The Economy Keeps Collapsing, Here’s How We Can Fix It
Elites have no idea how our monetary system works or have no political will to want to change it. Either way, it's costing us big time.
In late 2017, central bankers and governments worldwide thought they had cracked it. After a global initiative to rescue “markets”, the world entered a period of “synchronized global growth” where asset prices rallied and volatility fell. It appeared as if their policies had finally started to work, and they could simply step back and let the economy fix itself after a decade of below-par growth.
But early in 2018, as the Federal Reserve and the ECB (European Central Bank) switched off the liquidity taps, the global economic machine became unstable once again. Economic sentiment indicators plunged in Europe, then a week later in the U.S and China, triggering the Volpocalypse: the unwinding of the risk parity trade where market participants thought volatility could never rise with liquidity rampaging through the global system.
Still, they were wrong. Volatility spiked rapidly as traders panic-unwound their positions. Multiple “short vol” funds blew up, and worldwide asset prices fell more than 10%. Markets started to price in the opposite of what central bankers had anticipated: a synchronized global slowdown.
Since the market peak in early 2018 — which some economists claim to be the real inception of this cycle’s bear market — multiple financial “episodes” throughout the world have revealed that the global monetary system has yet to heal from its near-collapse a decade earlier.
On May 29th, 2018, without any explanation other than a selloff in Italian assets, a sudden huge bid for U.S treasuries told us someone somewhere fell short of liquidity and was prepared to pay any price to obtain the highest quality paper. No media outlets reported any major financial institution experiencing funding stress or liquidity issues, but even if a bank, pension fund, or hedge fund was indeed on the verge of insolvency, we’d never find out who. In our world of extreme financial planning, anyone who threatens the system’s collapse can and will be bailed out in the shadows.
Insolvent institutions traditionally borrow emergency funds from the Fed’s Discount Window: a lending facility that helps “to relieve liquidity strains for individual depository institutions that fail to secure a counterparty”. The problem is the Discount Window is public-facing. So if an entity is a public company and applies for emergency funds, the company exposes its insolvency to the outside world, and, more importantly, shareholders.
Bear Sterns and Lehman Brothers taught us that stock prices plummet if word of funding issues spread, leading to the inevitable bank run and ensuing financial contagion. So instead, troubled institutions seek help via shadow markets— the repurchase agreement (repo) market and the eurodollar system, to name a few — where shady transactions remain off the books. It's likely that whatever transpired on May 29th, 2018, had been covered up to buy time to discover a system fix. But the sudden collateral spike caused a ripple effect throughout the world.
In August 2018, not long after, along came a currency crisis in emerging markets. The Turkish Lira fell 50%, the South African rand fell 20%, and the Swedish Krona fell 10%. But again, markets recovered miraculously, out of nowhere.
In December 2018, as the Fed hiked rates to 3%, the global financial system began to seize up as anyone who had borrowed at subzero rates felt the heat of higher financing costs. The Fed performed a complete 180 and pledged to support markets by slashing interests as low as possible to regain confidence and maintain stability, and as other central banks followed the Fed’s lead slashing interest rates profusely, all was well once again. Or so they thought.
In September 2019, the biggest sign that something wasn’t right below the surface developed as repo market rates soared over 10%. Yet another unanticipated event with no clear explanation and no solid conclusion. Again, the system was on the verge of collapse, the Fed had to step in.
We know all these recent monetary episodes are connected to the event on August 9th, 2007. We know this was when the system broke down because even with trillions in central bank liquidity injections and government stimulus, it has never recovered, destroying any prospect of a functioning global economy.
Now, the problem we face is the people in power have no idea how the system functions and why it snapped in two. The creators of the modern monetary system are not governments nor are they central bankers. It’s the commercial megabanks, the financial elites that create most of the global money supply offshore in the shadow banking system, which operates outside any administration’s jurisdiction.
We know the authorities either have no clue how this hidden system works or have no political will to want to change it. Central bankers continue to do the opposite of what the system wants. They create more and more reserves hoping it will fix liquidity issues, but the system cries out for more. Even the Chinese central bankers understand the system more than the Fed as the People’s Bank of China (PBOC) accepts it’s a debt-based, reserveless system.
In 2009, PBOC Governor, Zhou Xiaochuan, said, “the desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.” The Chinese and other nations conducting in global trade know the system is a failure because anyone who tries to escape it or bypass it witnesses the near-collapse of their economy and currency.
This is a monetary issue, not a political one. It does not matter if Trump, Biden, or any other bureaucrat assumes the role of POTUS in 2020. They will inherit the ultimate burden which they have no idea how to fix. Name a recent economic advisor who has mentioned the Eurodollars or dollar hegemony recently. Not one. Not a single person in the White House has any idea that with the global financial system in tatters it’s impossible to create a thriving global economy.
Instead, central bankers and governments try the insanity approach, repeating the same failed policies, expecting a different result. They think they’ve fixed the problem but they haven’t, and the global economy slips back into chaos. This cycle has repeated itself several times over the past decade, and each time, the authorities lose more credibility, and the probability of an unstable world increases. While they fail to accept that the monetary system is broken, we’ll witness the same facade on repeat: Central banks financially engineer a short period of economic growth, claim they have fixed the underlying issue, and take away the system’s life support. But the system always finds a way to tell them they were wrong.
This faulty global economic system will continue to create issues not only economic but societal if the U.S authorities’ ignorance of the financial system continues. What we’re seeing today is the natural response to a financially repressive regime; the absence of economic growth manifesting itself in many ways within society. When people become desperate and revolt in the streets, it’s usually a sign of a failed system that stems from broken economics. When we see young embrace socialism and abandon “capitalism”, can you really blame them after experiencing a decade of stagnant economic activity? Surely not.
Time is running out for the U.S to realize its dollar hegemony will be its downfall. If we continue in this environment for another decade, then things like rising civil unrest, anti-intellectualism, and fake innovation will not only continue but get worse. We can stop the societal collapse that many keep calling for because we always do. We’ve had a knack for that recently. The question is how much pain will we have to endure?
This ends one of two ways. The pain-free way is where the financial elites come together to fix what caused the breakage on August 9th, 2007. The painful way is where they ignore it and let the global economy slumber on until another superpower or transnational organization overthrows the system out of desperation or need, and it doesn’t take a genius to tell which scenario points to a scarier or serener future. Either the monetary elites transform the financial system from a weapon into a tool for economic prosperity or the global economy will casually descend into chaos once again.
Unfortunately, we citizens can’t save the system. Instead, we’ve been forced to embrace our inner masochistic, observing the economic, social, and political mayhem from our homes via media, almost powerless to stop an uncomfortable economic truth: If we want to return to the pre-2007 world of at least semi-decent growth, the will to fix the global monetary system must come from higher up.