Bill’s Blog October 10. 2020
Before we get started, the above question actually really matters to your personal financial life. Whether you are on the low end of the economic rung, a part of the middle class, or the ultra-wealthy. As I listen to dozens of expert economic analysts globally each week, the above topics are often debated. Where are we headed with this growing global economic crisis?
To be clear, the Covid-19 issue did not create this crisis…it accelerated the slowing economic growth that started well over a decade ago and became serious in 2019. 2018 ended with a 30% market crash that was once again papered over by central banks and governments. Then in September of 2019, the big primary and secondary banks repo market (overnight lending market) froze up and the interest rates they charged each other spiked to 10%…very serious. Again, the Federal Reserve came to the rescue with 100’s of billion injected into the banks weekly to keep them afloat. Fast forward to March of 2020 another major market crash of 38% in just a few weeks. Not to worry, governments and central banks can print endless money with no consequence…NOT!!! Remember, all money printing is an interest-bearing obligation and too much debt really does matter.
So, let me define the above four scenario’s and then explain how it will affect both you and me. All definitions are taken directly from Investopedia.
What Is Deflation?
Deflation is a general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy. During deflation, the purchasing power of currency rises over time.
Hey this sounds great; you get to buy more stuff with your currency. The problem is, in a big deflationary event like the 1930’s Great Depression; the economy crashes, massive unemployment and all asset prices from houses, farms, cars, businesses, stocks, etc. dropped 89% in value. Can you guess what the culprit was? Too much leveraged debt might be a good answer. People who had insider information or wisdom and saw it coming, prepared. They had no debt, they built up savings and purchased assets 5 to 10 cent on the dollar…this was a very small minority. Most people got wiped out in this deflationary crash. Governments and banks hate deflation! Governments loose huge amounts of tax revenues with massive unemployment and business failures. Banks get wiped out as so many people and businesses default on loans, mortgages and credit obligations.
What Is Stagnation?
Stagnation is a prolonged period of little or no growth in an economy. Economic growth of less than 2 to 3% annually is considered stagnation. It is highlighted by periods of high unemployment and involuntary part-time employment. Stagnation can occur on a macroeconomic scale or a smaller scale in specific industries or companies. Stagnation can occur as a temporary condition, such as a growth recession or as a temporary economic shock, or as part of a long-term structural condition of the economy.
Stagnation is another real option with our current crisis…little economic growth, high unemployment, and no income growth…sounds much like today. For those who are old enough to remember the 1970’s was a very difficult period with stagnation. Inflation began to rapidly increase due to excess money printing, as the US government removed the gold exchange standard (Bretton Woods Agreement from 1946). Paul Volcker (head of the Fed) started raising interest rates to control inflation and central banks followed. In Canada interest rates hit 22% and many people lost their homes when they needed to refinance. The same economic phenomena occurred in Japan in the 1990’s; they have never been able to recovery from that stagnation period for numerous reasons beyond the time for this blog.
What Is Inflation?
Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time. It is the rise in the general level of prices where a unit of currency effectively buys less than it did in prior periods. Often expressed as a percentage, inflation thus indicates a decrease in the purchasing power of a nation’s currency.
In past blogs I have already mentioned that inflation is the stated goal of all central banks and governments. It is also a known fact, that governments manipulate how inflation is calculated to make it appear less than it really is. John Williams of Shadow Stats and the Chapwood Index, though using different metrics…both state real inflation is around 10%. The problem is inflation creates the illusion of prosperity and ever-increasing growth in assets prices. But in reality, your purchasing power diminishes very year. The question is, what is the cost of inflation?
The powers to be model believes that you can fabricate unlimited credit with no consequences…I disagree. This policy has created many millionaires on paper with insane house prices in dozens of Canadian cities. Again, at what cost to society?
I have travelled coast to coast over the last decade and the massive homelessness problem is ever increasing in Canada and many nations. Yes, I am fully aware of the many causes of homelessness (addiction, mental health issues, poor financial decisions, poor government polices and inflation). Currently, many asset classes are in a serious inflationary state…inflating at 10% or more: food, housing, stock and bond markets, insurance costs and medical costs, educational costs, etc. Inflation is not your friend. As a side note, the only asset classes that have kept up with real inflation or out-performed has been gold, silver and cryptocurrencies (although crypto’s are very volatile).
What Is Hyperinflation?
Hyperinflation is a term to describe rapid, excessive, and out-of-control general price increases in an economy. While inflation is a measure of the pace of rising prices for goods and services, hyperinflation is rapidly rising inflation, typically measuring more than 50% per month.
Although hyperinflation is a rare event for developed economies, it has occurred many times throughout history in countries such as China, Germany, Russia, Hungary, and Argentina.
Now, Investopedia states it is a rare occasion in developed economies (mostly true). However today we are seeing many economies collapsing with high inflation or hyperinflation. Venezuela, Zimbabwe, South Sedan, Argentina, Sudan, Iran, Lebanon and Turkey to name a few. In all cases we see horrific, degrading economies in these countries with starvation, worthless currencies, high unemployment and the break down of the society…it is very tragic! There were about 100 countries in the 20th century where their currency fully collapsed and became worthless…that is hyperinflation.
So, what will we be the outcome from the above four options? Will it be one or a combination? To be honest, I am not 100% sure how it will all play out. Two options are catastrophic, major deflation or hyperinflation. Inflation and stagnation are both very destructive and generally play out over years or decades. We have already experienced some assets deflating such as oil and gas. Others are in extreme over evaluation like the stock markets and real-estate in many cities.
One thing I am 100% certain of is that we will continue to see very volatile markets. Mainly, due to too much DEBT which is now reaching 300 Trillion. Also, never ending currency printing, currencies destruction in many countries, growing geopolitical tensions and of course the US election. We also have several asset classes that are in record territory. Remember, all asset bubbles eventually crash.
So, I encourage you to make wise decisions for yourself and family. Prepare for the worse and hope for the best! Protect what you have worked so hard to build. Be willing to make adjustments or completely make course changes after sound counsel and personal research. No one should care more about your wealth than you!
If you need help in the decision process, talk with your financial advisor or if you want a second opinion please reach out to me. I can be reached at 778-539-7107 or email me at bill@fivefoldfinancial.ca. You can also reach me through my website: www.fivefoldfinancial.ca.
Best regards,
Bill