The result of the US elections should have rung warning bells everywhere in the world, but apparently, it didn’t. Europe, Canada, Japan, South Korea – the list of economies that persist in feeding asset bubbles is long. The US is still part of it, considering the market is forcing (sorry, I meant to say “expecting”) the FED to cut rates one more time before Trump is officially the president in charge. Then why are people are unhappy to the point that you start seeing them turning against their governments in charge if, as every single bureaucrat out there keeps preaching, “everything is awesome”?
Try to imagine yourself struggling to put food on the table, or even worse losing your job, while every week you go to the grocery store you buy less and less with the same amount of money while on TV all you hear is markets crushing new ATH every single day. What would you do in this situation? Unless you haven’t done it already, you put your savings in whatever keeps going up because “it’s a sure thing” and you hope to earn enough income to replace the one you lost. Here’s the problem: once you sell to cash out and pay the expenses (that keep increasing for anyone living in the real world and not for those sitting behind a desk of a public statistical agency), your assets need to continue going up by the same percentage amount for this arrangement to be sustainable.
Another problem is that assets cannot go up forever by definition. No worries though – the more people need to supplement their income, the more demand for stocks and assets that are perceived as “safe” sources of stable returns. This is clearly a perverse feedback loop and, contrary to what the regulator should be doing, they make money cheaper so leverage is more accessible for the happiness of banks (WHY A HEALTHY ECONOMY IS BAD FOR BANKS AND SHADOW BANKS BUSINESSES).
Clearly, the wealth transfer from the majority of the population to the few rich is still running at full steam with only one major country as a true exception: China (CHINA HAS BEEN THE FIRST ONE TO ABANDON THE QE ABERRATION, WHO IS GOING TO BE NEXT?)
Besides China being unwilling to send 800 million people back into poverty after it took decades to lift them out of it, China knows very well what happens to the social stability of a country once your paper money value starts evaporating since they were those that invented it (History of Chinese currency).
On the contrary, western countries (and their allies elsewhere) keep doing exactly the opposite of what they should, effectively killing their own fiat currency system, adding one more cut to it that starts bleeding every single day. How does this happen? You have to “follow the money” to understand it.
- I am a young adult who wants to buy their first home – no problem. Whatever the upfront payment you can put forward, there will always be a lender eager to lend you money.
- Why? Because the lender doesn’t care about your income, talent, job, or anything else for real. The lender cares about the value of the collateral. What if the value of this collateral starts going down to a point where the “equity” the buyer put at the beginning is being erased?
- Option 1: The owner keeps paying their mortgage, often unaware this helps the bank, not them. Why? Because until you pay the last installment, the bank can repossess 100% of the collateral.
- Option 2: The owner cannot afford to pay the full mortgage anymore. No problem – the bank will keep allowing you to just pay the interest (because those are their revenues) while the principal payment is being postponed, making your mortgage longer (and the bank is happy again since the stream of revenues is extended).
- Option 3: The owner walks away and gives back the asset to the bank. This is when the bank is potentially in trouble. But no worries, here is when central banks come to the rescue every single time. How?
- Lowering the cost of debt and/or increasing the liquidity in the system will make borrowing money more affordable so the bank can lend to a new buyer who can buy the property, sustaining its market price.
Always bear in mind that banks (in theory) hate sitting on a big cushion of liquidity. Why? Because (in theory) it doesn’t generate interest income while they have to pay interest on their liabilities. Wait, what happens when they run out of willing borrowers? No problem again since the central bank has it covered and, as a matter of fact, they pay banks market interest on their reserves. Yes, my dear reader, this is still money printing, but since it doesn’t impact the amount of central bank assets, most people don’t notice it. How much money was printed in this way? The FED alone transferred ONE TRILLION USD directly into banks’ income statements (for the joy of their investors): Fed’s high-rates era handed $1tn windfall to US banks
As you can see, no matter what, banks are being constantly bailed out by central banks, helping them to keep asset prices inflated and to still make revenues when there aren’t enough willing borrowers left. What I said above cascades to every single asset class out there. Some examples:
- Margin Lending: Why should a rich entrepreneur sell their stock, giving up potential future gains, when banks are more than willing to lend them the cash they would like to spend in their private life?
- Consumer Lending: Why consume what you can afford when the bank sends you a “free” credit card in your mailbox?
- Private Lending: Why pay for an asset in full when you can “generate alpha” in extra yield by leveraging it with the money the bank is more than eager to put to work?
What happens if banks stop lending? That would drain liquidity from the system, create new sellers, and ultimately impact asset prices. Of course, neither banks nor governments (because stocks going up is the indicator they are doing a good job for the economy) have any willingness to let that happen. What if central banks don’t want to loosen the purse that much to keep this perversion going? Just make more deficit spending because that will put money in people’s pockets and help the economy and the debt will still be swallowed by all the liquidity out there looking for a place to be parked… not really.
People will see an increase in their deposits where more often than not they get zero interest, and if they don’t spend that, the bank will still make money off central banks’ interest on reserves. Of course, no one wants to sit on too much cash in a high-inflation environment, right? So in one way or another, those deposits are being spent either on assets or on consumption (because next year’s prices will be higher). Who is the ultimate beneficiary of all this cash inflow, along with banks? Shareholders are rewarded simply by sitting on assets that keep increasing in value and dividends and/or stock buybacks that keep increasing thanks to the inflation of their revenues. However, they will hardly sell those assets when banks are sitting on so much liquidity and are willing to lend.
One cut here, one cut there, all for the benefit of very few while only breadcrumbs “trickle down” to many. Statistically speaking, this is awesome: if you have 10 chickens and 10 people, everyone can enjoy a chicken, while in reality, one owns 9 chickens and the rest share one. The common denominator among everything? The more money is printed out of thin air, the more unwilling people are to hold (fast-depreciating) cash versus assets, and when this goes to an extreme, perhaps Weimar Republic style, then the fiat currency system in place ultimately dies.
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