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4.February 2019


This guest contribution in the FINANCIAL TIMES (FT) is so good and virtually brings bto's world of ideas to the point. It clearly shows that we are at the end of a decades-long malfunction that can and will end only in a big bang, combined with a reset of the System:

„While many investors are fretting over what stage of the business cycle we are in, the global monetary system is collapsing — with a whimper initially, but ultimately a bang. The whimper is causing losses for equity investors. The bang will impact global asset prices as much as the end of the Bretton-Woods system or the end of the gold standard.“

  • „The system that is ending has no name. It is a system patched together in the embers of the Asian economic crisis, when many countries intervened in the foreign exchange markets to prevent the appreciation of their currencies. The impacts for investors were profound. The roughly $10tn rise in world foreign exchange reserves between 1999 and 2014 resulted in the forced purchasing of US Treasuries. Foreign central bankers owned just 13 per cent of the Treasury market in 1995, but held a third of it by 2014.“ bto: Das ist das, was Leute wie Ben Bernanke und Larry Summers als “global savings glut”
  • „This monetary system thus provided a funding holiday for global savers, freeing them to focus on funding the private sector instead. Meanwhile, central bank liabilities increased by $10tn. What could be better for global investors than a monetary system that depressed the global risk-free rate while boosting growth through an explosive rise in the money supply of emerging markets, particularly China? For equity investors the combination of a low discount rate and high growth rate drove prices and valuations higher until 2014.“

  • „(…) as foreign exchange reserves have stopped climbing, the job of funding the US government has fallen to savers, not central bankers. Foreign central bank ownership of US Treasuries has fallen from a third five years ago to just under a quarter today. Savers must take up the funding slack, while also buying the Treasuries now being sold by the Federal Reserve. This structural shift in the demand for Treasuries comes as supply is boosted by the Trump administration’s fiscal policy. Savers now have to fund the US government, and to do so they have to either sell other assets or save more.“

  • „The whimper is evident, but how will the bang look? Lower growth, lower inflation, lower asset prices and the prospect of declining cash flows will always raise questions about solvency. The global ratio of non-financial debt to gross domestic product is 234 per cent, compared with 210 per cent in December 2007, just before the last credit crisis. If the bang of credit default was possible 12 years ago, how much more likely is it today? For 10 years the growth of debt has outstripped growth in broad money and nominal GDP. Central bankers have bought growth by sacrificing financial stability.“
  • „(…) problems are particularly acute in China, with broad money growth at its lowest in the post-Mao era. The country’s debt-to-GDP ratio is rising at probably the fastest rate ever for a big economy in peacetime. This is the economy that we are told is de-gearing and reflating! It is not, and the burden of the economic adjustment enforced by theend of the growth in its foreign exchange reserves, and hence money supply, will probably be deflationary and will involve debt default. China will probably move to a flexible exchange rate, thus creating the freedom to grow and inflate away these debts.“

  • „The key consequence of this collapse will be the destruction of the euro. The expected success of the far-right and far-left in the European parliamentary election in May this year augurs the beginning of the end for the currency union. Both extremes share a commitment to the return of sovereignty to their parliaments that is incompatible with a single currency. That end will come even more quickly with the resultant economic pain from the collapse of the global monetary system (…).“

  • „(…) it is likely to begin with the imposition of capital controls by key eurozone countries. In the financial, political and social maelstrom of a eurozone dissolution, investors should not expect property rights to be respected.“

  • „The UK, where democracy and the rule of law will remain largely unchallenged, will become an attractive safe-haven investment for European investorsfacing increasingly authoritarian regimes and property sequestration on the mainland. Monetary collapses bring social and political ruptures and we now face two such collapses. It would be naive for any investor to assume that ‘government of the people, by the people, for the people’ will survive such ruptures. The risks remain highest in Europe.“