A few weeks back I said I marginally preferred a Biden victory from the perspective of the performance of our funds. Essentially, we are operating the funds as a hedge against the collapsing financial system and our 100% + returns in just over two years show that it is working.
If our funds have a weakness, it’s that their performance relies on other people making really bad decisions. Politicians and central bankers have not let us down yet. They are important to us, as are the decisions they make.
Assuming Biden withstands the legal challenges, my mind turns to the little known Kamala Harris. To me Joe Biden seems unwell, there would be a very strong likelihood he doesn’t see out the full four year term and if he does he will not have the vigour to take forward his own agenda. Others will do it for him.
Harris clearly has something, you can’t just stroll into the office of Attorney General in California. From January 20th next year she will likely be right next to the hot seat, I doubt she will sit idly by and not push her own projects.
Her agenda includes the following:
- A climate plan in which she pledged a $10 trillion investment in a clean-energy transition over the next ten years
- A Green New deal (including the above)
- KamalaCare, scant details, but better healthcare coverage for the uninsured
- Student Loan forgiveness of up to $20,000 each
Policy assessments aside, America does not have $10 trillion, or indeed $1 trillion annually. Not even close. The student loan book totals $1.6 trillion, forgiving 20% of it is another $320 billion the USA doesn’t have. That’s all before healthcare and the rest of the New Deal has even been looked at.
Clearly not all of this will happen but it’s very encouraging for our funds. I am certain the administration will borrow the money and the Federal Reserve will be forced to print more dollars to keep interest rates down. We are almost guaranteed economic mismanagement and frenzied spending (as we equally would have been under Trump).
What’s more, Harris is close to Alexandria Ocasio-Cortez (AOC), a proponent of Modern Monetary Theory (printing money). Last year they jointly announced details of the Green New Deal which AOC subsequently indicated would be paid for through MMT. The article about it here is probably more interesting in retrospect than it was at the time.
We can’t say they didn’t tell us, because they did.
I find all this talk about Central Bank Digital Currencies (CBDC) very odd. Particularly Lagarde’s nonsense. The Euro, to the best of my knowledge, is already digital. When she chooses to print billions of them to buy junk bonds every month, it is simply a key press at the European Central Bank.
The way she carries on would make you think she is marching through town with a wheelbarrow full of money each month, leaving it outside Deutsche Bank so their traders can unload their toxic waste.
The Euro is digital. So is every other fiat currency.
The whole smoke and mirrors show is just a proxy for introducing a currency with more flexible aspects, like helicopter drops and negative interest rates. Specifically, the issue for policy makers is that the money they are printing isn’t reaching people, it just goes straight into bonds and equities. That is because of the current mechanism of banking. A central bank introduces looser policy, retail bank lowers borrowing cost, but people still have to be willing to borrow more for it to be effective.
Contrast that to a CBDC, I suspect they will be designed to circumvent retail banks. Press a button and money will appear in an app on your phone. Go and spend it please. It will massively improve the transmission mechanism of money printing and direct monetary policy interventions. In some ways it’s a hybrid monetary/fiscal tool. You simply give money away very directly, knowing that it will be spent.
The Reserve Bank in Australia has jumped on the bandwagon too. They have gone the whole hog using Distributed Ledger Technology. Again, it’s total nonsense because a central bank by definition cannot distribute its ledger. The word “Central” is in there for a reason. It’s centralised and they control it on behalf of the government.
Fractional Reserve Banking
Books have been written about how fractional reserve banking works, they are astonishingly boring. I assure you though that when fractional reserve stops working, the reverse will be true. That’s about to happen.
Here’s an effort at condensing the issue.
Fractional reserve banking:
Person A opens bank account: $1000, gets 2% interest
Person B wants a loan: bank lends $500 client pays 5% interest
For simplicity, assume person B deposits with the same bank.
Bank has $1000 in actual cash $500 in loan assets and $1500 in liabilities
They make $250 in income on the loan. They pay $200 to the depositor.
The bank is profitable, the customers are happy.
Now it is the year 2021
Interest rates have gone negative, they are -1%
Person A opens bank account: $1000, they refuse to wear -1%. Who would deposit and pay? So the interest rate is zero, or nobody would deposit.
Person B wants a loan: bank lends $500, client pays 1% interest
Bank has $1000 in actual cash, $500 in loan assets and $1500 in liabilities
They make $50 in income on the loan. The bank pays nothing to the depositor
The bank is barely profitable.
Person A believes they can do better than 0% (which they can). They withdraw their money.
Bank now has $0 in cash, $500 in loan assets and $500 in liabilities.
Person B starts to use their loan. The bank has no cash and it collapses.
- Ability to charge negative rates
- Stops on withdrawals during a crisis
- Automatic haircuts for depositors when a bank goes bust
It’s a trap, I’m sure of it.
The IMF upped their game again this week with a piece in the FT from their Chief Economist Gita Gopinath. She too has realised that monetary policy no longer works. “Fiscal policy will be the main game in town”.
I think we must accept that to be definitionally true with interest rates where they are, but where will the money come from? Who will buy the hastily issued government bonds? In theory large scale bond issuance would increase bond supply and force the price down and the interest rate up, but we know that won’t be allowed to happen.
Simply, central banks will print the money required to buy the bonds in the secondary market keeping interest rates low. It is a gigantic perversion of the financial system and it will explode. There are no free lunches. Exactly this was promised in Australia this week.
In particular, we are intending to buy $100 billion of government bonds over the next six months, purchasing bonds issued by the Australian Government as well as by the states and territories.
Actually, as Chief Economist of the IMF I would prefer the truth be called out. That governments cannot print money and buy their own bonds forever, that interest rates must be allowed to rise so that risk can be properly assessed and the technically bankrupt become actually bankrupt so their debts are wiped clean.
The macro-economic picture has never been clearer. I don’t recall government policy being so explicitly laid out for future years. It has been true since QE2 in 2010, we broadly knew then that their was no way back from the banking crisis of 2008. QE1 was fair enough “temporary” they said, “we’ll unwind it” they said.
Well they didn’t and the policy measures become more and more extreme. It is no coincidence that every fiat currency in the world has hyper-inflated against bitcoin in the same time period. The wonder is only that 2% of the world has noticed. They will notice when the bond market turns though because it is enormous and a lot of people unknowingly rely on it for retirement.
Once again, another political-bureaucrat is singing the tune she is paid to sing. Her CV can be found here, it is absolutely glittering and totally absent a real job.
For the avoidance of doubt, I reiterate. Since QE2 in 2010 the EUR, USD, JPY, GBP, AUD, CAD, pick anything credible, they are all down over 99% versus bitcoin. It’s hyperinflation.
I very much believe this to be true. I give you the heavily supported bond market as an example of the corrupt insulation of a specific asset group. That’s why the bond market will eventually collapse.
Another example, the stock market. The S&P 500 began trading in 1957, it takes breaks when it falls more than 10%, it doesn’t trade on the weekend or public holidays. In total it has traded for 98,000 hours since 1957.
On the other hand bitcoin trades 24/7, 365 days year. It has been dramatically volatile at times as a result because it receives no support and has no trading breaks for price falls. It finds its natural level, however severe and uncomfortable that journey might be.
Total trading hours since launch for bitcoin, 93,000. It will go past the S&P 500 in total traded hours in July next year.
Which one will eat the others lunch? The cosseted bond and stock markets or the wolf in the wild?