Submitted by Erico Matias Tavares of Sinclair & Co.

While a decade is just an arbitrary measure of time, people often attribute certain emotional and cultural characteristics to it, such as the “roaring 20s” of the 20th century.

The 20s of the 21st century are promising to mark a defining period in world History, particularly for the West, as vital trends that have been developing for years are expected to accelerate and reach a tipping point. “Roaring” might not be the best description by the end of it.

Consider that at the very start of the decade the UK will no longer be part of the EU, itself a monumental change with deep social, economic and geopolitical consequences. The US and other major economies will face even more profound developments this decade.

The dominant context behind all this is what British historian C. Northcote Parkinson defined in the early 1960s as the great dynamo of History – the passing of the baton of global preeminence between East and West since historical records began.

Nobody knows what will happen 6 months from now, much less a decade, but recognizing the ascendancy of the East as a whole – and the evident decline of the West – can help pinpoint important trends and cycles that are likely to materialize in the near future. That ascendancy has started decades ago and will solidify in the short years ahead.

This is a humble “back of the envelope” attempt by the author to read some through important tea leaves, colored (as a disclaimer from the outset) by his rather pessimistic view of the prospects of his native West and by his admiration of the resilience of the East:

1. The productivity of debt in most major economies is already below 1, meaning that it takes several dollars in new debt to create a dollar of GDP. This is particularly the case with government debt, and consequently in order to sustain even meager economic growth debt loads as percentage of GDP will continue to growing strongly, following Japan’s path;
2. This in turn means that interest rates can never be normalized, otherwise such debt loads would become immediately unsustainable. Financial repression will thus continue, likely even be expanded. Central banks will continue to monetize debts at unprecedented levels and even take on the role of steering industrial policy, a good example being the “green economy”;
3. These actions by central banks have enabled Eurozone banks over the last decade to become liquid but not necessarily solvent, a situation exacerbated by negative interest rates and the flaws of and structural imbalances generated by the Euro. A quick look at the share price of Deutsche Bank, Germany’s largest bank, clearly shows this;
4. Birth rates across the West will continue to fall further given a confluence of social and economic problems. Many Eastern countries are are wrestling with this problem, but the way Western elites are dealing with it are transforming its cyclical nature into a structural one, with deep generational consequences;
5. Related to that, the pension crisis will come to the forefront, with more Baby Boomers retiring (where possible) into pension plans that for the most part are underfunded, in many cases severely, despite record high asset prices;
6. Modern agriculture has been very successful in delivering calories, basically by converting copious amounts of fossil fuels into food, but rather less so in delivering nutrients. This is because it exhausts top soil and organic matter, critical to produce nutrient-dense foods. As such the health crisis will become worse as a depleted nutrition acts as a catalyst to major diseases;
7. All these factors will add more pressure for governments to take action, meaning that all those contingent liabilities will finally start materializing in budgets over the course of the decade – with a vengeance;
8. This situation is particularly serious in the US, where it is very possible that the government will lose control of its budget deficit at some point (if it hasn’t already), especially given zero political will and capability to address this. One look at the Congressional Budget Office decadal projections should raise alarm, especially as no recession is expected, but no party seems to care;
9. Mass migration into the Western world will continue unabated driven by massive demographic imbalances between developed and developing countries, and Western elites seeking to maintain control by “dividing and conquering” their societies and absorbing the spoils into supranational compacts that they control;
10. Another thing which is unlikely to change is the US’ foreign entanglements. Like with immigration and the budget deficit, no party has the will to do anything about it. Three dynamics make highly likely the emergence of a new, bigger conflict where the US will once again become involved this decade: (i) the military being spread all over the planet, raising the chances of some fire exchange with someone, even by accident, (ii) enormous military spending, already larger than several major countries combined, that keeps on growing, and (iii) America’s enemies becoming more entrenched and determined in their quest to develop capabilities to seriously challenge its dominance (like Iran developing medium-range nukes this decade, along with others);
11. Automation, the replacement of humans with machines, will accelerate and start replacing enough jobs to generate even more income inequality between workers and capital owners, already a sensitive topic thanks to the monetary and fiscal policy imbalances of the last decade;
12. It is therefore inevitable that populism will continue to increase, both on the right and the left of the political spectrum. The hollowing out of the moderate center, tied to a neo-liberal model that is seriously sputtering, will prompt a major political and social polarization in many Western societies not seen since the 1930s;
13. The trend towards globalization will be impaired, despite the best efforts of supranational organizations like the UN to maintain the status quo. Major exporting economies like Germany will be disproportionately impacted, creating more tensions inside an already frail EU;
14. The political landscape will massively change in the US. The fragmentation of political views and aspirations already means that a two party-system is incapable of dealing with differing objectives inside their respective electorates. However, the emergence of new parties is severely limited by lack of access to funding necessary to win at the federal level, which means that democracy will suffer;
15. This loss of democracy is even more likely given the profound demographic change taking place in the US, where immigrants tend to vote overwhelmingly for the Democratic Party. As a result Texas and other states will likely swing Blue by the end of the decade, meaning that Republicans will be locked out of power for a generation+. Once again California led the way for the rest of the country, with an entrenched Democrat super-majority there. As democracy recedes, societal and ethnic conflict will gradually become mainstream;
16. What this really means is the beginning of the end for the great American experiment this decade, as its traditional institutions – including its Constitution – can no longer properly function under such conditions. This is hugely consequential for the world in terms of prosperity and freedoms;
17. One feature of diverse societies is that they are inherently unstable, meaning there’s a far greater need for a government to mediate the interests and conflicts between different groups. Politicians will increasingly tighten their grip on society, aided by technology that will become even more intrusive. Silicon Valley and Washington DC will thus become even more intertwined;
18. Societal fragmentation will not be limited to the US, far from it. French President François Hollande warned in 2016 (after he left office, of course) that his country would eventually break apart. This may become a de facto reality in the 2020s as multiple societal, demographic and economic factors converge in French society. In fact the new decade was inaugurated with dozens of cars set on fire in Paris. These factors will also impact other European countries in similar ways, including Sweden, Belgium, even Germany;
