EC Economic And Monetary Outlook For 2021

Hedging a dollar collapse

We have established that a rise in interest rates and the increasing pace of covid-related bankruptcies in the new year will be the valuation background for financial securities, making a broad-based portfolio of them destructive for the purpose of wealth preservation at what is turning out to be a time of monetary hyperinflation. That is not to say that some equities will not perform well in nominal terms measured by depreciating currencies. But because modern financial economies are built on the sand of zombie corporations, the elimination of this accumulated deadwood is likely be one of the early hurdles to face in the new year.

Instead of seeking shelter in regulated investments it should be sought in sound money — the money that will eventually replace unbacked fiat. In an earlier article for Goldmoney, The psychology of money, I analysed what this money is likely to be.[vii] I concluded that after an indeterminate period governments and central banks would be forced to change the status of their fiat currencies to gold substitutes, because gold reserves are the only asset that they possess to back a sounder form of money than infinitely expanding fiat.

That being the case, we know how fiat currencies will eventually be replaced. But there are significant hurdles to be overcome, not least the destruction of establishment’s beliefs that a government can manage economic outcomes better than individuals left to pursue their own economic objectives. It requires macroeconomics to be spurned and replaced by the laissez faire policies that emanated from the Manchester school in its fight against corn laws and other tariffs in nineteenth century Britain. But as a first step there will be no alternative to stopping a collapse of the dollar and other major currencies by backing them credibly with gold — the lessons may have to come later.

It is too early to speculate about the timing and duration of these events. But as noted in this article, the lesson from the John Law episode is a collapse of today’s currencies and financial securities could happen remarkably quickly. When it does, there will be confusion likely to drive both cryptocurrency and precious metal prices considerably higher measured in collapsing fiat. A second stage will be the debate as to whether bitcoin or gold inherits the vacuum left by fiat currencies, as a wider population, rejecting fiat, makes its choice.

But to assume, as bitcoin hodlers do, that governments will have no say in the matter is a naïve mistake. States have no bitcoin, but they have gold. Gold is their last resort and that is where it will end up. And gold as money has the inherent flexibility for a successful form of money, as proved before the First World War.

Conclusion

The similarities of today’s financial condition to that of John Law’s France almost exactly three hundred years ago are too striking to ignore, strongly pointing to a similar outcome. This has become the background to assessing monetary and financial outcomes in 2021. With respect to financial assets the following points should be noted:

• By the end of 2021, we could see the end of fiat currencies. The most likely outcome is central banks will be forced to turn their fiat currencies into credible gold substitutes. No doubt, many central banks will fail to do so because they possess little or no gold unencumbered by loans and leasing. Others, such as the Fed, only possess a gold note from the US Treasury, which for geopolitical reasons is likely to be extremely reluctant to loosen its hegemonic power over other nations by accepting gold substituting the dollar as the world’s default currency.

• The Fed will almost certainly lose control over financial markets as it is forced to hyperinflate the dollar. Foreigners will dump the dollar, fixed interest holdings and equities, reducing their $27.7 trillion exposure to a level of liquidity that relates to more closely to their trading prospects.

• Equities are being pumped up by the Fed through QE to valuation extremes, a policy set up to fail when interest rates are forced to rise. It will almost certainly lead to a vicious bear market on 1929-32 lines, with the exception that financial asset prices are being measured in collapsing fiat instead of dollars backed by gold.

• That leaves the field to leading cryptos (particularly bitcoin) and precious metals. After an indeterminate period of time, we can be certain that gold will become the money to replace fiat because monetary gold is already owned by governments and their central banks.


[i] See https://www.youtube.com/watch?v=H8hm3IDWT_A

[ii] See https://fortune.com/2020/05/27/goldman-sachs-bitcoin-call-leaked-documents-slides-crypto-clients/

[iii] See https://fortune.com/2020/05/27/goldman-sachs-bitcoin-call-leaked-documents-slides-crypto-clients/

[iv] See https://www.forbes.com/sites/youngjoseph/2020/12/14/bitcoin-faces-a-600-billion-catalyst-jpmorgan-strategists-say/?sh=41f1febf1e6c

[v] For long-term securities see https://ticdata.treasury.gov/Publish/slt2d.txt and for short-term securities and bank deposits, see https://ticdata.treasury.gov/Publish/bltype.txt

[vi] See Money creation in the modern economy pp 21-25: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

[vii] See https://www.goldmoney.com/research/goldmoney-insights/the-psychology-of-money

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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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