The United STATES Solvency Regression (USSR)
The working assumption, amongst governments, most economists and and central banks globally, was that at some point in the near future everything would get back to ‘normal’, that our economies would return to either the pre-pandemic levels or, maybe even a prior to the 2008.
Such beliefs are pushed by the legacy media’s economics commentary which is no-doubt fuelled by those guiding us towards economic doom.
However, the world’s largest asset manager, the infamous Blackrock who oversee assets globally worth $10trn (trillion) suggests we are entering a period which will see increased risk and uncertainty, with an unavoidable recession and inflation at a much higher rate.
BlackRock are not only well-connected, but hugely influential, traits that enable them to remain at the helm of global capitalisms drive for more and more profit. Its ‘2023 Global Investment Outlook’ (1) report states that:
“The Great Moderation, the four-decade period of largely stable activity and inflation, is behind us.”
BlackRock a regime change to “brutal trade-off” creating falling standards of living “for the many” with profits for “the few”, literally the polar opposite of what Jeremy Corbyn offered us.
The world it seems is undergoing a fundamental transformation, the “new normal” we were threatened with during C19, and the continued disruption to mode of existence is yet to make it to the mainstream news of our economic outlook.
Have people noticed the systemic chaos?
In the United Kingdom, annual food inflation rose to an all time high of 13.3% according to the British Retail Consortium, (2) a situation no doubt compounded by the U.K lumbering into a flawed Brexit deal after a vote for a deal that didn’t actually exist, and a falling pounds value, which is critical while our major source of food remains via import. Wholesale energy prices may have dropped from the summer 2022 peak, yet the price of food continues to soar.
As those who monitor the Federal Reserve will be aware, this global spike in prices continued to described by those holding power in economic establishment as “transitory”. (3) The continued inflation was then explained as being due to excessive worker power, but lets not forget that real wages in Western nations are falling and we have all been exposed to rampant money printing through what is termed quantitative easing, a method used since 2009 following the 2008 banking crisis.
BlackRock thinks that the only way to decrease inflation is for central banks ‘crush’ nations economies into a severe recession. However, as a whole the economic profession, including most central banks, still suggest this global instability is due to temporary factors rather than a systemic failure.
The central banks continue to focus on pushing up interest rates to bring about a recession to quash inflation. Equally governments remain committed to holding down wages whilst profits to explode to vast new highs for companies such as Shell. (4)
BlackRock suggest the world will from now on be “shaped by supply that involves brutal trade-offs” with a world economy that is less effective at goods supply and services than it previously was.
After the pandemic we saw the after-effects in supply chain problems, coupled with an ageing population that meant fewer workers that in theory pushed up the cost of labour; coupled with “geopolitical tensions” that disrupted global supply chains (lets not forget how fast weapons are able to be supplied when requested. The focus on shifting to net-zero carbon emissions has also created a demand and supply pressure at a time when it wasn’t ideal for normal people who cannot profit.
BlackRock suggested inflation will only come down to the previous 2% level if and only if, central banks ‘crush’ their economies into a severe recession. They suggest that’s unlikely and inflation will continue to remain high or go higher than we are used to, this will be combined with recession.
Massive profits are available
Post Covid some continue to see huge profits via the health industry and climate change drives profit for some while ensuring resource depletion of something that just isn’t oil. The threatened “climate supercycle” (5) promises food shortages and continued rising prices, but this likely provided a cover story for a collapsing economy in which production (and importation) becomes prohibitively expensive. This was seen as the Soviet Union collapsed and we are already seeing signs of industry simply giving up. As many will be aware, posting goods is now a game of chance, guarantees of delivery no longer exist.
Are we seeing the collapse of the dollar-dominated global economy?
Financial shocks in recent years are being blamed as the threat to the global monetary architecture and measures are being taken to maintain the global economic order. The primacy of the dollar, is eroding and the West is facing a radically worsened instability.
