I'm not talking about a strong west wind. No, you do not have to fear gusts of wind.
But for years of wind sowing by the Federal Reserve Board (FED), the European Central Bank (ECB) and the Bank of Japan (BOJ). What that will bring is a storm that is unparalleled.
The absurd government policy on spending that has been going on for years, and the failure of central banks to intervene but even support this spending policy, will soon lead to an economic crisis of unprecedented magnitude.
I'll explain it to you. Read and shiver.
Everything used to be better… ..
We used to have some very decent central banks in Europe. Of course that of Switzerland, but the most famous and famous was the Bundesbank, the central bank of Germany. The main task of central banks has always been to control inflation. This worked as follows: If the economy was operating well and there was plenty of employment, then producers and shopkeepers could raise their prices. This often led to wage increases because workers wanted to be compensated for the higher cost of living. The increase in wages in turn resulted in higher costs for the entrepreneurs who then wanted to increase their product prices again.
This phenomenon is known as the 'wage-price spiral'.
If that process threatened to get out of hand, the central bank intervened by raising interest rates, usually step by step. Higher interest means for most people there is less purchasing power and for most companies there are higher costs. That stopped the inflation process. As a result, the growth of the economy slowed down and inflation calmed down. This was a delicate game, as acting too late would lead to interest rates being too high and continuing with high interest rates for too long could bring the economy into recession. And that was not the intention. The Bundesbank was very adept at this game and the Dutch Central Bank therefore always followed the policy of the Bundesbank 1 on 1.
But for the last 15 to 20 years (the BOJ for a little longer), central banks have been changing their policy. They have turned into economic stimulators and set minimum targets for inflation. And they have come up with the idea of achieving those goals by throwing around a lot of money.
Interest is low.
Absurdly low. That is actually very strange, when you consider that interest is a price for money. And the price for money in a normal world is determined by supply and demand. But in today's world, the demand for money is high while the price is low.
I will now try to explain how that is possible.
The major central banks finance the governments of Japan, the US and Europe. They shouldn't do that. That is not part of the tasks of the central banks. But in order to do that, they have come up with the following trick: The central banks do not lend money directly to the governments, but buy the debt securities of the governments on the financial markets.
In a normal world, you and I and our pension funds would buy government debt directly from the government or in the financial markets, and the relationship between supply and demand and the risk assessment would determine the level of interest. Interest that the government, as a debtor, would have to pay to you and me as an investor / creditor.
But now there is no relationship between supply and demand at all. The central banks have unlimited amounts of money. That is simply created there. The banknote press can be used 24 hours a day, 7 days a week. Figuratively, because in reality they are just digital numbers. That's much easier.
On top of the gigantic debt (28.275 billion) and the budget deficit (3.100 billion) of the United States, Joe Biden is taking it a step further this year with a stimulus package of $ 1.900 billion. Enough money, the FED will press on!
By the end of the year, the US national debt will exceed 30.000 billion. Staggering amounts that most people can't imagine.
But that will be about $ 175.000 per American employee.
Expressed as a percentage of the total value of the US economy, the debt is approximately 40%. And that is an optimistic estimate, because all the economically destructive measures will cause the US economy to contract again this year.
The amount of money that the European Central Bank has already created from scratch is now close to 7.000 billion, or 60% of the total value of the European economy.
But the most dizzying thing is the BOJ, with a mountain of debt of almost 140% of the value of the economy.
According to the Institute of International Finance, the total amount of debt (governments, companies and individuals) worldwide has risen to 191.000 billion euros. Three times more than 20 years ago, and 3,65 times higher than what people earn on our planet in a year.
Can this continue like this?
You may be wondering.
No, this cannot continue like this. But the problem is that there is no going back either.
At some point, the massive money creation will make its way into the economy and trigger a gigantic wave of inflation. So far we have only seen asset inflation as a result of printing money. Asset inflation means that it has had an effect on the prices of houses, real estate and stocks.
But right now there is a very dangerous movement going on. On the one hand, the economies are severely affected by dictatorial government policies. As a result, government spending will increase even more. At the same time, government revenues are falling. As a result, taxes must increase even further. Companies that thrive in this oppressed, sabotaged economy are raising their prices. Entrepreneurs dealing with lock-downs will either go bankrupt or the survivors will soon, if they get a little breath of air again, raise their prices sharply. On the world stage, we are already seeing that commodity prices are higher than ever and freight rates, both shipping and road transport, have exploded. Tax increases are also inevitable for businesses.
All of this is only a matter of time until it starts to lead to overall price increases.
In the short term you will notice the pressure of higher taxes and municipal charges. The costs for housing and mobility, the two largest cost items for most families, have already risen sharply. And I don't know how you fare at the supermarket checkout?
We call that inflation.
In the past, inflation was the result of exuberant economic developments and inflation could be combated by means of the interest rate weapon of the central banks, as I explained above.
Now we are dealing with a slumping economy and an excessive spending pattern of governments.
This is a very poisonous cocktail.
And the central banks can do nothing at all. Due to the policy of the central banks in recent years, printing money and lending it indirectly to governments, they have managed to get the price of money, the interest, to 0 or even below it. This, of course, gave vent to countries such as Greece, Italy, Spain, Portugal, France and Belgium, which already had far too high public debt in relation to the economies in those countries.
But of course there was no incentive to do something about the sky-high debts. On the contrary, if they can get money so easily and cheaply, then politicians are the first to start spending well. And if it were still spent on improvements in infrastructure, better education or in other matters that could increase the future earnings model of a country…. But that is often not the case.
The money is spent on current affairs, more government intervention, more supervisory bodies, a larger government apparatus and more bureaucracy. The corona idiocy has added a hefty boost. And none of that results in economic growth or more prosperity.
The inflation wave, which is already underway, threatens to become an inflation tsunami and cannot be counteracted by interest rate hikes. The whole system has been disrupted. Doing nothing will allow inflation to run rampant and eventually bring down the economy. Intervening will mean the bankruptcy of, especially, the southern European countries. These countries, with their mega-debt position, cannot cough up higher interest rates during an already shrinking economy. And thus also bring down the economy.
Long-term US interest rates recently rose to 1,5%, which already caused a small shock wave among economists and investors.
This is what I am concerned about. Is this how it will happen? I am reminded of a Chinese sage who once said:
Forecasting is difficult, especially when it comes to the future.
But I also have to think about this:
For all we've seen, we ain't seen nothing yet.
Except when we think back to the Weimar Republic, about a hundred years ago. Then it was thought that printing money could solve the problems. Just take a look at where that has led to:
And it didn't stop here, it got much crazier:
More recently we have seen the same thing happen in Zimbabwe:
And right now there are dramas in Venezuela where you need a trailer full of money to run errands. If anything is available at all… ..
In each case:
History has always taught that printing money en masse to solve economic problems leads to hyperinflation and that money eventually becomes worthless.