In the previous blogs we have already established that all is not well despite the fairy tale world many people live in. A major global crisis can still be averted if governments and central banks take bold, deliberate and mostly unpopular measures based on a sound understanding of history and economic realities. However, looking back at the accomplishments of the establishment in the past decade we must doubt that this will happen. Central bankers still base their decisions on faulty economic models and exhibit outrageous hubris in their firm belief that their actions will end business cycles and generate perpetual growth. And politicians will avoid any unpopular measures as they seek reelection. Recent decisions by the European Central Bank and the U.S. Federal Reserve to continue and reinforce their already disastrous monetary policies do not bode well. As they saying goes “Insanity is doing the same thing over and over again and expecting different results”.
To know that trouble is ahead is feasible provided that one carries out a proper and unbiased analysis of the facts. To predict the exact timing and sequence of future events is impossible. A lot of analysts are wrong most of the time but if they are lucky once with a single accurate prediction, they tend to use this as proof of their superior capabilities until they die. The fact that there are too many players involved in the world economy with largely divergent and often changing agendas makes it impossible to come up with accurate predictions. We should also not underestimate the power of politicians and central bankers who will do everything to keep the party going.
All countries will be affected by the coming crisis but severity and duration will vary. Some countries might manage to avoid the worst while others will be at the center of the crisis. There are already clear candidates for the former and the latter but everything depends on how the respective elites deal with the approaching challenges. Don’t make the mistake of thinking that problems will only occur in Third World countries. The Great Financial Crisis started in the USA and there are many indications that the epicenter of the next downturn will be one of the big three economies namely Europe, China or the USA.
As the saying goes “the market can remain irrational longer than you can stay solvent”. Therefore, don’t try to time the market. Also don’t try to expect only one sequence of events or a single outcome. Be what famous scholar and writer Nassim Taleb calls “antifragile”, i.e. expect and be prepared to benefit from shocks, volatility, and disorder. It sounds difficult but it can be done.
Some or all of the following might occur in your country within the next decade, either as part of a big bust or a gradual collapse:
- Extended periods of ZIRP (Zero Interest Rate Policy) and especially NIRP (Negative Interest Rate Policy). The latter can cause interest rates of normal savings accounts to go well below zero despite the fact that this contravenes basic economic sense and previous attempts have failed to generate positive results — ZIRP/NIRP is already a well-established policy set of most the Central Banks and the first commercial banks in Europe have already started to charge negative interest rates
- Expansion of Quantitative Easing (EQ), i.e. central bank purchase of government bonds (to finance government debt) as well as corporate bonds and equities (to sustain asset bubbles and to prop up big businesses at the expense of small and medium sized companies) — already a well-established policy of central banks
- Helicopter money (= free money for everyone created out of nothing) — proposed by government think tanks and central bank/government representatives
- Trade wars as governments seek to keep more production at home — already started between the U.S. and China
- Currency wars as every country tries to gain advantage in international trade by lowering the value of its currency well below that of competing countries — already started though not yet as widely covered in the media as the trade war
- High tax increases to be born mostly by the dwindling middle-class allowing bankrupt governments to sustain insolvent pension and health care systems and to prop up struggling financial institutions and zombie companies at the expense of the rest of the economy — on the way
- Ban on cash and perhaps even private possession of gold to bar people from escaping negative interest rates — proposed by government think tanks and central bank/government representatives at least in relation to cash
- Capital controls reducing or prohibiting the global transfer of money — partially implemented in some countries
- Asset deflation (at least in real terms) as central bank and government policies to contain the bubbles fail — on the way
- Growing consumer inflation — already here
- Election of extremists with political agendas to centrally control all economic activity and further curb personal and economic freedoms — look at the last election results
- Steep increase in the bankruptcy rate and consequent spike in unemployment figures — to mirror and potentially surpass the Great Financial Crisis
- Default of banks and insurance companies that have been severely weakened by zero/negative interest rates and will lose part of their remaining assets with the bursting of the asset bubble. They will subsequently be rescued by governments at the expense of the middle class (higher taxes) and/or the insured (partial or full loss of deposits) — respective legislation is already in place in many countries
- Insolvency of public pension and health care systems as the number of recipients increases, emergency funds have been depleted and governments are bankrupt. Officially the insolvency will be disguised as “changes in benefits” but the effects are clear: Significant reduction in benefits and the number of beneficiaries — government bodies and partially even the respective organizations themselves are already warning about it even though this information is mostly suppressed by politicians and the mass media
- Collapse of the current fiat monetary system — global financial systems have gone under before and it will happen again
- Breakdown of supply chains resulting in a shortage of food and other necessities and causing rapidly increasing prices — we have recently seen it in Venezuela, a country that should be rich and prosperous but instead suffers from incredible government mismanagement. Don’t think it can’t occur in your country
- Intergenerational conflicts as the old, who have lived well beyond their means for decades, want to maintain the status quo whereas the young, who have to pay for an ever-growing number of retirees, are crushed by unemployment and inflation — young people are slowly realizing the big mess we have caused through our irresponsible and selfish behavior
- Civil disobedience and civil unrest that can threaten the political order and cohesion of our societies — just look at history
- Proliferation of mass surveillance and substantial curbing of personal and economic freedom — already started
- Rise of international conflicts and wars as governments try to distract the populace from rapidly declining living standards by creating foreign enemies — history provides many examples
Does that sound scary? Sure, it does. But apart from a full-scale atomic war this will not be the end of civilization or mankind. The world will recover and as in the past, every crisis offers unique opportunities for those that are well prepared. If you retain a sufficient amount of real assets you will be able to invest in wonderful companies and properties at cents for the dollar or Euro once the worst is over. New technologies provide amazing opportunities for further growth and astute investors will be able to generate fortunes. If you prepare well to overcome imminent challenges you can emerge richer than you are today.
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