Virtual Insanity — The Global Economic Crisis Unfolding
Don’t move, don’t breathe…until the crisis is over.
That’s roughly the translation from Spanish of something I’ve heard people say in Argentina several times.
Argentina has had quite an economic history. It’s been in and out of crises for decades now — even though it has massive natural resources. They’ve gone through defaults, currency devaluations, deposit freezes, hyperinflation…you name it.
But, going back to the saying, to me it refers to two things. One is that a crisis should never catch you unprepared…‘cause once it hits there’s not much you can do during that time. Instead, you should always have insurances in place in case disaster happens before the crisis hits.
The second is, that during a crisis, things get too murky and confusing. It’s dangerous to make big movements. It’s usually after the crisis that those who are cashed up pick up the bargains.
We are in the middle of a pandemic crisis. But to me the real economic crisis has barely started. We’re in this lull so far, in the eye of the storm, waiting for it to hit.
The big question is what will happen next, and how can we prepare for whatever comes our way.
By the way, Jim Rickards has written a book on what the world after a reset might look like. You can read more on this here.
Best case scenario is that the virus simply disappears. But the likely scenario is that we are in this for longer. I mean, there may be more optimism out there but we still don’t have a vaccine.
The State of the Global Economy
Things in the global economy are already looking crazy to say the least.
Central banks flooded the system with money in 2008 and lowered rates to stave off the crisis. The US Federal Reserve has briefly tried to reverse course since…and gave up. It’s then that COVID hit and the flood of money turned into a tidal wave.
In this decade we’ve had negative interest rates — something that economists considered as an impossibility until recently — and oil at negative prices, which make no sense.
We’ve barely seen any growth either. Saving accounts pay you peanuts for your money and salaries are stagnant. We have racked up debt.
Central banks claim their policies haven’t created any inflation. In fact, they say they are struggling to create inflation. We may not have seen consumer inflation, but we have certainly seen inflation in property and the stock market.
But as I said, things are getting even sketchier.
Growth was already hard to come by before the crisis, never mind now, with the lockdowns. Even through lockdowns and rising unemployment stock markets have been climbing, with the S&P 500 and the NASDAQ trading higher now than they were before the pandemic. This is a complete disconnect.
All that money is boosting the market instead of creating jobs. But it’s people and their decisions that move the economy.
But some of this disconnect is already starting to sift into the markets.
Earlier this week Reuters commented on a report from Janus Henderson. The asset management group found that global dividend payments dropped by US$108 billion to US$382 billion in the second quarter of the year. That’s a 22% year-on-year drop, the worst since 2009.
And, we aren’t the only ones thinking about what comes next.
The US Federal Reserve is meeting this week, at their annual meeting in Jackson Hole, Wyoming (virtually, of course) where Fed Chairman Jerome Powell is set to deliver a speech titled ‘Monetary Policy Framework Review’. The speech should give some insight on how the Fed’s policy could look like in the future and their plans for inflation.
One of the possibilities on the table is to allow inflation to rise above their 2% inflation target, while still keeping rates near zero. That is, until the Fed considers inflation and employment are stable.
The Fed has for some time now missed their inflation target, so the argument is that they could increase it and run it higher than their target to make up for all that time they missed having inflation running lower than the target.
While inflation runs higher, the Fed would keep rates low. That is, real interest rates would be negative, which would be good for gold.
But, as Argentina has learned plenty of times in the past, controlling inflation is very hard to do. And as it turns out, out of control inflation is also good for gold.
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