19. The EU will become increasingly authoritarian to prevent more BREXITs and keep that political project going. Any dissent of its main guiding policies, from the environment to immigration, is already being stamped out under the guise of “hate speech”. It will only get worse from here. A draconian social credit system similar to what China is developing might be in place by the end of the decade. It seems inevitable that the political make-up of the EU and several of its members will be radically different by the end of the decade compared to today;
20. BREXIT might have been a fantastic idea given all that is happening in the EU, but the timing will prove to be off. First, we are close to a global recession, which absent very vigorous central bank action might become serious, thus curtailing any initial enthusiasm. Second, Boris Johnson will be pursuing free trade deals when the globalization tide is turning against him. Third, because in order to ensure the City of London’s preeminent access to global capital markets he will have to offer a bargaining chip, and that is what’s left of British industry – meaning the working class seats the Conservatives were able to impressively flip from Labour on the back of BREXIT. Perhaps the UK as well might not escape the coming fragmentation;
21. Working and middle classes across the West, including the UK and especially the US (if one looks objectively at the results of three years of “America First” policies under Donald Trump), will finally realize that they have no real political representation. The real political fault line is not between right and left, rich and poor, liberal and conservative, but rather globalism versus nationalism. There is no money in the latter, beyond extracting taxes to pay for that burgeoning government (that will inevitably oppress them) and elite pet projects, like solving “climate change” and the “migrant crisis”;
22. The West thrived when its working and middle classes thrived. These are the people who consume, who largely maintain the national traditions, who fight their wars. Financially and demographically they are in a very tough spot, with birth rates far below replacement levels and life expectancy plunging due to drugs and health problems. Half of Americans can’t cut a $400 check for an emergency. As things stand this rot will likely accelerate as the decade progresses;
23. All this does not mean that it will be smooth sailing for the East, far from it, as those economies still depend a great deal on Western markets. Still, they have a highly motivated, educated and productive workforce, comparatively low debt levels (ex-Japan), high savings and very little contingent liabilities. They are also very safe to live in. Attracting top talent from the US and Europe, in addition to their own, should not be too difficult, further cementing their competitiveness. In a sense these economies are merely reverting to the global place they used to occupy before that baton swung to the West;
24. Russia is an interesting case as it was always between East and West, given its vast cultural, ethnic and geographical components. Thanks to incredible short-sightedness and (frankly speaking) stupidity from the NeoCons in Washington DC it will now embrace its Eastern future. The 2020s will consolidate the emergence of Eurasia as a super economic block towards the end of the century, independent from any US interference;
25. That sets up different scenarios for the coming fracturing of the EU by mid-century, if not sooner. Eastern European countries should gradually gravitate towards Eurasia, including Germany – the worst case scenario for US hegemony. The center West of Europe will become more culturally and demographically aligned with Africa, and so might pursue its future there. And Portugal and Spain, if they had any sense, should seek close ties with their cultural peers in Latin America and Africa;
26. Africa could be the one bright spot in the middle of all the turmoil elsewhere, especially given that it has a lot of development potential and a vast supply of all sorts of natural resources. China (i.e. the East) is spending vast sums to unlock this potential and is now the continent’s largest trading partner. Unfortunately, the constraints holding Africa back are all too familiar: corruption, loss of their most enterprising people to mass migration, weak institutions incapable of addressing the aspirations of its very young populations and increasing social and ethnic conflicts, exacerbated by a resurgence of political Islam – another quintessential Eastern ideology that gains force whenever the West declines. This decade will indicate which way it will eventually go the rest of the century;
27. Energy prices should remain very volatile, as demand is pressured by a weakening of the economic cycle and supply by a coming peak in US crude oil production this decade. The explosive situation across the Middle East, from Libya to Pakistan, will add much greater uncertainty as the decade unfolds. The West faced serious oil shocks in the 1970s as the US could no longer ramp up its production to counter supply embargoes from the Middle East; it is vulnerable to a repeat of that by the end of the decade. Sustained crude oil price rallies above $100/bbl would very likely put a nail in the coffin of the financial house of cards concocted by Western central banks;
28. Commodities markets in general should perform better on a relative basis this decade, especially when compared to US stock markets, which have been on an absolute tear since the end of the financial crisis in 2009. The longest bull market in the context of the weakest capital expenditures cycle since WW2 suggests that significant productive capacity might be taken offline at some point this decade. Mean reversion is a real thing in capital markets;
29. Aging farming populations worldwide, quite severe in some cases, will finally put significant pressure on food supplies by mid-decade, if not sooner. And the young, so far, are not replacing them. As a result, record food supplies globally at the start of the decade may turn into food deficits by the end, especially given strong population growth projections (including in the West via mass migration);
30. And the US dollar? Its cycles typically last around a decade, and if that is the case we might be nearing the end of is bull run, certainly this decade. Adding to this cyclical outlook is the fundamental deterioration of the US fiscal position outlined above. That deficit will have to be financed somehow, and some pretty juicy yields might have to be offered especially if the dollar starts weakening. While it may still remain the world’s reserve currency given lack of competitors, cryptocurrencies might increasingly offer an alternative. StableCoins, a variant, in particular offer governments a monetary alternative to generate growth within the constraints of the Euro, for instance;
31. Gold should remain part of any investor’s portfolio (in physical form), although nobody can say for sure whether prices will be higher in dollar terms by the end of the decade. Trillions of dollars in debt issued in the last decade will become due and together with weak economic growth the risk of a deflationary shock remains significant;
32. The wildcard in predicting financial outcomes is as Western societies profoundly change so will the rules of the investment game. It’s not inconceivable that capital controls will be in place before the end of the decade. The more Europe and the US sink into deep fiscal and economic issues, the bigger that wildcard will be;
33. Investors’ focus will gradually shift from speculation to wealth preservation, given the dearth of fairly valued opportunities at the start of the decade and a far more uncertain global environment.

