Anatomy of the Road to Come

Traditional Markets

In 2000, the great economist Milton Friedman described a bubble with great precision as a time where "stock valuations do not meat the, likely, real earnings of the stock's company" which very accurately descibes today's financial markets. Today we have manipulated stock valuations where the companies are using stock buybacks to produce artificial earnings growth and trap unsuspecting retail investors.

This is nothing new and has been common practice for the last three years or so. The Fed contributing to this fiasco with free money in the form of low interest rates for the last decade has only added fuel to the firepit which is financial markets. Recently it seems someone has lit the flame and the subsequent bonfire has been ragining ever since in hte form of extreme volatility.

Many traditional institutions will not make it out of this alive and that can been attested to from recent reports of hedge funds and multi-million dollar, publicly traded companies getting large loans from the PPP fund. Even hedge funds have been tapping into the essentially free money being injected at alwo interest rate of 1% and the possibility of it being a grant if their retention rate is high enough. As Bloomberg reported about a week ago, hedgefund managers are attempting to take advanatge of the loans to recoup losses from the recent downturn.

Deflation or Inflation?

Why not both? So far we have seen deflationary trends despite the unprecedented levels of of QE being pumped into the global economy by central banks across the world. At no point in history have we seen such a coordinated effort by central banks. The Fed has unleashed all it can so far short of buying stocks outright, though that is on the table as well.

Among the many programs intiated by central bankers are large credit lines between the central banks themselves that have been dormant since the 2008 crisis. The have opened a credit paper purchasing facility to provide extra liquidity to the overnight repo market. They are even purchasing junk bonds in the U.S., this decision coming conveniently 2 days before Ford received a credit downgrade making it untouchable under previous bond purchase program standards.

Inflation and deflation are in a constant battle with one another in any centrally planned economy, and if the planners have any say in it, delationary trends will not prevail. One of the goals of central banks is to slowly erode the value of it's currency over time to allow for debt accumulation on a large scale. This means inflation will certainly win this battle.

What's Next for Fiat?

All fiat fails. There has been no fiat currency to survive the tests of time, they all have tended towards zero. If you need some examples look no further than the Venezuelan bolivar which has suffered peaks and troughs of their currency that are 1000's of percentage points apart. Most recently in 2018 it suffered a serious shock, resulting in prices like 14 million bolivar for a chicken. This is one of many examples and not even the worst. There is of course the famous case of Weimar currency crisis in Germany in the 20's.

What was common among all of these systems that failed and crashed in a violent exponential deterioration of their currency? Central banking. The U.S. is no different and the recent tens of trillions being injected into the markets will eventually catch up to the value of the dollar and consumer prices will skyrocket. Socialism is not coming to your neighborhood some time soon because it is already here and has been for quite some time.