x
In case you missed it there has been a significant shift in attitude amongt the global financial elite over the last 6 months towards the long term value of cryptocurrency. For example Tesla just recently bought in excess of 1 Billion in bitcoin. Why? As a hedge against the falling and unpredictabiities of fiat currencies and more speficically against the vageries of a centralized banking system which has strong political overtones.
In a recent interview Camen Rhienhart, World Bank Economist had this to say.
"World Bank Chief Economist Carmen Reinhart gave an interview on Bloomberg Television recently and she didn’t disappoint.
For those that don’t know Reinhart, she co-wrote “This Time Is Different: Eight Centuries of Financial Folly” in 2009 with Kenneth Rogoff.
Bloomberg describes the book as having made Reinhart “the go-to resource on the history of government defaults, recessions, bank runs, currency selloffs, and inflationary spikes.”
This expertise and experience led to the World Bank’s top economist job earlier this year.
There were two interesting comments that Reinhart gave during the interview.
The first was:
“This did not start as a financial crisis but it is morphing into a major economic crisis, with very serious financial consequences. There’s a long road ahead.”
She specifically is calling out the central bank responses to COVID-19 shut downs across the world as a potential catalyst for these financial crises.
This led to the second comment, which related to central banks attempting to keep yields low by buying bonds:
“This is a war. During wars governments finance their war expenditures however they can and right now there are dire needs. The scenario we are in is not a sustainable one.”
It is not every day that an economist uses the terminology of war to describe central bank actions.
It is not every year that central banks manipulate interest rates to 0% or negative, while also flooding financial markets with trillions of dollars either.
This isn’t the first time that Reinhart has used the war metaphor though.
A few days ago, the Financial Times reported her saying “First fight the war, then figure out how to pay for it.”
This is powerful coming from someone who has been a staunch critic of the debt situation.
What we are witnessing is the classic trade-off between mitigating short term pain and optimizing for long term sustainability.
Central bankers are choosing the short term pain mitigation, but majority of them know it is an unsustainable situation.
They essentially will be forced to decide between (a) allow countries to default or (b) continue to devalue the currency at such a rapid pace that they can use the cheaper dollars to attempt to pay off the debt in the future.
Either way, the citizens in the lowest socioeconomic classes are hurt the most.
They don’t have the luxury of disposable income that can be used for investments in inflation-hedge assets.
They don’t have the financial education to understand what is happening.
They simply are stuck in a rat race that will see their cost of living explode and the feeling of never getting ahead become even greater.
Central banks are in a really tough position.
Do nothing today and people will suffer.
Save people today and people will suffer later.
The easy decision is to load up on debt today and save people, but it is unclear that the easy decision is the right decision.
There is general agreement across central bankers that they will figure out how to pay for the debt later.
Maybe they do, maybe they don’t.
