fear. With demand for new government debt thereby limited, the Fed, together with central banks in other jurisdictions, will find that they are effectively the only significant actors on the buy side for not just government debt, but a wider range of financial assets as well.

The Fed has already stated it will offer additional support to bond markets by buying exchange traded funds invested in corporate bonds. By putting a floor under bond spreads, the Fed obviously hopes to support everything from junk to investment grade, because if it did not, spreads would blow out even more, threatening bank balance sheets which are thought to carry some $2 trillion of this debt both directly and in collateralised loan obligations.

The Fed already supports house prices by buying mortgage debt. It hopes that by preserving a wealth effect, investors will not only continue to feel well off but be encouraged to keep investing. The policy is to swamp financial markets with new money. The other side of the Fed buying financial assets of any description is the payment for them, expanding the quantity of money in circulation.

The overwhelming imperative to keep control of markets is a recipe for hyperinflation and will ultimately fail. The Fed would have us believe that the slump in business activity is only due to the coronavirus lockdown and that shortly after it ends normality will return. It will hope that we have forgotten that fully five months before the virus hit, it was forced to inject liquidity into the repo market at the rate of tens of billions every day.

The Fed’s monetary policy replicates John Law’s attempt to keep his bubble going in 1720 France. Law failed to maintain the price of just one asset, the Company of the Indies, his Mississippi venture, by printing livres to buy the shares. Within seven months the currency had collapsed and priced in worthless currency, the shares had fallen from 12,000 livres to just one or two thousand.

The principal upon which the Fed and the other major central banks are embarked is the same in every respect, but with a far larger task. The project will fail for the same reason: no one can fool all of the people all of the time. It is increasingly obvious that both the currency and financial asset values will collapse John Law-style, probably by the end of this calendar year, if precedents are any guide.

There will be economic turmoil, with businesses and their banks collapsing, for which yet more quantities of money will be required to discharge the socialistic imperative. There will be a new currency, whether it is an attempted government reset which will only delay the ending of fiat currency for a few more months, or one that evolves from gold or silver and their credible substitutes.

Those seeking to profit from the situation will emulate the Inflation King, Hugo Stinnes, who bought real, instead of financial assets. As Zweig put it in the second extract quoted above, whatever was for sale, coal mines and ships, factories and stocks, castles and country estates, actually for nothing because every payment became equal to naught. But among financial assets, there could be shares of businesses that will survive, but stock markets being dependent on fiat money will be finished. Thinking that there is some protection from inflation in equities has been true in Phase 1 of the inflationary collapse, the last fifty years to date. But in Phase 2, a sudden global collapse of the fiat currency system, financial assets are probably to be avoided.

By far the best strategy is to have sound money at the outset. When $100 could buy rows of six-storey houses on Kurfürstendamm in Berlin and factories were to be had for the old equivalent of a wheelbarrow, the dollar was gold-backed. Today, with all currencies set to collapse there are no substitutes for gold itself, the only exception being silver. A case could be made for bitcoin, and other restricted-issue distributed ledger cryptocurrencies, but is yet to be proven. The adventurous will borrow fiat to buy bullion today, in the expectation the fiat repayment will cost them nothing. And what better opportunity is the gift presented to present day inflation kings than the suppression of interest rates by central bankers.

https://www.zerohedge.com/geop...at-currency-collapse

All of the money printing (QE) over the years has been doable only because the USD is the world’s primary reserve currency. We’re not going to see rampant inflation unless there is a flight from that. If that ever does happen, then things will get interesting.