Summing up, this decade will very likely be remembered for the end of the world order that had been in place since WW2.

Yes, there is a positive drift on societies across the world emanating from relentless technological progress, but it is highly unlikely that this will do anything to stop the profound demographic, financial and cultural changes that have accelerated this past decade.

Adam Smith noted that a nation can take a lot of ruin. For decades Westerners have been doing their best to figure out how much. Not only that, but a progressive cultural revolution starting in the 1960s has upended all Western traditional values and morals, and so the present generations are ill-prepared to cope with the massive challenges that lie ahead.

If there is a silver lining in all this is that young people are starting to acknowledge the failure and dead-end of the current economic, moral and governance models, and are gradually returning to tradition, family life and communities. Localism, as opposed to globalism, will gain traction.

Building resilience should be the motto of the coming decade.

And with that, wish you a very hopeful, positive and healthy 2020.

Authored by Michael Snyder via TheMostImportantNews.com,

We are facing a corporate debt bomb that is far, far greater than what we faced in 2008, and we are being warned that this “unexploded bomb” will “amplify everything” once the financial system starts melting down.

Thanks to exceedingly low interest rates, over the last decade U.S. corporations have been able to go on the greatest corporate debt binge in history. It has been a tremendous “boom”, but it has also set the stage for a tremendous “bust”. Large corporations all over the country are now really struggling to deal with their colossal debt burdens, and defaults on the riskiest class of corporate debt are on pace to hit their highest level since 2008. Everyone can see that a major corporate debt disaster is looming, but nobody seems to know how to stop it.

At this point, companies listed on our stock exchanges have accumulated a total of almost 10 trillion dollars of debt. That is equivalent to approximately 47 percent of U.S. GDP…

A decade of historically low interest rates has allowed companies to sell record amounts of bonds to investors, sending total U.S. corporate debt to nearly $10 trillion, or a record 47% of the overall economy.

In recent weeks, the Federal Reserve, the International Monetary Fund and major institutional investors such as BlackRock and American Funds all have sounded the alarm about the mounting corporate obligations.

We have never witnessed a corporate debt crisis of this magnitude.

Corporate debt is up a whopping 52 percent since 2008, and this bubble is continually growing.

And actually the 10 trillion dollar figure is the most conservative number out there. Because if you add in all other forms of corporate debt, the grand total comes to 15.5 trillion dollars. The following comes from Forbes…

Total corporate debt is actually much higher. Adding the debt of small medium sized enterprises, family businesses, and other business which are not listed in stock exchanges ads another $5.5 trillion. In other words, total US corporate debt is $15.5 trillion, 74% of US GDP.

