Financial Armageddon

It is not for no reason that cryptos are roaring, and precious metals are playing catch-up. In the last month there have been developments that point to a new phase of accelerating monetary inflation for the dollar, and fiat money is only just beginning to be exchanged for these inflation hedges at an increasing pace.

Hyper-inflation of the dollar is now becoming obvious to a growing cohort of investors. It is driven by factors on both sides of bank balance sheets, with evidence that large depositors are reducing their term deposits and increasing their instant access checking accounts. This appears to be behind the increase in M1 money supply fuelled out of a shift from the M2 statistic, which includes savings deposits.

It amounts to a hidden run against bank balance sheets. Meanwhile, increasing supply chain problems against a background of covid lockdowns are leading to the withdrawal of bank credit from non-financial businesses, potentially imploding bank balance sheets as a bank credit contracts.

Foreign support for both the dollar and dollar-denominated fixed interest assets are being withdrawn, which is sure to lead to rising bond yields and dollar interest rates in the New Year, undermining the equity market bubble.

The Fed is now faced with not only financing ballooning federal budget deficits, but underwriting US supply chains in their entirety, which is corroborated by ongoing global logistical problems, tying up an annualised $34 trillion of intra-business payments in America alone. The Fed’s unwavering commitment to Keynesian monetary policies will lead the Fed to attempt to offset these supply chain problems, to rescue banks that fail to survive the inevitable contraction in bank credit, and to defray the bad debts that will arise.

It is a momentous task encompassing the whole US economy, requiring even faster money-printing, and is impossible without destroying the unbacked dollar.

Since May, I have been warning of a dollar collapse. I showed that commodities, stocks, cryptocurrencies and precious metals were all rising because of the dollar’s loss of purchasing power.

The media is still reporting on the economic effects solely of Covid-19. In doing so, they have consistently underestimated them and ignored other factors. To return to a normality was always there as a beacon of hope — the spring of hope in a winter of despair. And it has only been a small minority who have pointed out that far from being a solution, inflationary financing has negative consequences. And even fewer of us who have tried to demonstrate that instead of stimulating economic activity, debasing the currency actually kills it.

In the past, hyperinflations of the money quantity have led through rising prices to an increase in demand for currency in the form of notes. In the Germany of 1922—23, wage earners had to encash their salaries in order to spend them immediately, which led to a rapid increase in demand for paper marks while their purchasing power collapsed. This is why the printing presses were running at full tilt. In the modern economy where cash notes and coin play only a small role, the raising of spending liquidity at the banks creates a reservoir of funds, which when a shock comes, is poised to flow rapidly into anything which is not fiat money.

If that condition is triggered, it will drive the dollar’s purchasing power over a cliff-edge. An adjustment on these lines will lead to a more sudden increase of consumer goods prices measured in declining fiat than occurs in an economy where cash notes are the principal means of payment. But we are not there yet.

For commercial banks the initial effect of a reduction of savings accounts increases their exposure to the temporal mismatch between funding and their loan books. In the past, this has ended up with bank runs, such as that of Northern Rock in the UK in 2008, a warning of what was to come. A more apt laboratory example, perhaps, is the collapse of the whole Cypriot banking system in 2012. This is getting closer to where we are.