Saudi Arabia’s finance minister said the Gulf kingdom had “no objection” to selling its oil in a currency other than dollars. (6)
Saudi has suggested this previously, but the recent suggestion follows Chinese president Xi Jinping urging the Gulf states to use the yuan to settle oil and gas trades with China. (7)
Such a transition would mean both the world’s first and second largest oil exporters, Saudi and Russia would no longer trade oil in only dollars. For this reason both China and Russia are the greatest economic threat to US hegemony.
Chinese tech giant Huawei (8) are in discussion to supplying cloud computing and high-tech infrastructure for Saudi cities, despite US bans and new ‘petroyuan’ (9) looks certain as an international system, unless the US is able to block it via some means.
Argentina and Brazil also threaten the system with a new currency for bilateral trade using the ‘sur’ something that has previously been suggested but failed to materialise due to strong opposition from central banks in both countries. The new left-leaning (and potentially soon to be over thrown) governments in both countries, the willingness to try and establish a new currency, away from dollar system seems to be gaining traction.
Since the end of WWII and the Cold War the world has been dominated by the US economy, and with it the dollar. The sanctions on Russia that seemed to strengthen Russian and have a greater impact upon Germany and the rest of Europe have acted as a warning to nations relying on the dollar system, If Russia can be excluded, we all could.
The system has long been wobbly, but the dramatic crash of the 2008 global financial crisis seemed to demonstrate the vast power of the US, which showed it could stabilise the global economy via a system of Federal Reserve ‘swaplines’. (10)
These swaplines offered cheap dollars as an emergency to politically favoured counties, such as Britain, bailing out our domestic financial institutions, but creating a debt to the US.
Acts like this give the US huge political weight, and much like the Marshall Plan following WWII, the US ability to print dollars and attach a debt to it gives them immense power globally to those that will accept assisistance and then become wedded to the US dollar. The US has long been able to exercise its colossal monetary power to pursue its global broader interests, thus only its close allies were able access swaplines. In an economic emergency every country could need dollars, thus the US in trying to incentivise strict adherence to the dollars reserve status, has actually created a desire in many countries to withdraw from a dollar-centred international monetary system.
Dollar regime
While Occupy Wall Street fizzled out without the need for US snipers to shoot, they have enacted policies to prevent political unrest, indeed with the 2019 repo crisis bailout, the Fed printing was hidden behind the “need” for covid economic stimulus. Protests were also impossible due to lockdowns. However, since 2008, other economies, undoubtably led by China, grew faster than the US, and US allies, such as our economy here in Britain, have fallen far behind. C19 caused a dramatic jolt to the system, one that many felt was intentional to reset the economic order.
For years the US empire unambiguously dominated the globe, simultaneously it was the largest economy, dominated as the technological leader, and remained the planets greatest military power, making withdrawal by other nations near on impossible. As the US loses its power, the risks of a withdrawal seem less for those countries contemplating it. China has long been threatened by US military presence, and recent discoveries by the US seem intent to stoke this fear.
With US military threats to China et al as pervasive as ever, the risks of remaining inside the dollar system seem dramatically higher given the giant warning sign given following US sanctions upon Russia. The exclusion by the US government, shows any country can suffer the fate of a US ban, which creates a greater incentive to withdraw, so as to avoid the whims of Washington.
The Bretton Woods conference in the US in 1944, saw the Allied powers lay down the ground rules for how the post-war international monetary system would work, this led to an agreement which set up the World Bank and the International Monetary Fund. Alongside this came a system of fixed currency exchange rates that were pegged to the dollar (and to gold before the US refused to maintain the dollar’s gold standard).
‘Bretton Woods’ II occurred 20 years later in the wake of the Cold War, with the US acting as a massive, debt-funded consumer, exploiting the demand globally for the dollar in both trade and as a reserve. In doing this it ran up huge debts against other nations, who were seemingly happy to lend to the US. China was happy to finance the debt because the US in turn, imported from the fast-growing Chinese economy.