Needless to say, this mountain of corporate debt is definitely not sustainable, and I have already noted that defaults are rising. One expert recently explained that all of this debt is “an exploded bomb” and that at some point something will come along to “trigger the explosion”…

“We are sitting on the top of an unexploded bomb, and we really don’t know what will trigger the explosion,” said Emre Tiftik, a debt specialist at the Institute of International Finance, an industry association.

Right now a lot of large corporations are so maxed out that they can barely service their debts. So when things start getting really bad for the economy, we could be facing a wave of defaults unlike anything we have ever seen before.

When asked about what this will mean during the next recession, a finance professor at the University of Pennsylvania warned that it will “make everything happen faster, larger, worse”…

“It’s going to amplify everything,” said Krista Schwarz, a finance professor at the University of Pennsylvania’s Wharton School. “It’s going to make everything happen faster, larger, worse. The recession would just be that much deeper.”

It sounds like she could be a writer for The Economic Collapse Blog.

Of course I am being a bit silly, but the truth is that there is nothing silly about the giant mountain of debt that our society is facing.

In addition to our looming corporate debt crisis, U.S. consumers are 14 trillion dollars in debt, state and local government debt levels are at record highs, and the U.S. national debt just hit the 23 trillion dollar mark.

If you can believe it, we have actually added another 1.3 trillion dollars to the national debt just since last Thanksgiving…

The federal debt has increased by $1,303,466.578.471.45 since last Thanksgiving, according to data released by the U.S. Treasury.

That is the largest Thanksgiving-to-Thanksgiving increase in the debt in nine years. The last time the debt increased more from Thanksgiving to Thanksgiving was in 2010, when it increased by $1,785,995,360,978.10.

It also equals approximately $10,137.48 per household in the United States.

Adding 1.3 trillion dollars to the national debt in 12 months while things are still relatively stable is utter insanity, and what we are doing to future generations of Americans is beyond criminal.

And we aren’t even spending the money well. In fact, Senator Rand Paul continues to document how we are wasting money in some of the most ridiculous ways imaginable…

Sen. Rand Paul is continuing to expose the rampant waste of tax dollars by our government agencies. In a special Fall edition of his Waste Report, the Kentucky senator highlights some of the most wasteful expenditures of our federal government, including a half-a-million-dollar toilet nobody could use and a $22 million project to bring Serbian cheeses up to international standards.

“Once again, The Waste Report takes a closer look at just some of what the federal government is doing with the American people’s hard-earned money, this time including stories of it continuing to turn over so many taxpayer dollars to the Washington Metropolitan Area Transit Authority, funding research that involves hooking Zebrafish on nicotine, buying textbooks for Afghan students that are subpar or sitting in warehouses, and more in a list that totals over $230 million,” states a press release from Sen. Paul’s office.

Of course it isn’t just the United States that is drowning under an ocean of red ink. As Bloomberg has detailed, when you total up all forms of debt in the world it comes to a grand total of 250 trillion dollars…

Zombie companies in China. Crippling student bills in America. Sky-high mortgages in Australia. Another default scare in Argentina.

A decade of easy money has left the world with a record $250 trillion of government, corporate and household debt. That’s almost three times global economic output and equates to about $32,500 for every man, woman and child on earth.

So if you have a household of four, your share comes to $130,000.

Are you ready to pay up?

In the end, all of this debt will never be paid off. Instead, the bubble will just keep ballooning until it inevitably bursts.

And when it finally bursts, many are warning of a complete and total meltdown. In fact, Rick Ackerman believes that “a Mad Max scenario” is likely…

Ackerman contends, “I am a little more bearish than that. I see a Mad Max scenario as inevitable. . . . I try not to think about it because we’ve all got lives to live and kids to raise. . . . When you go back to the calculous of deflation and that every penny of every debt must be paid, if not by the borrower then by the lender, we have already put ourselves into a condition where Social Security is going to fail. Medicare is going to fail. All the ‘just-in-time’ deliveries are going to be in jeopardy. Food from the grocery stores, one day shipping from Amazon, I don’t see how all these things can continue to operate in a condition other than in the false prosperity that we have now. We are at the pinnacle of affluence.”

I haven’t been able to find anyone that can logically argue that the road that we are currently on has a positive ending.

The truth is that we are headed for complete and total disaster, and the only real debate is about how long it will take for us to get there.

So enjoy these moments of relative stability while you still can, because it is only a matter of time before we go over the precipice.

Authored by Alasdair Macleod via GoldMoney.com,

The legal formalisation of the creation of bank credit commenced with England’s 1844 Bank Charter Act. It has led to a regular cycle of expansion and collapse of outstanding bank credit.

Erroneously attributed to business, the origin of the boom and bust cycle is found in bank credit. Monetary policy evolved with attempts to control the cycle with added intervention, leading to the abandonment of sound money.

