Some people believe our current monetary system is over stretched. Let's explore.

 

Working assumption: 

Our money is backed by debt. Meaning at the core of our money, there is more negative than positive. This system assumes that the ease with which money is created will boost economic growth. This positive % will offset the negative % that comes from money issuance. As long as growth is larger than the interest payment, the system is sustainable.

 

Current Situation:

A) Massive debt bubble collapsing on itself –> Adds deflation pressure (money is destroyed, risk of depression)

 

B) While it collapses, the interest on existing debt needs servicing –>

  1. Governments will collect taxes to service it (Adds financial repression on people)
  2. Central Banks will put a lid on interest rates to make debt serviceable (Adds financial repression on savers while encourages leveraging and risk taking)
  3. Corporations will take the advantage of low rates adding to already large debt, and will deleverage occasionally to pay off the debt (generating unemployment typically)

 

C) To avoid money destruction from "A":

  1. Governments issue more debt
  2. Central banks issue reserves to incentivise commercial bank lending
  3. Central banks lower corporate bond yields through bond purchases
  4. Regulators lower reserve requirements / loose regulation

 

D) Commercial banks cannot lend to an over leveraged economy, specially small to medium business in precarious situation. They will as the economy deleverages. Blowing up the bubble back again as it deflates.

 

E) Currencies adjust in FX value relative to its use in the real economy and their monetary inflation / scarcity.

  1. hard currencies will do relatively well, as they are used in international trade
  2. not so hard currencies will have to be printed to acquire hard currency to pay for loans

 

F) While this cycle goes on:

  1. Wealth is transfered from parts of the economy to another. Inadvertently everyone notices it generating social divide.
  2. Large corporations with access to cheap financing and good cashflows will outcompete peers reaching near-monopoly status.
  3. Medium and small business are screwed, and will depend on government to survive.
  4. Middle and working classes are screwed and will depend on government and large corporations to survive.
  5. Middle class loses purchasing power and social status, generating distrust in institutions and other social classes. Generates polarization.
  6. Governments become larger to tackle larger, more complex problems.
  7. Centrist polititians conscious of the polarization / radicalization of society, shift policy to accomodate the mood. The divide between poles generates discord and dysfunction inside political parties and government itself. Adding to the erosion of trust in institutions.
  8. Commercial Banks become zombie limbs of the central bank. Bankrupt but still operating thanks to the central bank lifeline.
  9. Central banks become essentially market makers for credit markets. Distorting the price of money, affecting other markets.
  10. High growth economies will gain share in the global balance of power. Disrupting institutions and global rules. Increasing risk of conflict.

 

G) As a citizen, what do you do?

  1. Rest in comfort while big government and big corporations take care of you. (Amazon will provide middle classes with tech or executive roles, and the working classes with warehouse or manufacturing roles while government will tax you if you are rich and pay you an extra if you are poor).
  2. Actively generate new value through investing or entrepreneurship to break through the monetary swamp we live in.
  3. Advocate for debt-free liberty-friendly money. Assuming those in power will hold on to the system that maintains the current balance of power among classes. A cultural revolution may be needed. As this class divide notion in our culture, informs the way in which we design our money. The advent of CBDCs can lead to authoritarianism. Widespread censorship and financial represion. Etc. Let's remember, we are not labour units waiting to be milked by someone. Mankind deserves better.

H) An overview on assets:

  1. Bonds (short term, price controls to avoid bankrupcy will keep yields low. Long term low growth due to huge deflationary pressure "A" combined with structural deflation (demographics and technology) will keep rates low) 
     
  2. Precious metals (bonds trending below zero makes gold an attractive substitute for bonds. In the event of anticipated inflation or geopolitic turmoil, gold can also outperform. In crypto form, $PAXG, gold generates interest return)
     
  3. Real estate (people's favourite investment, also hedge against monetary debasement. Downside is shrinking demographics and remote work related reelocation / repricing)
     
  4. Commodities (consensus is the commodity cycle has peaked. Covid-related supply chain shortages will also subdue. Long-term there is plenty of room for commodities as great part of the world is yet to develop physical iinfrastructure)
     
  5. Value Stocks (they've been catching up with levels seen in the Nasdaq. Companies with good cashflow to debt ratios, relevance in the radically-digital economy, and brand power will do well. In my view long term non-crypto banking sector will consolidate even further particularly in Europe. Many non-crypto banks will end up nationalized). Given that our pension system and goverment tax inputs rely on stocks doing well, the central bank will avoid extreme downside risk.
     
  6. Growth Stocks: (FANGS+ may become a new stock class. The are no longer growth, but basic technology utility. 
    Speculative technologies will do well when liquidity is abundant. May outperform the rate of new money creation / inflation. Some of this high growth may be needed to offset low rate of return in bonds to balance portfolios.)
     
  7. Crypto space: 
    (Short to medium term, same as Speculative technologies described in growth stocks. 
    Long term, crypto will split into industries. Bitcoin will become a reserve asset, for store of wealth, collateral and large settlements. As bitcoin is "tamed" by governments, Anarchic / Extreme Libertarians will adopt privacy coins such as Monero or ZCash, combined with VPN and Tor). Ethereum and ethereum killers will become infrastructure plays for DeFi, NFT, Gaming, Web 3.0, etc. they will compete for market share and users. Tribalizing the space. Specialised blockchains will outcompete main infra blockchains in certain niches. The collectible space will benefit greatly from tokenization; add liquidity and market access / depth. 
    Regulation will only increase creating disruption short term but certainty and stability long term.) The potential of crypto is difficult to understand. If we reached it's full potential tomorrow, the whole of society would desintegrate in very small atoms. That's why we need regulation, to evolve slowly and under control. New jobs will emerge and great economic growth will come from this industry. Governments need to be wise and informed here.