The Insolvency Unfolding

Hey Jesseconomists

As the lockdowns continue around the world so too do economies contract, the smaller they contract they higher the percentage of recovery will be once lock downs are over. BUT in terms of side by side comparisons, we will see far fewer economic output than we did in previous years.

We've had a debt problem, we've always had a debt problem, and I have to say I am remarkably impressed with how much confidence people have in the system, that money printing is still able to smooth things over, regardless of fundamentals.

As governments try to keep people calm, hide numbers, print money, provide forbearance and put off payments while taking on debt to keep lockdowns going, we as citizens are not exposed to the real impact of what is going on around us.

A game of hot potato

As money slows down in a debt-based economy, it starts to have severe effects on various sectors. In a debt-based economy, money is like a hot potato, everyone is trying to pass it around as fast as possible, or they'll be stuck with the asset that depreciates due to inflation.

Now when most of the world hold their wealth in this hot potato and things slow down, you find that other stores of wealth go up. It takes more fiat to convince others to part with their assets and so you see price inflation. Inflation is the key that will unravel this entire system, but before it hits, we'll see more insolvencies.

Solving the insolvent

No government is going to give us the real figures, nor can they calculate the full effect of lockdowns, but we know one thing, job losses are going to be in the millions. We understand business shutdowns are going to be in the thousands, but we don't think about what that means in a debt-based economy.

The more jobs and businesses that are lost, this means less money to pay for debts like car loans, student loans, home loans and business loans.

This leaves banks sitting with debt they need to write off or assets they need to sell off at a haircut, when it's done at such a large scale, banks will flood the market to try and secure liquidity.

When people go bankrupt when people become blacklisted, this reduces the number of people who can gain access to credit, so now you have a pool of people who banks can't lend to try and stimulate the economy.

How do we know banks are in trouble?

Again, don't listen to the narratives look at the numbers, and what do we see going on around the world? As you see, most people are focusing on how great certain indicators like the stock market is doing.

However, if we look into sectors of the market/stock market, the best performing is gold and silver miners, and the worst-performing are the banks.

So what does that tell us? It says to me that investors see that debt does NOT look like a place to park your money for a return or safety, and they are moving towards hard assets during this time.

If money is as good as gold, why is their a gold rush?

Signs from central banks

If we take a look at the G4 central banks are the Bank of England (BOE), the Bank of Japan (BOJ), the Federal Reserve (FED), and the European Central Bank (ECB), the biggest banks in the world, and review their balance sheet what do we see?

The cumulative balance sheet of G4 central banks - the US Federal Reserve, Bank of England, Bank of Japan, and the European Central Banks - has expanded to $20 trillion, as noted by Jeroen Blokland, portfolio manager with Robeco.

The G4 balance sheet size has increased by $5 trillion this year.

Source: fxstreet.com

As this new money comes into play from thin air, the dilutive impact of the surge in inflation of money supply has boded well for scarce assets like gold. The yellow metal recently rose to record highs near $2,090 and is currently up 33% on a year-to-date basis.

Now here is the real kicker

All asset classes benefit from the inflation of the money supply as that new base money, and M2 money supply floods the market looking for a home.

As I mentioned gold gobbled up some, and so did the stock market and real estate, but when you measure the uplift in those markets versus what you lose in inflation. Many of these asset classes do not offset the loss in purchasing power of fiat with a growth in their purchasing power.

For example golds growth in purchasing power is only around 50% of what the growth of central banks balance sheet was, whereas, with Bitcoin, it's the only asset class that has outstripped the increase in the balance sheets of central banks.

Bitcoin looks to be a blockhole at the moment, and it's sucking up capital faster than any other with its quantitative tightening due to its recent halving.

Have your say

What do you good people of HIVE think?

So have at it my Jessies! If you don't have something to comment, comment "I am a Jessie."

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