Western economies were on the verge of collapse during 2007-8. The crisis was solved by printing money. Of course, no problem was solved. Economic misery has only increased.
The central banks around the world have printed money for the last five years. Normally, this would lead to hyperinflation. You would recognize such an event by the fact that prices would be rising. To some extent, this is happening. Stock prices, house prices and bitcoin, for example, are rising to stratospheric levels. This means that regular currencies are losing value against these assets. Yet, normal people do not yet see the type of inflation that was witnessed during the 1970s, for example. Why not?
Hyperinflation occurs when people lose confidence in the paper money. They began to exchange it, in a race against each other, for tangible goods and other assets that have real value. You in essence want to get rid of all your money before it loses any more value. When everybody does this, and when there are fewer and fewer tangible assets to buy, hyperinflation occurs.
Let me just point out that, to my knowledge, money printing has always lead into this outcome.
This time confidence was not broken, not at least yet. Why not?
I think it was because money printing (called “quantitative easing”) was cloaked by stating that the money printing will be “reversed” in the future. That is, the central banks told us that, yes, we will print trillions out of thin air, but don’t worry, we will destroy it later. This promise allowed people not to lose confidence in the paper money. They were thus willing to hoard it.
Interestingly, today is that future. According to their own words, the central banks are now supposed to unwind their portfolios. In other words, they are supposed to destroy all the money they created. Will they destroy all the money they’ve printed?
Would you?
And if they do that, what will happen?
To answer the first question, the FED promised to begin its money destruction by October 1st. We can see, by examining its own reports, that it has not done anything of the sort. It is, on the contrary, still creating more money. Many have predicted that the alleged money destruction phase was a bluff. It will not occur. I think it won’t. But we’ll see.
If it doesn’t occur, then asset prices will continue to go higher. Bitcoin, housing, stock, land, eventually gold and silver, then energy and food, will become more expensive. You can sell your assets with what looks to be great profits, only to discover that you cannot purchase anything with those profits. That is, profits were generated because money is worth so much less. This is the inevitable consequence of money creation. It will, at some point, lead to hyperinflation, as people realize they cannot hold money at all.
Hyperinflation not only wipes out savings, pensions and salaries, it wipes out all debt as well. It is therefore a “solution” for too much debt. There could, therefore, be powerful actors who are consciously aiming for this scenario, or who know that this is the direction we are ultimately heading for.
But what will happen if Mario Draghi begins to destroy money?
Has this ever happened in the human history? I don’t think so.
But we can take a guess. Real markets and market forces would slowly take over. We know what the underlying realities are. Around 2011-12 the Eurozone was in crisis, as the interest rates were creeping higher in Southern Europe. This is because real markets saw these countries are risky investments. Would you loan your money to the Italian government? Hell no.
It was this problem that Draghi solved by printing. He buys these assets, and thus hides the true market forces. ECB is a buyer, with endless supply of money, in a market that would otherwise have only panicky sellers. If he stops, the music will stop. Real markets will take over.
Interest rates would rise, first to 5% then to 15%.
Credit would freeze, nobody would lend any money to anybody.
Banks and whole countries, like Finland and Italy, will become insolvent at once. They just don’t have any more the real productivity to support their promises.
Debt-based economy is based on future promises: you create these goods to me at once, I pay for them later. Once it is realized that we cannot keep those promises, everything comes to a halt.
Inflation means misery for everybody. Deflation means that two older generations (mine and the previous one) will be ruined, but the young generation will have a new start. They will enjoy the luxury very low, realistic prices!
But if we use the last century as a model, violence will ultimately outperform economic factors in determinng the outcome.
If we we take the previous century as a model, then something positive can be said as well. During all these crises, science and technology took giant leaps. Computers, relativity theory, quantum mechanics. These leaps increased our productivity enormously. These leaps still occur, at least in places that have reached modernity. Information technology, Internet, sharing of information, automatization, self-riving cars, block chain, quantum computing, space colonization, and what else? But that’s the real why reaching modernity matters so much.
Finnish Syntax 