Today, we face infinite monetary inflation as a final solution to 150 years of monetary failures. The coming systemic and monetary collapse will probably mark the end of cycles of bank credit expansion as we know it, and the final collapse of fiat currencies.

This article is based on a speech I gave on Monday to the Ludwig von Mises Institute Europe in Brussels.

Introduction

So that we can understand the financial and banking challenges ahead of us, this article provides an historical and technical background. But we must first get an important definition right, and that is the cause of the periodic cycle of boom and bust. The cycle of economic activity is not a trade or business cycle, but a credit cycle. It is caused by fractional reserve banking and by banks loaning money into existence. The effect on business is then observed but is not the underlying cause.

Modern banking has its roots in England’s Bank Charter Act of 1844, which led to the practice of loaning money into existence, commonly described as fractional reserve banking. Fractional reserve banking is defined as making loans and taking in customer deposits in quantities that are multiples of the bank’s own capital. Case law in the wake of the 1844 Act, having more regard to the status quo as established precedent than the fundamentals of property law, ruled that irregular deposits (deposits for safekeeping) were no different from a loan. Judge Lord Cottenham’s judgment in Foley v. Hill (1848) 2 HLC 28 is a judicial decision relating to the fundamental nature of a bank which held in effect that:

“The money placed in the custody of the banker is to all intents and purposes, the money of the banker, to do with it as he pleases. He is guilty of no breach of trust in employing it. He is not answerable to the principal if he puts it into jeopardy, if he engages in haphazardous speculation….”

This was undoubtedly the most important ruling of the last two centuries over money. Today, we know of nothing else other than legally confirmed fractional reserve banking. However, sound or honest banking with banks acting as custodians had existed in the centuries before the 1844 Act and any corruption of the custody status was regarded as fraudulent.

This decision has shaped global banking to this day. It created a fundamental flaw in the gold-backed sound money system, whereby the Bank of England, as a prototype central bank, could only issue extra sterling backed entirely by gold. Meanwhile, a commercial bank could loan money into existence, the drawdown of which created deposit balances. The creation of these deposits on a system-wide basis meant that any excesses and deficiencies between banks were easily reconciled through interbank lending.

Bankers’ groupthink and the credit cycle

While an individual bank could expand its balance sheet, the implications of all banks doing the same may have escaped the early banking pioneers operating under the 1844 act. Thus, when their balance sheets expanded to a multiple of the bank’s own capital, there was little cause for concern. After all, so long as a bank paid attention to its reputation it would always have access to the informal interbank market. And so long as it can call in its loans at short notice, the duration mismatch between funding by cash deposits and its loan book would be minimised.

Since the Bank Charter Act, experience has shown the expansion of bank credit leads to a cycle of credit expansion, over-expansion, and then sudden contraction. The scale of bank lending was determined by its management, with lenders tending to be as much influenced by their own crowd psychology as by a holistic view of risk. Of course, the expansion of bank credit inflates economic activity, spreading a warm feeling of improving economic prospects and feeding back into increasing the bankers’ confidence even further. It then appears safe and reasonable to take on yet more lending business without increasing the bank’s capital.

With profits rapidly increasing due to lending being a multiple of the bank’s own capital, confident bankers begin to think strategically. They reduce their lending margins to attract business they believe to be important to their bank’s long-term future, knowing they can expand credit further against a background of improving economic conditions to compensate for lower margins. They begin to protect margins by borrowing short from depositors and offering businesses term loans, reaping the benefits of a rising slope in the yield curve.

The availability of cheap finance encourages businesses in turn to enhance their profits by increasing the ratio of debt to equity in their businesses and by funding business expansion through debt. By now, a bank is likely to be raking in net interest on loan business amounting to eight or ten times its own capital. This means that an interest margin of a net two per cent is a 20% return to the bank’s shareholders.

There is nothing like profitable success to boost confidence, and the line between it and overconfidence is naturally fuzzed by hubris. The crowd psychology fuelled by a successful banking business leads to an availability of credit too great for decent borrowers to avail for themselves, so inevitably credit expansion becomes a financing opportunity for poorly thought out loan propositions.

Having oversupplied the market with credit, banks begin to expand their interests in other directions. They finance businesses abroad, oblivious to the fact that they have less control over collateral and legal redress generally. They expand by entering other lines of banking-related business, assuming their skills as bankers can be extended into those other business lines profitably. A near-contemporary example was Deutsche Bank’s failed expansion into global investment banking and principal trading in foreign securities and commodities. And who can forget Royal Bank of Scotland’s bid for ABN-Amro, just as the credit cycle peaked before the last credit crisis.

At the time when their balance sheets have expanded to many multiples of their own capital, the banking crowd then finds itself with lending margins too low to compensate for risk. Bad debts arising from their more aggressive lending decisions begin to materialise. One bank beginning to draw in its horns, as it perceives it is out on a limb, can probably be weathered by the system. But other bankers will stop and think about their own risks, bearing in mind operational gearing works two ways.

