Emergency Report: On the Road to Global Hyperinflation
12th of March 2023
Introduction: Silicon Valley Bank & Global Central Bank Policy
This week we witnessed the collapse of Silicon Valley Bank, the second-largest banking collapse in United States history. It is easy to think this is an isolated event with little to do with global central bank policy. But this couldn’t be further from the truth. In a saga that has its roots more than six decades ago with the uncoupling of the US Dollar to Gold peg by President Richard Nixon in 1971, up to the present situation where we are currently increasing global interest rates in the fastest fashion since the 1980s.
But this couldn’t be further from the truth. In a saga that has its roots more than six decades ago with the uncoupling of the US Dollar to Gold peg by President Richard Nixon in 1971, up to the present day situation where we are currently increasing global interest rates in the fastest fashion since the 1980s.
With the hindsight of history, we see that Silicon Valley Bank was the victim of policies in the effort to combat the damage of Covid-19 on the global economy. Firstly, global interest rates were cut to zero, and we even saw the first instance of “helicopter money” where checks and subsidies were sent directly to consumers. This led to a huge increase in bank deposits, including Silicon Valley Bank (SVB).
Specific to SVB, the zero interest rate policy had a huge stimulatory effect on long-duration assets, with venture capital of non-cash-producing companies and speculative assets such as cryptocurrencies being the key beneficiaries. Leading to a massive boom of malinvestments, of which SVB had the most exposure to being Silicon Valley’s prime banking institution.
Forced by the highest inflation rates seen this century, global central banks have been compelled to raise interest rates in an extremely rapid fashion. The recent demise of SVB is far from being a highly isolated event.
Indeed Silicon Valley Bank is but the first victim if central banks continue their aggressive rate normalization policy. Far from an isolated event, we are seeing huge cracks and stress points across the global financial system. In my view, central banks will be forced to stop policy normalization or risk a systematic economic crisis. However, this will come at the severe price of runaway inflation.
Cracks Appearing Everywhere: From small US regional banks to European megabanks to Japanese Government Bonds
With the huge influx of stimulus capital, there was an equally extreme investment by banks, especially smaller regional banks, into long-duration bonds such as Treasuries and Mortgage-Backed-Securities. The recent historical rise in global interest rates and equally historic bond rout has ensued. The losses currently held by banking institutions are literally “off-the charts”.
Now the theoretical loss in banking bond portfolios doesn’t have to be a direct problem in itself. However, recent decreases in deposit ratios by American consumers have caused severe stress for liquidity, forcing some banks, of which SVB was the more extreme example, to sell bonds at a severe loss.
This is, however, not an SVB-specific problem. As many banks in the US face this very same problem. With the small regional banks being the epicenter of the current crisis. However, even mega-cap banks such as Bank of America ($BAC) have enormous unrealized losses.
However, the issues facing the Euro system are of an even more existential nature. With SVB grabbing headlines, it is easy to overlook the slow-motion collapse of Credit Suisse and Deutsche Bank over the past years. With especially Credit Suisse is in a dangerous area, with share prices at all-time lows and elevated credit default swap rates. Small regional banks are one thing, but systemically important banks such as Credit Suisse and Deutsche Bank are too fundamental to fail if a global systemic banking crisis is to be prevented.
In an even more extreme case, we have seen profound stress in the UK and Japanese government bond markets. The Japanese central bank (BoJ) keeps interest capped at 0.5% while inflation is ragging at over 4% in the country. Even worse was the United Kingdom and the Bank of England (BoE), which was forced to conduct a quantitative easing program with inflation at over 10% just a few months ago.
As indicated in previous articles, we have reached a monetary “End-Game”, where it will become obvious to all market participants and consumers that inflation can’t be tackled adequately and that real rates will not be allowed to rise.
Between a Rock & Hard Place: Deflationary Depression or Hyperinflation
Global central banks face the extreme choice of either a deflationary depression/collapse of the banking sector or runaway inflation. Both of these options are highly negative in consequences.
Looking at monetary history, we see that the route of Hyperinflation is always chosen by political leaders. However, this comes at the terrible long-term price of severe social unrest and political upheaval when consumers are pushed too far into the corner of subsistence poverty.
Profound Societal Consequences: The Gilded Age to Riots and the coming collapse of the Euro.
Already we are in a 21st Century “Gilded Age”, where the top 100 wealthiest people have more wealth than 50% of the global population combined. We are seeing the classic signs of increased societal importance on status symbols, while the other echelons of society see increased crime rates, mental diseases, and drug abuse.
Such profound social inequalities are only accepted to a certain point. When the majority of the population starts facing existential challenges brought on by years of high inflation, which will put daily livelihoods at risk, social unrest and eventual political chaos follows. We are already seeing previews of this. With the political collapse of Sri Lanka and recent large-scale protests in Europe. This trend is only set to accelerate as the globe sinks deeper and deeper into hyperinflation.
Opium doesn’t Cure Cancer: Only Global Debt Restructuring is the Solution.
The obvious route of all issues plaguing the global economy in the medium term is the extreme levels of debt which can never be repaid in absolute value terms. The sooner the global political elite takes the severe choice to conduct a global debt restructuring, the better off people worldwide will be. But sadly, as with a cancer patient on opiate painkillers, a deep illusion is created that the medication has cured the root cause. In reality, painkillers only mask the severity of the underlying disease. We have reached a point where even the most potent painkillers can not prevent short-term pain, which will only increase in severity in the coming years. Eventually, when global political systems start facing severe pressure, we will see a restructuring of debt markets worldwide. Which will be profoundly painful in the short term but of essential importance in the longer-term perspectives.
The Bright Future of Radical Abundance with Technology.
Once global debt markets are restructured, I foresee a period of unimaginable prosperity due to the exponential progress of Emerging Technologies. The following list is a non-exhaustive example of the exciting possibilities that will increase the quality of life for everyone worldwide.
- – 3D Printed Houses.
- – Perovskite solar panels and Graphene-Lithium batteries.
- – Advanced Healthcare: Prevention Algorithms, E-Health, Digital Prevention Platform.
- – Digital Education Platform.
- – Autonomous Electric Car Sharing.
- – Novel Agriculture, such as Vertical Farming.