I’ll try to keep this as simple as possible. Modern fiat money is just computer blips, nothing more. It is created when debt is taken on either by the:
- Normal system of borrowing from a financial institution
- Governments spending more than their tax revenues
- Central banks printing and injecting money directly into an economy
Sound familiar? Until the global financial crisis in 2008 we’d only seen the first two. Now, thanks to the GFC and covid, nearly all central banks are wildly engaged in the third. Governments are borrowing like a drunken sailor, and normal bank lending has also gone nuts due to near zero interest rates. This triple whammy has resulted in a huge jump in the amount of debt and therefore extra money sloshing around in each global economy.
That’s why house prices (and the price of most other things) have also gone nuts. There has been a huge increase in the supply of money chasing the same relative number of things to buy, and the cost of all this extra money has been the cheapest in all recorded history! In a normal market when money supply goes up interest rates go up too to cool things down a bit. But for the last decade the US central bank, which sets the benchmark for most western central banks, has artificially suppressed interest rates to keep their economy stimulated. It’s like they got drunk but there was no hangover because they stayed drunk!
But things are rapidly changing. Think covid. Think Ukraine supply chain shocks.
Inflation, the hangover to all this nonsense, is finally here and is now running at an official rate of 7.5% in the USA. And it is not going away. (Side note: Inflation is actually much higher than the official rate because government boffins have found ways to make it look lower than it really is. But you already know that as you live in the real world, not their digital world). Even this low-ball official US inflation rate is the highest in over 40 years, and with the global commodity index jumping over 8% in the week after Russia invaded the Ukraine spelling yet more inflationary disaster, something has to give, but what gives and where?
The USA, and by inference that means the rest of us, has two choices.
First choice: If inflation is not tamed in the USA, it will destroy the American dollar as the privileged reserve currency of the world. Think Zimbabwe or the 1970’s when European restaurants would not accept American dollars because they were devaluing too quickly. That was when gold went from $35 an ounce to $850 an ounce in a decade. Gold doesn’t inflate!
Second choice: If this newly runaway inflation is to be tamed it must be done through the repeated raising of interest rates, just as Paul Volker did in 1980. Therefore, the US central bank has a hard choice. Kill the dollar or kill the economy. I believe it will kill the economy because it has a legal mandate to do so, and its global status as the superpower relies on a strong military, and their massive military budget is only possible because of their reserve currency privilege. So, expect a global recession sometime this year, with the Federal Reserve raising rates into a collapsing economy. It’s the worst of all worlds. Thinks the stagflation of 1970’s. I remember it as a kid, watching toys and sweets become unaffordable! But I digress.
This all means your mortgage rate is going to go to levels that will destroy this recent crazy housing market. Prices will crash back to levels that will wipe out millions of recent buyers, destroy bank balance sheets and drive most global economies into another recession, even without a globally significant war sending prices even higher.
This time it will be worse than 2008 because the global government, corporate and household debt bomb is much bigger than back then, and interest rates are lower. We can’t lower them when the recession hits. The financial rubber band has been stretched to its ultimate limit. For example, I read recently that over 20% of all listed companies in the USA are zombies that have been kept alive for the last decade by the lowest interest rates in human history. How many mortgages are also zombies waiting to be exposed?
Expect the Federal Reserve to be printing money again by the end of the year too as the global economy will be in free-fall and need yet another dose of sugar money. Expect gold to go through the roof when that happens.
Its gunna hurt!!!!!