EC Economic And Monetary Outlook For 2021

The Fed can also influence commercial banks with respect to the expansion of bank credit. This it attempts to do through the suppression of interest rates, but other than by introducing regulations that have the force of law, the Fed’s powers in this respect are limited. And its management of interest rates is with a mistaken view that they can be deployed to manage the rate of monetary inflation, which events show only succeeds to a limited extent.

The objectives of monetary inflation must also be clearly stated, and that is two-fold. The most important is to ensure the government is always funded. The Fed cannot demonstrate its independence by telling the politicians that they will have to rely on commercial banks to fund budget deficits and to take their chances on interest costs. While notionally independent, like other central banks the Fed has to do its government’s bidding and has no part of setting the budget — a prerequisite of monetary control.

The secondary mission is to ensure full employment consistent with a price inflation target of two per cent. And in this, government statisticians have suppressed the statistics so that the Fed has ample latitude to increase the money supply to fund the government’s spending without the consequences becoming obvious.

Policy planners are generally assured that they can expand the money supply to achieve these two objectives. Despite the occasional upset, they have been doing so with increasing confidence since the financialisation of the US economy in the mid-eighties, a few years after changes were first made to the calculation methods of prices for the purposes of indexation, the beginning of a process that allows today for a fully managed outcome. Nothing now appears to be standing in the Fed’s way to expand the quantity of money in 2021.

This is delusion. There are early signs that there is a considerable risk that both markets and the wider US population are beginning to understand the consequences of a monetary policy that is committed to infinite expansion. The evidence of this is in the rising prices illustrated in Figure 2 above, particularly of cryptocurrencies, whose cohort have learned the vital lesson of the relative rates of monetary expansion and their consequences for prices.

There is a growing feeling, even among the establishment’s mainstream supporters, that so long as Fed policies continue on their current course, bitcoin will go to the moon. In an interview on CNN, Morgan Stanley’s chief investment strategist recently made the case for bitcoin as a hedge against money-printing.[i] You can hardly get more establishment than that, excepting perhaps Goldman Sachs. Goldman reportedly rejected bitcoin as not a real asset as recently as last May.[ii] By December, this changed to bitcoin being a “retail inflation hedge”.[iii] JPMorgan is also turning bullish on bitcoin.[iv]

Analysing comments from these establishment pillars reveals they have learned the consequences of monetary policies for bitcoin, but not necessarily for the dollar. If one was to describe the mainstream view in simple terms, it has yet to fully understand the repercussions of an inflation hedge, not against rising prices for goods and services — the common macroeconomic definition of inflation — but against the classic definition of an inflation of the money supply. With mainstream understanding evolving from Goldman Sachs’ dismissal last May to a growing acceptance of bitcoin as an investment asset only recently, this is a trend not just in the price of bitcoin and its near substitutes, but of the wider consequences of currency debasement.

With previous hyperinflations, and they have all been of similarly unbacked fiat currencies, the public’s understanding of inflationary monetary policies has always lagged the reality, believing only until very late in the debasement process that money retains an objective value for the purpose of transactions. In 2021 we can expect to see a difference, with an educated, technology-embracing and growing cohort telling everyone what is happening to their money in advance of the final crisis. And there is no proof as visible as a rapidly rising bitcoin price for evidence that a viable inflation hedge is central to preserving wealth for the middle classes.

This does not describe a replica of the paper mark collapse of 1919-23, which is the example widely quoted. We are describing a combination of a public likely to awaken considerably more rapidly than the German middle classes did to the destruction of their wealth, together with a highly financialised modern economy. While currently confident of its control over money in its inflationary deployment, fairly early in 2021 the Fed is likely to see its policy rumbled. Other than rapidly rising prices for bitcoin being public evidence of the consequences of monetary policies, there is an increased likelihood of the 1929 crash replaying in current times, taking down commercial banks and zombie companies. It will be the Keynesian experiment failing for the same reasons that John Law’s Mississippi bubble failed, and because Keynes went global, it will be more dramatic. That is likely to be closer to the mark than Germany’s hyperinflation of the early 1920s

Setting the scene for a dollar collapse

In order to finance the government’s deficit, the Fed has suppressed interest rates. Other central banks have suppressed theirs as well, distorting their bond markets considerably more than the Fed, even to the extent of buying in government bonds at negative interest rates. The Fed has not gone that far, but there are signs that the cost of funding government debt is now beginning to rise. Figure 4 is of the yield on the US Treasury 10-year bond.

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Technical analysts will recognise the importance of a golden cross — arrowed on the chart. It is one of the most reliable indicators of a change in trend, telling us to expect higher yields in future. Powerful enough on its own, we must also note the extraordinary level of foreign ownership of dollars and of financial investments denominated in dollars, amounting to $21.662bn in long-term securities, and a further $6.003bn in short-term securities and bank deposits, giving a total of $27.665bn.[v] This is roughly 140% of US GDP of both assets and dollar deposits overhanging dollar denominated markets.

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Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information ...

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