There are growing signs that the global economic slowdown is for real. As was the case in 1929, the combination of the peak of the credit cycle coupled with trade protectionism in the Smoot-Hawley Tariff Act are similar conditions to those of today and potentially pose a serious economic challenge to the post-Bretton Woods fiat currency system. Therefore, we must consider the consequences if monetary policy fails to contain the developing recession and it turns into a full-blown slump. Complacency over broken markets is no longer an option, with rising prices for gold and bitcoin signalling the prospect of a new round of currency debasement to avoid market distortions unwinding. This article shows why this outcome could undermine fiat currencies entirely and looks at the alternatives of bitcoin and gold in this context.
That didn’t take long. On Saturday, well before the US stock market opened post-China-trade-talks, I wrote:
The next step for the market would likely be that the remaining stock indices that have not pushed past their own previous peaks would now punch through. By that … I meant those indices like the Dow that were very close to breaking past their old heights
Keith Weiner blogged recently explaining how borrowing to consume is a bad thing. Nice job Keith.
However, extending Keith’s arguments, it would imply that any consumption makes us poorer. Do you really need to trade in your 10 year old car when it’s still doing a fine job getting you where you want to go?
Keith makes the distinction between borrowing to consume but I don’t see it. Consuming is consuming. It’s only in the aggregate that the situation makes a difference.
Last week, we discussed the fundamental flaw in GDP. GDP is a perfect tool for central planning tools. But for measuring the economy, not so much. This is because it looks only at cash revenues. It does not look at the balance sheet. It does not take into account capital consumption or debt accumulation. Any Keynesian fool can add to GDP by borrowing to spend. But that is not economic growth.
Borrowing to Consume
Today, let’s look at another problem with GDP. To understand it, let’s walk through a plausible scenario. It begins with Johnny Fastlane. Johnny borrows $10,000 on his credit card to (yes, our favorite example) go on a gambling vacation in Las Vegas. An airline carries away some of his cash. A hotel lodges some. A few restaurants eat it. And of course, the casinos roll in his dough.
Stocks surged last Friday following a U.S. jobs report that, to put it mildly, fell far below expectations. At first this might seem counterintuitive. Shouldn’t signs of a slowing economy act as a wet blanket on Wall Street?
Not necessarily. Investors, it’s believed, are responding to the expectation that the Federal Reserve will have no other choice than to lower interest rates this year in an attempt to keep the economic expansion going. Earlier this month, Fed Chair Jerome Powell himself commented that he was prepared to act “as appropriate” should the global trade war risk further harm. President Donald Trump has also renewed his attacks on Fed policy, calling last December’s rate hike a “big mistake.”
So a rate cut looks more and more likely in 2019, perhaps as soon as this summer. And investors rejoice.
A “perfect storm” is brewing for midwestern farmers. Unending rains have led to the flooding of tens of millions of acres of farmland. The deluge comes on the heels of years of low crop prices.
It has the makings of an agriculture disaster on a scale never seen before.
The nation may see a “perfect storm” in terms of food inflation. Prices for some farm commodities figure to be a lot higher in the months ahead as markets adjust to dramatically lower crop yields. This will be coupled with price hikes associated with tariffs on all manner of goods from China and elsewhere.
To top it off, the Fed is signaling a reversal. The next move in interest rates now figures to be lower.