In 1945, the US was responsible for almost 50% of the global industrial production, this has sunk today to approximately 16% (11)
Despite this, the dollar fight to be dominant amongst the global monetary architecture will struggle against alternate competing currencies. Indeed, China’s renminbi, and the ‘petroyuan’, are clear examples of threats, as is the Russian push towards other methods for trade payments.
The dollar still accounts for approximately 50% of global trade, but cracks are appearing, with India trading in rupees with Russia and China, as well at The UAE using the Dhiram. Countries are beginning to inch out of the dollar system. While capitalism rose to dominance in a world system, for a new phase of growth to occur, a new ‘hegemony’ must emerge. As Genoa was surpassed by Holland in the 16th century, Holland too gave way in the 18th century to Britain, and Britain to the US in the 20th.
Such transition historically occurs through a period of great instability. As we live in an era of rising tensions across the globe, facing resource depletion and a fight to capture those resources, a new global monetary regime seems certain. The Fed’s continual aggressive rate hikes aim to combat high inflation, despite history indicating that deflation will become a more significant threat when the financial or credit market “break”.
As we saw in 2022, stable markets rapidly become unstable when something breaks due to rising rates or volatility. The Bank of England (BOE) was forced to start buying bonds to fix a crisis with the U.K. pension funds. The pension funds were hit with margin calls, which caused massive market instability. Due to the leverage (gambling) built up throughout the financial system, market instability can and will spread faster than C19 did around the globe. We all recall in 2008 and the Lehman Brothers crisis that toppled the house of cards and took a massive bail out to stop.
The U.S has a collosal magnitude of leverage running rife throughout its financial system, and we are likely on the verge of bigger bubble bursting.
The systemic consequences of the continual Fed tightening monetary policy repeatedly occur throughout history, with The Latin American Crisis occurring due to rising rates impacting upon the dollar-denominated debt, a crisis that could have left many banks in the U.S. insolvent. Rising rates again triggered the Market Crash of 1987 as we saw a failure of “portfolio insurance”. Other notable adverse events were the 1994 bond market crash, Mexican peso crisis, Contagion, Russian debt default, and the Dot.com crash.
“High inflation rates” are no doubt problematic for the economy, due its creation of demand destruction, we see a greater risk from the ensuing“financial instability,” that would occur in a “deflationary” due to its implications for wealth destruction that further undermines consumer confidence.
Inflation Is Unsustainable
Inflationary pressures are often touted as a “good thing” when aligned with strong economic growth and a period of productivity. However, when the price of inflation increases at a faster rate than wages, coupled with increases in costs for debt servicing upon those households who are heavily levered with debt. This typically results in liquidity contraction and can trigger an economic recession.
The current problem for the Fed is that continued rate hikes will further exacerbate disinflationary processes that already seem evident in our economy.
Deflation From Excess Inflation
High inflationary periods correspond with higher interest rates, and in countries that are highly indebted, such as that U.S. it creates a faster demand destruction due to the faster ride in prices and debt servicing costs that consume up more of available disposable income within households and businesses. In the following chart we see the “real interest rates,” as far back as 1795.
As you can see, a period of high inflation is followed by low/negative periods of deflation. The Fed attempt to slow the economy, but the risk remains that something may breaks and such a monetary policy is hell bent on pushing us towards and accelerating economic weakness, driving us towards destructive deflationary recession.
With deflation it sounds ideal, with a fall in the overall price level, and an increase in the currencies purchasing power. This can either be driven by increased productivity and an abundance in goods and/or services, or by a decrease in total (aggregate) demand or by the decreased supply of money/credit.
Understanding what deflation is
Changes that occur in consumer prices are observed via an economic statistics measure most nations use to compare changes in what is referred to as a basket of diverse goods/products to a set index. The U.S. refers to this as the Consumer Price Index (CPI) and it is the index most commonly referenced when evaluating inflation rates. If the index is lower than in the previous period, this indicates an economy experiencing deflation, if it is higher, naturally it is an economy in an inflationary period.
