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4-The best of the times the worst of the times; The current situation and forecast

Updated: Jun 1, 2021

The current situation

The last Long term Debt Cycle began after WW2 and saw the US emerging as the new leading Empire replacing the Unite Kingdom. A new world order had begun. Recall briefly the phases of the long-term debt cycle which runs from:

1) low debt which gives those who control money and credit growth(banks) plenty of capacity to create debt buying power for borrowers and a high likelihood that the lender who is holding debt assets will get repaid with good real returns

2) to high debt with little capacity to create buying power for borrowers and a low likelihood that the lender will be repaid with good returns.

At the end of the long-term debt cycle there is no more stimulant ability of central bankers to extend the debt cycle. When it is widely perceived that the money and the debt assets that are promises to receive money are not good storeholds of wealth anymore, the long-term debt cycle is at its end, and a restructuring of the monetary system has to occur. During this period debt restructuring or debt devaluation to reduce the debt burden happen. After that a new cycle starts over again

This is an overview of what has happened in the last 20 years:

-Every time there was a period of economic crisis Central Banks's typical response was always the same: to lower interest rates and provide more credit. This monetary policy intervention (in their opinion) was capable of "stimulate" and reflate the economy during each recession. However during the crisis of 2008 interest rates hit 0% limiting Central banks’ ability to use interest rate cuts to stimulate the economy again

-Central banks started using unconventional monetary tools not tried since the US Great depression(1930). They started printing money in order to buy financial assets (They buy bonds from the market - the seller cashes in and buys other financial assets-stocks) and/or printing money and buying high-quality debt. This Monetary Policy reflated the System initiating a decade of recovery(2010-2020). However only the financial market benefited (those who bought financial assets) at the expense of the real economy that stagnated, This caused the huge wealth and income gap we have today. The new born Financials Capitalism led to a high level of political polarization that took the form of greater populism and battles between ardent socialist- populists of the left and ardent capitalist- populists of the right.

-Then came the pandemic (Covid-19) and the globalized world build during the last 40 years turned de-globalized. The economic crisis that followed saw shortages of Supply of goods and services in many sectors of the Economy. It was here that a new policy was implemented coordinating both monetary and fiscal policy (massive deficits). The State basically returned to have an active role in the economy after a generation of laisser faire

Central Banks bought both assets and government debt and monetize it, injecting maximum liquidity in the system. The quicker the printing of money to fill the debt holes, the quicker the closing of the deflationary depression, they thought. This is where we are now. They (Central banks and Governments) are trying to engineer a new economic recovery once again.

So we have on one side supply chain disrupted and shortages of goods (also due to the new Cold war between Us and China) nd on the other end potential new Demand coming from the deficit spending of Governments. More demand chasing fewer goods .. the Price can only rise to balance the 2 forces. The sooner you flood the system with a mountain of Debt, the sooner the worrying about the value of money begins. Velocity of money is what matters at the end; this means that it is People's perception of the risk what matters. Markets move in anticipation even if that unjustified. So, ONLY when the velocity will increase(people deciding to spend the money instead of saving) that will signal we will see INFLATION and that will change everything

To sum it up:

Classic monetary policies don’t work well anymore. The ability of central banks to be stimulative ends when they lose its ability to produce money and credit growth that pass through the economic system to produce real economic growth. That lost ability of central bankers typically takes place when debt levels are high, interest rates can’t be adequately lowered, and the creation of money and credit increases financial asset prices more than it increases actual economic activity. At the same time that there are big wealth and values gaps and there is a rising world power(China) that is competing with the leading world power in trade, technology development, capital markets, and geopolitics.

If this scenario holds true, in the years to come will could see:

1)-competitive devaluation around the corner. After the big government deficits due to covid-19 Governments are now attempting to create Inflation to devalue their National debts. to avoid bankrupcy. As we have seen earlier this is the last stage of the long term debt cycle. inflation wont’t come from higher demand inflation (good inflation) but from monetary -currency inflation.

2) -The inflationary period will lead to a new Monetary system that will replace the current one based on Dollar. Digital Currencies are around the corner . How they will be used ?

3) China will emerge as a perfect competitor to the US in production, trade, technology. Geopolitics. Geoeconomics will play an important role as the conflict with the current World leader (US) increases and intensifies leading to a new Cold War. We will have some form of De-globalization as global supply chains of the last 20 years will be disrupted.

4) Government's influence over the economy will increase further :a) to balance the budget b) with the (Utopic) purpose to redistribute wealth better after a long period of high wealth gaps in the Society. Obviously taxes will rise

5) The world will be shaped by Technology disruptions that will give rise to a new form of Capitalism based on track and trace (surveillance capitalism)

5) capital flights will intensify. As some Nations will risk to go bankrupt the wealthy will try to move their Capital to safer harbors. This will intensify the economic war on.


6) The Euro area could experience a sovereign debt crisis.

Its attempts to fix exchange rates, control monetary policy and allow freely flowing capital across its borders, all at the same time is what is called The Euro area's trilemma; Inevitably time comes when faced with a resulting economic crisis, it is forced to abandon at least one of the three policies.

The trilemma is based on the idea is that a Country cannot have all three of the following at once: a fixed exchange rate, independent monetary policy and free capital flows. (Capital flows are transfers of money in and out of a country.) One of those three has to act as an economic pressure valve. Otherwise, there will be an economic crisis.

Either countries will abandon the Euro’s fixed exchange rate and return to their own currency, capital will fly leaving southern Europe for the north triggering a banking or sovereign debt crisis, or countries will seek to regain control of their monetary policy.

All of these imply an Euro crisis that could lead to the end of Eurozone as we know it

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