We are literally months or a mere year away from meeting our greatest enemy: our true selves, at our worst behavior. The last ten years have proven that governments are incapable of finding any solutions to deficit spending and that no elected official is willing to tackle, head-on, the issues that lead to deficit spending, which are the unsustainable unfunded liabilities.
Instead, governments have taken a back seat for many years, allowing central banks to exclusively run the show by taking unconventional steps, such as the experimental QE programs and record-low interest rates inventions they came-up with.
Now, just as central banks were beginning to shrink their outsized balance sheets full of expensive government bonds – which would have been much cheaper (higher interest rates) if it weren't for central bank monetization – governments are coming in like a bulldozer, and intervening with monetary policy.
It's so upside down. In 2008, central banks were proposing insane measures, such as going on a NIRP (Negative Interest Rates Policy) and buying trillions of dollars in bonds, mortgage-backed securities, and even public stocks. While this was going on (and still is in Japan, for example), various governments looked away, ignored the risks and allowed these gangsters in suits to drive up asset prices and generate obscene profits for bankers and the ultra-wealthy. These actions marginalized the importance of employees across the globe.
Central banks understand they must shrink the size of their books, since the level of sovereign debt is getting out of hand, but governments aren't ready to ease off the peddle just yet.
In fact, now that stock markets are trading at all-time highs in the States, and with wages on the rise and record employment numbers, governments (prime ministers and presidents) jeopardize their political aspirations if they allow central banks to normalize. Raising rates brings unemployment levels up, in the short-term and no politician likes that.
In countries like Spain, Italy, Japan, and France, the government is offering investors negative yield when lending it money. In a sensible world, no one would take them up on their offer, but in 2019, $10 trillion have been sunk in these sure-to-lose bonds.
When the next recession comes, the division between central bankers and the people running governments, who will be faced with the cries of millions of voters who have no savings at all and depend on their low-wage job to survive, will overwhelm the elected officials.
I see no avenue of action which doesn't favor the poor, this time around. Governments will look to print, ensure universal income, and calm the masses, while the central banks will be extra fearful of stimulating at the risk of losing confidence from institutions that see governments succumbing to the people's revolts – but not addressing the causes of the problems.
That's why the next recession will be the last under the current dollar standard; the division will grow so detrimental that the system will collapse. The rich and poor will duke it out, and it will be UGLY.
WW2 began as Germany wasn't able to afford paying back the loans it had on its books to those that "engineered" its recovery in the 1930s; they had to attack, or risk bankruptcy.
As a tactic of diverting attention, War is a Bush Family mandate. Both father and son have used it, for example, but there countless such instances. We are at risk of another big one. My take is that smarter compromises will emerge, but the risk is alive and well that this turns toxic.
Best Regards,
Tom Beck
Research Partner, PortfolioWealthGlobal.com
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