One of the topics that came up in yesterday's conversation with my brother was whether we'll see hyperinflation as a consequence of the insanity that has gripped the world. Then he mentioned stagflation, and I told him that my bet would be on that rather than hyperinflation.
My prediction has long been for a 1970s type scenario, only worse. There will be a rapid rise in the price of all necessities like food and energy, while prices of non-essentials stay untouched. Speculative assets of all kinds will stay flat, or fall. The same will happen to luxury goods, including second homes and fancy cars. However, gold and silver will rise together with necessities due to their monetary properties. Sound money is a necessity, and hence, gold and silver rise when trust in paper currencies and their derivatives evaporate.
Businesses will react to this by loading up on commodities necessary for their operations, and speculators will try to front run these. They will also discover that money can be made by borrowing money to buy gold. With real interest rates consistently lower than inflation, gold will shine due to its inflation tracking property derived from the fact that gold is a commodity rather than a paper asset.
Commerce will constantly look for ways to hedge against inflation. Once their warehouses are full, they will home in on whatever commodity is easy to store and trade as an alternative to holding paper assets or cash. With storage cost going up due to hoarding, gold will present itself as the commodity of choice.
Bitcoin will be revealed as a red herring because of the energy required to keep its network up and running. It will become clear to everyone that Bitcoin is far from free of storage costs. The scheme depends on power hungry computers, floor space, and a whole range of services related to maintenance and upgrades. Gold has none of these requirements. A small box, hidden away in an attic, can hold a fortune in gold at no cost. Only Bitcoin requires an army of engineers and a constant flow of energy to be available 24/7.
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| Cryptocurrency mining farm |
There will be a market driven flow out of currencies and paper assets that will continue until the current financial system either collapses or some brave central banker pushes interest rates so high that people are forced to abandon their speculative bets against central banks, government debt and all things related to paper currencies.
The stagflation period of the 1970s came to an end when interest rates were set substantially higher than the rate of inflation. However, this was done in an era of relatively little national debt. If something like this is tried today, nations will go bankrupt, and the system will crash. It's therefore unlikely to be tried. Interest rates will never be set above the rate of inflation, and stagflation will therefore become hyper-stagflation, at which point everything crashes and nothing but a complete reset will restore confidence.
A prolonged period of stagflation will force commerce onto a de facto gold standard, similar to what has already been established between Russia and China. Contracts will be written against gold, rather than currency, and central banks will be forced to incorporate this market driven demand in their reset. Otherwise, they'll risk irrelevance, because commerce will not abandon their gold standard unless currencies can provide the same stability. Any attempt at a reset without gold will be met with a great deal of skepticism.
With this in mind, it's interesting to note that Australia's two year bond yields shot up over night. This high quality paper asset fell substantially in price. If not corrected, this will spread to the rest of the world. If corrected, the message from central banks will be clear; they will let their currency crash and burn. Either way, life's necessities are about to get a whole lot more expensive.
As an interesting aside for the religiously inclined, the third horseman of the Apocalypse brings with him stagflation. Life's necessities become increasingly expensive, while luxury goods like wine and fine oils remain unchanged.
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| Four horsemen of the apocalypse |
By Viktor Mikhailovich Vasnetsov - http://lj.rossia.org/users/john_petrov/166993.html, Public Domain, Link
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