'We’re a bursting Bubble away from severe societal crisis. And this could be the major Issue 2021..
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The inflationism I’ve been chronicling weekly for over two decades has turned desperate. This is a deeply troubling dynamic – a disaster in the making. The culmination of a crazy financial mania right in the face of deepening late-cycle economic and social distress. The worst-case Bubble scenario is, most regrettably, a momentous Issue 2021. I saw nothing but ominous confirmation of this troubling thesis during a chaotic first week of 2021: The Year of Acute Monetary Disorder and Fragility.'The 2008 crisis was labeled “a hundred-year flood.” Crises inflict enormous pain. Normally, lessons are learned, and behaviors are altered. Speculators are chastened, while policymakers assume a more assertive role in safeguarding against lending, debt accumulation and speculative excesses. But contemporary central bank doctrine has transformed age-old dynamics. QE, zero rates and using asset inflation as the key mechanism for system reflation ensure anomalous dynamics. The Bubble was reflated and then some, ensuring only greater future Bubble collapses.
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It would be highly unusual to have back-to-back years of financial crisis. But the speed by which intense speculative excess reemerged post-crisis has been extraordinary. There are some similarities to the post-LTCM rally that briskly ripened into the 1999 technology stock mania – with less than 18-months from bailout to a major market top in March 2000.
Yet the scope of the current global Bubble across asset classes so dwarfs 1999. Between September 1998 and the end of March 1999, Federal Reserve Assets expanded $55 billion to $580 billion. For this cycle, the expansion of Fed Credit is now up to $3.580 TN in 69 weeks. Central bank largess spurred history’s greatest Credit expansion – in the U.S., China and globally. Many governments over the past year ran deficits surpassing 10% of GDP. The U.S. fiscal deficit exceeded $3.0 TN, or approaching 15% of GDP. In the face of an unprecedented supply of new bonds and debt, market yields nonetheless collapsed. Central bankers completely disabled the market pricing mechanism.
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Another massive stimulus program risks turning both Republicans and an increasingly inflation-focused bond market against massive Fed monetization. There is, as well, the not inconsequential risk of a disorderly decline in the dollar. The confluence of huge trade deficits, previously unimaginable fiscal deficits, massive Fed monetization, over-indebtedness, and a vulnerable financial Bubble places dollar stability in jeopardy.
It’s not unusual for a nation’s bond market and currency to turn disorderly concurrently. Such a scenario for Treasuries and the dollar would place the Fed under the most pressure to tighten policy in decades. The iShares long-dated Treasury ETF (TLT) sank 4.1% this week, a painful reminder of how quickly losses can mount for a perceived low-risk Treasury bond. Treasuries, corporate bonds and fixed-income securities more generally are extraordinarily vulnerable to a painful bear market.
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No country faces a greater challenge than China in balancing the need to reduce stimulus against underlying acute fragility. After expanding Credit $500 billion monthly for most of 2020, Chinese officials will attempt to restore some degree of financial restraint. The risk of a financial accident in China in 2021 is reasonably high.
Beijing postponed plans to get its Credit system in order as it confronted aggressive trade war tactics from the Trump administration. Officials then resorted to massive fiscal and monetary stimulus to counteract contractionary pandemic dynamics. Today, there’s excessive optimism regarding China’s economic recovery – and the soundness of its system more generally. Beijing is not oblivious to the perilous scope of China’s Bubble.
Authorities will now cautiously attempt to impose restraint, a risky proposition for one of history’s great financial and economic Bubbles. I expect cracks in the corporate debt market and “small” bank sector to widen into more systemic issues in the event of heightened risk aversion and deleveraging. China’s apartment markets remain an accident in the making. The stability of China’s bloated banking system is an Issue 2021.
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But for now – and especially after this week’s developments - I remain more worried about domestic conflict than international. What an absolutely abhorrent start to the new year for our country. Wednesday’s spectacle was an appalling national nightmare. Was it a freak anomaly? The end of something – or more the beginning?
As disturbing as Wednesday’s U.S. Capitol insurrection was, by evening I found myself trying to find reasons for hope. Would the debacle force some serious rethink? Would there be recognition that things had been pushed much too far? As a nation, through this disgusting episode of mayhem might we begin the challenge of national reconciliation. Could we come to a consensus that as a nation we need to tone down partisan rhetoric? Would Wednesday force the reassessment of efforts hell-bent on inciting anger – anger that burst into violence, desecration and even murder in our beloved Capitol Building.
Our nation is today dangerously divided – and how this social crisis is handled is a key Issue 2021. Here, on Friday evening, I find myself less hopeful. The end of something or the beginning? Will the chaotic conclusion of the Trump presidency set in motion the healing process, or has something menacing been unleashed that will prove difficult to contain? Is the far-right fringe energized and emboldened? Can we keep the extremists from the right and left from clashing? Do we now face elevated risk of domestic terrorism?
How citizen Donald Trump handles quite difficult circumstances is, unfortunately, a major Issue 2021. Does he resolve to play a constructive role in national reconciliation, or does the famed “counterpuncher” coming out swinging madly at his adversaries? How gory does the unfolding civil war within the Republican party become?
I am left to hope for a much-needed easing of socials tensions – a pulling back from the precipice. There were over 300,000 new Covid cases today, with another 4,000 American deaths. We can be hopeful that with vaccinations we’ll be through the worst of this terrible pandemic within a few months. But how much worse will things become in the meantime? There are these more contagious virus variants, along with the possibility that virus mutations may at some point weaken vaccine efficacy.
I worry about deepening scars – from the pandemic, from divisiveness, from all the hostility, and from waning faith in our institutions. I’m not happy to write another dark piece – in back-to-back weeks – 2020 and 2021 prospects. But I worry. We’re witnessing an increasingly combustible social tinderbox. I rather clearly see a fire starter.
We’re a bursting Bubble away from severe societal crisis. And this could be the major Issue 2021. It’s tempting to focus on booming markets and the constructive role they will play in economic recovery and social healing. But it’s no coincidence that securities prices are going nuts as social stability increasingly fractures. Society today suffers the myriad deleterious effects from decades of dysfunctional finance and resulting Monetary Disorder. Meanwhile, the Fed responds feverishly to late-cycle market, economic and social fragility with Trillions.
The inflationism I’ve been chronicling weekly for over two decades has turned desperate. This is a deeply troubling dynamic – a disaster in the making. The culmination of a crazy financial mania right in the face of deepening late-cycle economic and social distress. The worst-case Bubble scenario is, most regrettably, a momentous Issue 2021. I saw nothing but ominous confirmation of this troubling thesis during a chaotic first week of 2021: The Year of Acute Monetary Disorder and Fragility.'
- Doug Noland,
Issues 2021, January 9, 2021
Context(Banking Reform) - 'I have serious doubts contemporary finance will pass this test .. for centuries, post-Bubble post-mortem would invariably fault the instability of “fractional reserve banking.”..'Hayek Was Right, Keynes Was Not An Economist - '..Keynes ducks entirely the role of bank credit in inflating the money-quantity..'‘The methodological ideas of the Austrian School evolved in parallel with the debate on socialist economic calculation, and criticism of positivist methodology is one of the most interesting by products of this debate.’(Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..'