General a decrease in prices is considered good as it gives greater purchasing power to consumers, and to a degree, a moderate drop in specific products, namely food or energy, could have some positive effect by increasing the nominal consumer spending. However, a rapid deflation can and as seen, is often associated with a contraction of economic activity. This tends to occur, which is interesting given the level of debt held in many counties, specifically the U.S. In an economy heavily laden with debt, one that is highly dependent on a continuous expansion of the supply of credit to maintain the inflated growth in asset prices created by speculative financial investment, credit contracts, a fall in asset prices can see speculative over-investments being liquidated, which causes market panic and a “run on the banks”.
Inflation occurs as the result of excess money chasing limited goods in the economy, and deflation occurs due to a growing supply of goods/ services that are available to a stagnating or declining money supply. Thus, deflation can occur by an increase in the supply of goods and services (as we have now for instance in the cycle industry) or by a lack of increase (or decrease) in the supply of money and credit. In either case, if prices can adjust downward, then this results in a generally falling price level.
An increase in the supply of goods and services in an economy typically results usually acquires from technological progress, newly discovered resources, or an increase in productivity. In our current state we seem to be seeing a decline in the desire for product, possibly an effect driven by the excess consumerism exhibited early in C19.
The mighty U.S. government targets a 2% rate of annual inflation.
Yet some economists express fears that a fall in prices will cause a paradoxical reduction in consumption as it causes consumers to delay or avoid purchases in the hope of future lower prices. In periods of “typical” economic growth, as already stated, falling prices occur due to improvements in productivity, technology, and/or resource availability.
The majority of consumption is however constituing of goods and services which are not easily deferred to the future, such as food, healthcare, housing, and transportation.
Times of debt, speculation, and the conditions for debt deflation
Specific conditions can set us on a path to deflation following a period of economic crisis. When an economy is highly finanicialised, one in which a central bank, or other such monetary authority, engages in continual expansion of both the money supply and the credit within the economy, the reliance on using this method creates an ongoing inflation in the prices of commodities, rent, wages, consumer prices, and assets.
Investment activity begins to speculative based on the price appreciation of financial assets, rather than the typical focus on profits and dividends that occur as a result of economic activity that is fundamentally sound.
Business activities begin depending increasingly upon the circulation and turnover of newly created credit as opposed actual savings to fund operations.
Any economic shock, or large market correction can then put extreme pressure on businesses that are heavily indebted, as well consumers, and investment speculators who are similarly leveraged with debt. Business and individual may then have difficulty refinancing, or making their payments on various debt obligations, which can lead to debt liquidations by lenders, which begins to decrease the supply of circulating credit within the economy.
This sees a banks' balance sheets less stable, and fears may cause depositors to withdraw their funds as cash in case the economy/bank fails. A resulting bank run in which banks are over extended in their liabilities versus their inadequate cash reserves, a bank unable to meets its obligations begin to collapse.
Such a reduction in the supply of money and credit also reduces the ability of consumers, businesses, and speculative investors to continue to borrow, so with a lack of liquidity the purchase of assets and consumer goods prices begin to fall, which as you may guess spooks investors even more.
Falling prices begin to place even greater pressure upon indebted consumers, businesses, and investors, due the value of debts remaining fixed, while the corresponding value of incomes, revenue and collateral reserves deflates meaning greater assets are taken to service debts (liabilities). The cycle of debt and price deflation causes a spiral of disaster for many with waves of failing businesses, personal bankruptcies, and increasing levels of unemployment. This may drive the economy towards a recession and slowing economic output due to the slump in debt-financed consumption.
References:
https://www.federalreserve.gov/newsevents/pressreleases/monetary20211103a.htm
https://edition.cnn.com/2023/02/02/investing/shell-earnings-profits-intl-hnk/index.html
https://www.voanews.com/a/strengthening-ties-with-china-focus-of-sino-arab-summit/6870924.html
https://www.eiu.com/n/strategic-us-saudi-alliance-under-pressure/
https://www.tandfonline.com/doi/abs/10.1080/09692290.2019.1572639?journalCode=rrip20
https://www.safeguardglobal.com/resources/blog/top-10-manufacturing-countries-in-the-world