It may be marked by an unexpected event, or just an apparent loss of bullish momentum. With bad debts beginning to have an impact, groupthink quickly takes bankers from being greedy for more business to fearful of it. Initially, banks stop offering circulating credit, the overdraft facility that lubricates business activity. But former lending decisions begin to be exposed as bad when the credit tap is turned off and investments in foreign lands begin to reflect their true risks. Lending in the interbank market dries up for the banks with poor or marginal reputations, and banks begin to report losses. Greed turns rapidly to fear.

The cycle of bank credit expansion then descends into a lending crisis with increasing numbers of banks exposed as having taken on bad loans and becoming insolvent. A slump in business activity ensues. With frightening rapidity, all the hope and hype created by monetary expansion is destroyed by its contraction.

Before central banking evolved into acting as the representative and regulator for licensed banks, the credit cycle described above threw up some classic examples. Overend Gurney was the largest discount house in the world, trading in bills of exchange before it made long-term investments and became illiquid. When the railway boom faltered in 1866 it collapsed. Bank rate rose to 10% and there were widespread failures. Then there was the Baring crisis in 1890. Poor investments in Argentina led to the bank’s near bankruptcy. The Argentine economy slumped, as did the Brazilian which had its own credit bubble. This time, a consortium of other banks rescued Barings. Nathan Rothschild remarked that if Barings hadn’t been rescued the entire banking system in London would have collapsed.

Out of Barings came the action of a central bank acting as lender of last resort, famously foreseen and promoted by Walter Bagehot.

In the nineteenth century it became clear that crowd psychology in the banks, the balance of greed and fear over lending, drove a repeating cycle of credit boom and slump. With the passage of time bankers recovering their poise from the previous slump forgot its lessons and rhymed the same mistakes all over again. Analysts promoting theories of stock market cycles and cycles of economic activity need look no further for the underlying cause.

In the absence of credit expansion, businesses would come and go in random fashion. The coordinated expansion of credit changed that, with businesses being bunched into being created at the same time, and then all failing at the same time. The process of creative destruction went from unnoticed market evolution to becoming a periodic violent event. Monetary institutions still ignore the benefits of events being random. Instead they double down, coordinating their interventions on a global scale with the inevitable consequence of making the credit cycle even more pronounced.

It is a huge mistake to call this repeating cycle a business cycle. It implies it is down to the failure of free markets, of capitalism, when in fact it is entirely due to monetary and credit inflation licensed and promoted by governments and central banks.

The rise of central banking

Following the Barings crisis in 1890 the concept of a lender of last resort was widely seen to be a solution to the extremes of free markets. Initially, this meant that the bank nominated by the government to represent it in financial markets and to oversee the supply of bank notes took on a role of coordinating the rescue of a bank in difficulty, in order to stop it becoming a full-blown financial crisis. When the gold standard applied, this was the practical limitation of a central bank’s role.

This was the general situation before the First World War. In fact, even under the gold standard there was significant inflation of base money in the background. Between 1850 and 1914 above ground gold stocks increased from about 5,000 tonnes to nearly 24,000 tonnes. Not all of it went into monetary gold, but the amount that did was decided by the economic actors that used money, not the monetary planners as is the case today.

It was against this background that the US Federal Reserve Bank was founded in December 1913. Following WW1, it became a powerful institution under the leadership of Benjamin Strong. Those early post-war years were turbulent times: due to war time inflationary financing, wholesale prices had doubled in the US between 1914-1920, while the UK’s had trebled. This was followed by a post-war slump and by mid-1921 unemployment in the UK soared to 25%. In the US, the Fordney-McCumber tariffs of 1922 restricted European debtors from trading with America, necessary to pay down their dollar debts. A number of countries descended into hyperinflation, and the Dawes plan designed to bail out the Europeans followed in 1924.

While America remained on a gold standard, Britain had suspended it, only going back on to it in 1925. While the politicians decided overall policy, it was left to central bankers such as Strong at the Fed and Montague Norman at the Bank of England to manage the fallout. Their relationship was the most tangible evidence of central banks beginning to cooperate with each other in the interests of mutual financial stability.

With the backing of ample gold reserves, Strong was an advocate of price targeting through the management of money supply, particularly following the 1920-21 slump. His inflationary policies assisted the management of the dollar-sterling exchange rate, supporting sterling which at that time was not backed by gold. Strong also made attempts to develop a discount market in the US, which inflated credit markets further. One way and another, with the Fed following expansionary money policies and commercial bankers becoming more confident of lending prospects, monetary inflation fuelled what came to be known as the roaring twenties.

That came to a sharp halt in October 1929 when the credit cycle turned, and the stock market crashed. Top to bottom, that month saw the Dow fall 35%. The trigger was Congress agreeing to the Smoot-Hawley Tariff Act on 30 October, widely recognised at the time as a suicide note for the economy and markets, by raising trade tariffs to an average of 60% from the Fordney-McCumber average of 38%. President Hoover signed it into law the following June and by mid-1932 Wall Street had fallen 89%.

