For almost seventeen years the world has lived with the threat of the imminent collapse of the paper debt notes system. It has been a fascinating period in humanity’s history. I spent part of the time in the US and part in Europe, just observing the process in the primary spheres of western civilisation.
Sure, there have been debt collapses before, with the concomitant collapse of the pseudo money. Those notes that we value so highly in our wallets and purses are really tiny slivers of the national debt. Real wealth they are not. Prior collapses though have been at a national level, never at the international level, as the world faces now.
Incrementally things have deteriorated to the situation that the world is in today. Growing unemployment and bankruptcies, capital destruction on an unprecedented scale (caused primarily by falling interest rates), geo-political tensions rising weekly, ceaseless wars and political uncertainty around the globe.
What could be worse?
A change in the trajectory would be worse and that is what seems to be upon us.
For the whole seventeen years that I have been focused, intensely, on this monetary theatre, the fringe Gold bugs have shrieked “hyperinflation is on the way”. It never was; they just didn’t understand the forces at play.
But, like the broken clock, if you shriek for long enough you’ll eventually be right.
Now, the price deflation of the last thirty to forty years may be over. Long term interest rates are rising (bond prices are falling). So far only on the long-term, market determined rates, but the Fed will almost certainly be forced to follow suit with short term rates – and soon.
Watch the pain when short term rates begin to rise. Banks will be more profitable, but everyone else will be shafted.
The plodding linearity of the collapse so far determined parameters within which central bankers could act. Along with the growing familiarity to the drama came a growing complacency. That slow-motion crash is about to leave the rails. 2017 will be an interesting year.
Back in 2009, while attending a class in Szombathely, Hungary I asked the eminent monetary scientist Professor Antal E. Fekete how much longer he thought that ‘it’ could go on. His answer, which I remember clearly, was “Philip, these central bankers have many more tools at their disposal than you can imagine; it could be a long while yet.” He was right on both points. When I pressed, he shrugged his shoulders and said “maybe 2016 or 2017”.
It’s beginning to seem like the sage of Szombathely might be right on that point also.