On the Way to Monetary Ruin

A handful of cash pictured on October 30, 2009 in Hialeah, Florida. Joe Raedle/Getty Images

Since the first fiat paper currency was printed in China, 1,000 years ago government fiat money have wrought havoc on economic activity, purchasing power, and the 99 percent of the population who don’t receive “free money.”  All such schemes failed - without exception.

In 1944; at Bretton Woods, New Hampshire; the world’s most powerful nations ceded leadership of a global “gold standard” to the United States. When Nixon reneged on this pact in 1971 for the first time, not a single national currency was backed by anything but government coercion.  What ensued has been the most egregious example of irreversible central bank monetary destruction in global history.

Not a single signatory complained – as without gold’s shackles, central banks of all countries were given a license to “print money.”  With essentially no debt, they were free to “charge up” their respective nations’ “credit cards” – creating the illusion of prosperity; and of course, the accompanying, unprecedented increase in financial asset prices.

Unfortunately, the debt accumulation that accompanies such money printing eventually has to be repaid. Through money earned or if that’s not possible, through inflation.

Dotcom Bust Just the Beginning

Most people consider the 2000-02 dotcom bust to have been a typical cyclical phenomenon – but in fact, it represented the peak of history’s largest credit boom…which would have led to a painful, but necessary credit contraction if central banks allowed Economic Mother Nature to run her course.

However, “Maestro” Alan Greenspan opened the Pandora’s Box of relentless intervention when he fought the post-dotcom decline by lowering interest rates from 6.5 percent in 2000 to 1.0 percent in 2003 – in turn, igniting the biggest housing bubble in global history.  The resulting crash in 2008-09 was far worse than the 2000-02 bust…setting the stage for a far more painful credit contraction sometime in the future will inevitably occur.

However, now that central banks were getting the hang of 24/7 intervention, increasingly destructive tools were invented to prolong “prosperity” – or better put, delay the inevitable.  Given the success of the U.S. “President’s Working Group on Financial Markets” to support stocks, Greenspan’s protégé Ben Bernanke; and his cohorts at other central banks; realized it was possible, via various “manipulation operatives,” to support financial markets indefinitely, via both overt and covert means.  Or so they thought.

Pandora’s Monetary Box Opened in 2008

The United States got the global intervention ball permanently rolling downhill with 2008’s “TARP” bailout program – forced into existence when then Treasury Secretary Hank Paulson; before that, CEO of Goldman Sachs; threatened Congress with economic annihilation if it wasn’t enacted.  Since then, all central banks have utilized heavy-handed means to prevent what will inevitably be the worst credit contraction in global history - as highlighted by European Central Bank (ECB) Central bank head Mario Draghi’s infamous 2012 statement that he’d do “whatever it takes” to save the Euro.

The global monetary dominoes that have since fallen are truly historic – as essentially all currencies have dramatically declined, despite similar central bank efforts to “support” their economies.  To wit, the Euro has fallen nearly 10 percent since 2012; whilst the ECB balance sheet has risen an additional 50 percent, to a level more than seven times larger than where it stood at the turn of the century.  This, as Europe’s economy has stagnated, with the “99 percent” suffering so powerfully from debt servitude and inflation, powerful anti-government revolutions have emerged in nation-states as diverse as the UK, France, Italy, and Spain.  Still, the debt keeps climbing - as negative interest rates have been in place since 2014; and “QE,” or quantitative easing, since 2015.

In Japan, QE originated in 2001 because atypical demographics (i.e., an older population) caused its financial markets to collapse a decade before other Western societies.  And following 14 years of zero interest rates, the Bank of Japan followed the ECB’s lead by taking them negative in 2014.  Consequently, Japan’s balance sheet has nearly quadrupled since 2012 - yielding an economic stagnation that will likely never end, given the “Land of the Rising Sun’s” unfathomable debt to GDP ratio of roughly 250 percent.

Finally, there’s the United States – which masks the explosion of debt/GDP through misleading economic statistics and hiding Freddie Mac and Fannie Mae debt “off balance sheet”; but irrespective, has the world’s largest “on balance sheet” debt load - of $21.7 trillion, compared to $5.7 trillion in 2000, $10.0 trillion in 2008…and $0.4 trillion in 1971.

The “Emerging Market” Currency Crisis

When “leading” central banks print money, the rest of the world suffers more.  Declining economic activity and surging debt have caused all central banks to follow the aforementioned “Big Three” – but since their currencies are far less liquid, the resulting inflation surge has been far more powerful.  Hence, the “Emerging Market” financial crisis that has caused essentially every global fiat currency to fall to, or near, all-time lows – including “emerging markets” where the majority of the world’s population reside…particularly, China and India.

Which in turn, fosters a vicious feedback loop of new money-printing schemes – like the ECB’s pronouncement two months ago that it would maintain negative interest rates through “at least the summer of 2019” and “as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2 percent over the medium-term.”  In other words, central bank monetary destruction is on course to dramatically worsen, with potentially terrifying political, economic, and social ramifications – yielding increased demand for assets associated with monetary preservation, like gold and Bitcoin.

Andy Hoffman is a CFA charterholder who spent 16 years on Wall Street as a trader, buy-side, and sell-side analyst. He now runs the consultancy firm CryptoGoldCentral.com

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.