With such a clear signal to the bankers it is not surprising they drew in their horns, contracting credit, indiscriminatingly bankrupting their customers. All the expansion of bank credit since 1920 was reversed by 1934. Small banks went bankrupt in their thousands, overwhelmed by bad debts, particularly in the agricultural sector, as well as through loss of confidence among their depositors.

The depression of the 1930s overshadowed politics in the capitalist economies for the next forty years. Instead of learning the lessons of the destruction wrought through cycles of bank credit, economists doubled down arguing more monetary and credit inflation was the solution. To help economic sentiment recover, Keynes favoured deficit spending by governments to take up the slack. He recommended a move away from savers being the suppliers of capital for investment, with the state taking a more active role in managing the economy through deficit spending and monetary inflation.

The printing of money, particularly dollars, continued under the guise of gold convertibility during the post-war Bretton Woods system. America had enormous gold reserves; by 1957 they were over 20,000 tonnes – one third of estimated above-ground gold stocks at that time. It felt secure in financing first the Korean then the Vietnam wars by printing dollars for export. Unsurprisingly, this led to the failure of the London gold pool in the late 1960s and President Nixon suspending the fig-leaf of dollar convertibility into gold in August 1971.

Once the dollar was freed from the discipline of gold, the repeating cycle of bank credit was augmented by the unfettered inflation of base money, a process that has continued to this day.

The current position

Since the turn of the millennium there have been two global bank credit crises: the first was the deflation of the dot-com bubble in 2001-02, and the second the 2008-09 financial crisis that wiped out Lehman. It was clear from these events that the debate over moral hazard was resolved in favour of supporting not just the banks, but big business and stock market valuations as well. Furthermore, America’s budget deficits were becoming a permanent feature.

The cyclical rhythm of bank credit expansion and crisis was taking place against a background of increasing wealth transfer from the productive sector by means of an underlying monetary inflation. The beneficiaries have been the government and non-productive finance as well as large speculators in the form of hedge funds. The evidence of this transfer of wealth through the effect on the general level of consumer prices was increasingly suppressed by statistical method. While the official consumer price inflation indicator has been pegged between one or two per cent, independent analysts (Shadowstats and Chapwood Index) reckon the true figure is closer to ten per cent.

That being the case, the use of a realistic price deflator tells us that the US economy, and presumably others, in recent years have been contracting in real terms. Furthermore, GDP, nominal or real, is an appalling indicator of economic progress, being no more than a measurement of the increasing quantities of government funny-money inflating the economy. It does not tell us how that money is used and the benefits that actually flow from it, nor the degree of price distortion it generates.

It is hard to avoid concluding that manipulating the statistics to hide the evidence is the last throw of the fiat currency dice, just as the Emperor Diocletian collapsed the Roman economy by suppressing evidence of rising prices through his edict on maximum prices in 301 AD.

This brings us to the current position, which is increasing looking like being on the edge of another cyclical crisis. If so, it marks the end of a period of far greater monetary and credit expansion than seen in previous cycles, coinciding with a Smoot-Hawley lookalike in the trade war between the two largest global economies.

The following big-picture factors are relevant to the likely timing for a credit crisis:

• Global debt has accumulated to an estimated $255 trillion, up from about $173 trillion at the time of the Lehman crisis An alarming proportion of it is unproductive, being government, consumer borrowing, and funding for financial speculation as well as owed by unviable businesses.
• With annual debt payments already accounting for most of the US budget deficit and that deficit getting larger, any rise in dollar interest rates would be ruinous for Federal government finances. Eurozone governments are in a similarly precarious financial position. Governments are ensnared in a classic debt trap.
• An estimated $17 trillion of global bonds are negative yielding, which is unprecedented. This is a market distortion so extreme that it cannot be normalised without widespread financial disruption and debtor destruction. There is no exit from this condition.
• The repo market crisis in New York indicates the banking system is in intensive care. The start of it coincided with the completion of the sale of Deutsche Bank’s prime dealership to BNP. It would be understandable if large deposits failed to transfer with the business and went to rivals instead. The problem has continued, indicating senior bankers’ groupthink is already turning from greed to fear.
• US bank exposure to collateralised loan obligations and the leveraged loan market, comprised mainly of junk loans and bonds, is the equivalent of most of the estimated $1.9 trillion sum of bank capital. It confirms this article’s thesis that the level of ignorance over banking risk is late stage for the bank credit cycle and likely to be catastrophic.
• The share prices of Deutsche Bank and Commerzbank indicate they are not just insolvent but will need to be rescued – and soon. Banks in other Eurozone jurisdictions are in a similar situation. However, all Eurozone countries have passed bail-in laws and do not expect to bail out individual banks. The upshot is at the first sign of a bail-in being considered, a flight of large deposits will very likely be triggered and bank bond prices for all Eurozone issuers will collapse. The room for error in crisis management by central banks is considerably greater than at the time of the Lehman crisis eleven years ago.

