Since at least 2008 central banks have poured money into the economy at an accelerating rate.
Now twelve years later, the temporary printer that was turned on back then not only hasn’t been turned off, but has seen the addition of new shiny bazooka printers.
To stop a bust after a debt fueled boom, banks and other companies were bailed out. For good maybe they thought, except as it happens they now need to constantly stop the bust by more and more increasing the money supply.
That’s to the point where Jerome Powell, the Chair of the Federal Reserve, has stated there won’t be a monetary tightening even if inflation runs above 2% for some time.
That’s even while prices increase, monetary expansion will keep increasing, in what may well be a very dangerous combination.
That’s because all this is starting to sound like a crack-up boom, described in summary as:
“The crack-up boom develops out the same process of credit expansion and resulting distortion of the economy the occurs during the normal boom phase of Austrian business cycle theory.
In the crack-up boom, the central bank attempts to sustain the boom indefinitely without regard to consequences, such as inflation and asset price bubbles.
The problem comes when the government continuously pours more and more money, injecting it into the economy to give it a short-term boost, which eventually triggers a fundamental breakdown in the economy.
In their efforts to prevent any downturn in the economy, monetary authorities continue to expand the supply of money and credit at an accelerating pace and avoid turning off the taps of money supply until it is too late.”
The crackup occurs when people expect prices to keep going up because the monetary expansion will continue, with fiat money then losing value to the point prices double everyday in hyperinflation.
This theory was developed by Austrian economist Ludwig von Mises who played an instrumental role in avoiding a crack-up boom in Austria while watching Germany collapse into hyperinflation in the 1920s.
Unlike Venezuela’s hyperinflation and Argentina’s galloping inflation, the west is not quite near a cracking up yet, but the collapse in the monetary value of Venezuelan Pesos came very quickly.
The central bank just kept doing what it was doing previously as it seemed to work. A downturn was met with a monetary expansion, and when shortly thereafter there was a downturn again, the monetary expansion expanded.
At some point however this monetary expansion no longer has an effect, and by the time one notices, it is too late as different forces have already come into play.
That is people start ditching fiat because they expect it to lose value, compounding the problem as now everyone wants more fiat for their goods because they too expect it to lose value.
By the time the central bank realizes what has happened, the monetary system has already collapsed, with the central bank at that point left helpless.
The federal reserve banks have also now run out of ammo. They’ve signaled to the market they no longer care about inflation, and to prove it they are printing trillions, so there isn’t much else they can do except print even more to the point bonds are driven well into negative interest territory.
All this creates obvious distortions to the point effectively bankrupt Greece is now being paid by the ‘market’ to borrow with their bonds courting negative interest rates.
That’s just how much money is being printed. Borrowers are being paid to take fiat with all this very new.
A decade ago, when the idea of money printing through quantitative easing was proposed, it was seen as a radical departure.
Even a couple of years ago budgeting the books to get debt back in control was the mainstream approach of western governments.
Britain for example saw a decade of painful cuts to assure the markets in the face of mounting debt.
Now those debt levels seem insignificant as quantitative easing gets expanded to debt monetization with no real chance these sums are paid back. Meaning more debt will need to be taken just to pay back the interest.
Debt obviously can’t grow faster than the economy, Powell said, but that is what it has been doing for now more than a decade and no one expects anyone to have the guts to do what is needed: to hold the reigns in face of a downturn instead of further accelerating the monetary expansion.
Hence bitcoin as something like a crack-up boom can’t happen in bitcoin due to its fixed limit, meaning you can’t just increase supply, so even billionaires are now using it as a hedge while banks call it the new gold.
In fiat however there is no constrain, but if monetary expansion gets out of hand, a political consensus may well start arising that there should be some sort of a bitcoin standard, a fiat pegged to bitcoin’s supply.
Bitcoin not gold because bitcoin’s supply is transparent and it can easily be proven just how much bitcoin is backing a currency by just looking at a blockchain explorer.
All this may well seem very far fetched right now, but if trust in fiat money collapses due to mass debasement, then there will be no choice but to regain trust in fiat money through an indisputable method that proves the fiat can’t be debased again.
That method used to be pegging it to gold, but the gold standard was ditched in the 70s because the dollar was not quite fully backed by gold to the percentage they said it was.
So the market might not quite trust a new gold standard, but as with a bitcoin standard they can actually see how much bitcoin is anywhere at any given time, then no question of trust would arise.