For anyone who hasn’t yet retreated to a dark cavern, it’s no surprise that economic hardship is on the way. However, few realize how severe the recession will become, what is actually causing it and most importantly – how limited our options are for preparation. With this article I hope to show we are all capable of allocating our wealth and energy into ‘safe harbor’. Although that might not be the place you would think to look. But first, let’s set the stage.
What is going on?
At the moment, a “perfect storm” is developing, resulting from the convergence of a number of simultaneous “depressions” in the financial atmosphere. These all follow a nasty script of runaway central banks, corrupt incentives, and helpless regulators. But they also all have the same basis: the disconnected worlds of paper and real (or: physical) value.
A paper world has been created around many traded stocks and other financial products. In this parallel world, mostly occupied by large and professional investors*, ‘fake’ assets can be created endlessly with the help of derivatives, without consequences. Made possible though ‘dark pools‘ in which the actual trading takes place, often without any relationship with the actual supply and demand.
For example, due to the illegal ‘naked short selling‘ of shares and the lack of consequences for not delivering the borrowed shares (so-called ‘failures to deliver’ or FTDs), trading parties can indefinitely postpone and thus manipulate pricing up or down as they please. The ploy is that if the underlying company goes down – or is helped with it – all manipulation disappears in the bankruptcy.
But this is just the tip of the iceberg.
Oh, and not just shares
It has been known for decades that all this is not only possible, but happening. From certain indicators, it can be clearly seen that the problem is getting bigger. There are even plausible theories that many stocks, but even many other financial product (mortgages, bonds) are heavily manipulated by a small but very powerful group of companies.
For example, the practice of reselling mortgages that we may remember from 2008 (or the various movies about it) has never stopped, but has even gotten worse. A similar bubble is now about to burst in China with something like $8 trillion dollars in potential impact.
Other exchanges (commodities, energy, crypto, precious metal) all have their own derivatives with similar potential for corruption. You may have noticed that the gold price has stopped responding to demand – which has of course risen sharply – or even moves with the inflation of the currency in which it is held. This has been manipulated for years by a few large banks. There’s nothing secret about it, but the fines are unfortunately more than worth the practice.
Even our money?
The greatest – but sadly least known – corruption of all is our entire money system. Since we abandoned the gold standard in 1971, an impressive number of economic indicators have declined disastrously. Ever wonder why our macro-economic policies have not been focusing on these indicators? The answer is as simple as it is astonishing.
Since the rise of central banks, they have provided our governments – under the guise of Keynesian economic theory – with a fantastic tool for an endless flow of money into the treasury. In (very) simple terms. it means that a central bank buys debt from a government, which then spends it on their expensive political promises and is re-elected. Rinse & repeat this cycle for a few decades and it doesn’t matter anymore whether you choose left-wing or right-wing politicians, let alone vote for a smaller government.
You might think that this has a natural end; like when the government debt burden becomes unaffordable. But that has also been ‘thought of’. This debt decreases over time because of a wonderful instrument called ‘inflation’, the depreciation of money over time. In other words, citizens ultimately pay the cost of the loan in the form of higher prices – the basis for the saying “Inflation is taxation without legislation“.
The only condition for this system to continue to work is a somewhat normal ratio of gross national product to national debt and permanent economic growth. Small point of concern: this way of ‘printing money’ has gotten completely out of hand since 2008 and especially the last 3 years due to extreme spending on the bailing out of banks as well as measures against climate change and the pandemic. There is now far too much money in circulation compared to the real economy that must bear the debt.
So just like with stocks, gold and commodities, a huge bubble of ‘fake money’ has arisen in which confidence is rapidly declining.
Where is this going?
Without looking at other worrying developments in the financial world**, there is ample reason to expect an escalation of the above problems.
One way the crash could be triggered is by a so-called ‘Short Squeeze’ of even 1 single stock or precious metal. In practice, this happens when the underlying share or precious metal quickly rises in value while a lot of money has been invested in short positions. If these positions have grown extremely and the derivatives (options, forwards, etc.) expire, then the party that is short must buy a huge amount of shares, deliver the physical metal, or otherwise close its position in the contract.
Due to the increased practice of both legal and illegal (naked) shorting, a domino effect could cause a large number of financial institutions to collapse. In the Reddit forums that deal with this, this is referred to as the ‘Mother of All Short Squeezes’ (MOASS). According to the well researched due diligence in these forums, a situation such as in 2008 is again emerging.
In the realm of our money system, Putin currently plays an important role. Because he demands gold or rubles for his oil and gas, he compels the various currencies link back to real scarce goods. As a result, both the Eurodollar and Petrodollar power blocs are under increasing pressure. In addition, the central banks must print even more money to both buy energy from other suppliers as well as to help the industry and population to pay the energy bill.
OK! Now what?
One expectation in the online financial communities is that a crash of a single investment from a hedge fund or bank will drain the liquidity they need to continue to cover others. Because of the many joint ventures and mutual loans & guarantees between these companies, one ‘squeeze’ could result in a large number of bankruptcies. The concern remains that there are still no serious consequences for overt fraud, as a result of which parties may not be forced to meet their obligations. But if the FED or ECB have to step in because of the systemic risk of certain banks and hedge funds, then they cannot use that ‘money’ to support the Dollar or Euro.
So the central banks have two choices: either cause high inflation through low nominal interest rates for the countries (print more money) or fast-forward the scenario from the 1920s and let big banks or even countries go bankrupt due to deflation. Given the fear of the consequences of the second choice, central banks might tease the latter option, but will ultimately always choose the first. What collapses then, is not the government bond, but the currency itself.
This would cause extreme inflation somewhat akin to a Weimar Republic 5.0. Some therefore expect an immediate introduction of a digital crypto Dollar or Euro (‘Central Bank Digital Currency’, or CBDC). Unfortunately, its ability to control inflation is only equally impressive as its potential for complete control over every aspect of our economic lives.
Help! What can I do?
Normally, these types of articles are concluded with a number of financial tips. Not entirely coincidentally, these are often exactly in line with the personal interests of the writer. But I’m afraid there is something afoot of which no one can tell how it will turn out exactly. The ‘safe harbor’ I would point to is any so-called ‘bearer asset’. Often used to describe investment instruments such as physical gold, scarce commodities, Bitcoin or direct-registered anti-cyclical (‘negative beta’) stocks. But here I would like to widen this definition.
If the world of monetary value is stuck in a manipulated paper scheme, perhaps it’s time to look at the physical world again. The real world. Yes, that’s all the assets mentioned above, which you can own in your name. But it can also be your stock of raw material; the factories under your control; the machines that make your product; the trucks that deliver your goods; the people in your company that trust and execute your strategy.
On a more personal level – it can mean your physical health, your family, your local support community, your level of autonomy from life supporting networks that provide warmth, power and food.
These are all ‘bearer assets’ that central banks cannot print, that governments cannot promise into existence, that financial institutions can’t secretly trade amongst themselves. Perhaps it’s time to invest more of your wealth and energy there?
Perhaps this crisis will lead to a long recession. Perhaps it will finally lead to a much needed radical decentralization of our financial system. But whatever comes out on the other end, your ‘bearer assets’ are yours to own and yours to care for.
Good luck out there!
Sources / Reading tips:
*mainly major banks, hedge funds, market makers, brokers, clearing houses and for-profit exchanges
**like the fundamental problem with fractional reserve banking