The forthcoming credit crisis could repeat 1929-32

An extreme amount of monetary creation over the last ten years and the US-China trade war over the last two is horribly reminiscent of late 1929, when the combination of the end of the credit cycle and escalating trade protectionism combined to wreak financial destruction on a global scale. We face a possible repeat of the 1929-32 experience and the depression that followed. The long-term expansion of global trade has already come to a halt. The secondary impact on economies such as Germany’s is beyond question.

Even if a halt to the trade war between the US and China is agreed in the coming weeks, the crisis has been triggered and our empirical evidence suggests it will get worse. It appears that common sense on trade policies is unlikely to prevail, because the conflict is far deeper than just trade, with the Hong Kong riots as part of the overall picture.

The Chinese believe America has destabilised Hong Kong with good reason: the US Treasury has become dependent to receiving the lion’s share of international portfolio flows to support the dollar and finance the US budget deficit, and China’s own investment demands are a threat. With the dollar’s hegemony under attack and China seeking those same portfolio flows to invest in her own infrastructure projects through the Hong Kong Shanghai Connect link, Hong Kong had to be destabilised.

For this and other reasons, trade tariffs are only part of a wider financial war, which is increasingly likely to escalate further rather than abate. With his trade policies having backfired badly, President Trump is now under pressure with time running out ahead of the election in a year’s time. He is threatened with impeachment by Congress over the Ukraine affair, and his popularity ahead of an election year remains subdued. He has even appealed to Jay Powell, Chairman at the Fed, to introduce negative interest rates to boost the economy. Backing down over China is unlikely, because it would be a presidential policy failure.

What will the developing crisis look like?

Clearly, central banks will respond to the next credit crisis with an even greater expansion of money quantity than at the time of the Lehman crisis eleven years ago. The consequence of this monetary inflation seems certain to lead to an even greater rate of loss of purchasing power for fiat currencies than currently indicated by independent assessments of price inflation.

Monetary inflation is likely to be directed at resolving two broad problems: providing a safety net for the banks and big businesses, as well as funding rising government deficits. Therefore, the amount of quantitative easing, which will be central to satisfying these objectives, will soar.

The effect on markets will differ from being a rerun of the 1929-32 example in one key respect. Ninety years ago, the two major currencies, the dollar and sterling, were on a gold exchange standard, which meant that during the crisis asset and commodity prices were effectively measured in gold. Today, there is no gold backing and prices will be measured in expanding quantities of fiat currency.

Prices measured in fiat currencies will be determined ultimately by the course of monetary policy. But in real terms, the outlook is for a repeat of the conditions that afflicted markets and economies during and following the 1929 Wall Street crash. A further difference from the depression years is that today western governments have extensive legal obligations to provide their citizens with welfare, the cost of which is escalating in real terms. Add to this the cost of rising unemployment and a decline in tax revenue and we can see that government deficits and debts will increase rapidly even in a moderate recession.

This brings us to an additional problem, likely to be evident in a secondary phase of the credit crisis. As it becomes obvious that the purchasing power of fiat currencies is being undermined at a rate which is impossible to conceal through statistical method, the discounted value of future money reflected in its time preference will rise irrespective of interest rate policy. Consequently, borrowers will be faced with rising interest rates to compensate for both increasing time preference and the additional loan risk faced by lending to different classes of borrowers.

Besides closing off virtually all debt financing for businesses and increasingly indebted consumers, this will play havoc with governments accustomed to borrowing at suppressed or even negative interest rates. Prices for existing bonds will collapse, and banks loaded up with government debt to benefit from Basle regulations will find their slender capital, if they have any left, will be quickly eroded.

The world of fiat currencies faces no less than its last hurrah. Indeed, some of the more prescient central bankers appear concerned the current system is running out of road, with the dollar as the world’s reserve currency no longer fit for this purpose. They want to find a means of resetting everything, exploring solutions such as digitising currency through blockchains, doing away with cash, and finding other avenues to try to control the vagaries of free markets.

None of them will work, because even a new form of money will be required to rescue government finances and prevent financial and economic failure through inflation. The accelerating pace of monetary creation to address these problems will remain the one problem central to the failure of a system of credit and monetary creation: the impossibility of resolving the debt trap that has ensnared us all.

Just as Germany found in 1923, monetary inflation as a means of funding government and other economic liabilities is a process that rapidly gets out of its control. Eventually, people understand the debasement fraud and begin to dispose of the fiat currency as rapidly as possible. It then has no value.

The ending of the fiat currency regime is bound to terminate the repeating cycles of bank credit legitimised since 1844. The socialism of money through inflationary debasement will be exposed as a fraud perpetrated on ordinary people.