We are not free of our home imprisonment yet here in Singapore but China, South Korea, Japan and part of the US and Europe are undergoing an opening or partial opening of their economy.
First thing first, let us not be delusional. The economy is not going to hit the ground running and picking up from when we last left it. We will not have a V shape recovery. We have lost a lot of grounds during the month or two of lockdown and the headwinds we are now facing are quite telling. The pandemic is not over yet, the disease is still around and will be around until we have discovered an effective vaccine and everyone has gotten their vaccination in the biggest ever mass vaccination program ever in history. Social distancing will still be the rule of the day and this means that we will not be able to get back into full productive capacity as long as restaurants, trains, buses, elevators and office spaces and factory floors can only hold a fraction of the number of people, post lockdown. In one of my previous article “An upside down world” I gave a lot of credit to the timely and strong actions taken by the Federal Reserve Bank of the US. Yes good stuff if it is a once-off but this is not to be so. Historically we can see that weaning the economy off economic stimulus is never going to be easy. Economic stimulus were introduced during and after the last global economic crisis of 2008/2009 in what was broadly known as Quantitative Easing (QE) programs which involved more borrowings and more creation of currencies by governments. Most just called this money printing. Prior to the pandemic, the global economy was already slowing down as a result of trying to unwind the borrowings from the last crisis, starting back in 2018. In short, pulling back economic stimulus is near impossible without creating an economic downturn as the economy has gotten (for want of a better word) addicted to cheap credit and easy money.
The working of an economy is truly complex in that interventions (such as QE) will cause problems in areas which we, in most cases, cannot foresee. The best solution is to leave it to the free market. I will not want to go into these debates between Keynesian and Austrian economics as these have been raging on for decades without much conclusive evidence. Leaving it to the free markets will cause a sharper short term pains but longer term prosperity is all I want to say.
Intervention causes price distortion and prevents true price discovery. This is the present conundrum and without the political will to take the shorter term pains, I am afraid we will continue to climb higher up the debt ladder resulting in a much higher fall when that happens. This fall is inevitable. Put simply, there is no free lunch and all debts will need to be repaid one day, in one way or another. The result of this fall will undoubtedly be severe as we have climbed at a parabolic rate up this debt ladder, in the last decade. The latest and current scenario has seen governments flying up this ladder rather than merely climbing and this leads many of the great economic minds of our world to come to the same conclusion that this will be the mother of all falls, off this debt ladder.
The end game will be a severe recession or even depression resulting in a likely economic and monetary system reset. It means we are likely to see a revaluation of the bills we hold in our wallet. Through the Bretton Woods Agreement of 1944, all of the world’s currencies are tied to the US dollar in their values (with some adjustments along the way). With the exponential creation of currencies, the value of each unit (dollar, Yen, Euro, etc) will be further debased or having lesser value. The US dollar being the world’s reserve currency, making up of more than 60 percent of all the “money” in the world, is of big significance and consequence. The US dollar is being devalued rapidly by the huge amount of “money” creation through borrowings currently, as we speak. As all other currencies are tied to the US dollar with strings of varying elasticity, we will see the overall devaluation of the bills in our wallet regardless of what currency we are carrying in it. The issue here is, not every country is willing to let their currency be dragged down into oblivion by the US dollar. Not surprisingly, as the big spenders are now telling the money savers that they will now have to foot for the bill as well! This of course will be happening on a global scale and the resulting amount of dissent and noises will end up in big arguments (arbitration) and a new monetary system will need to be trashed out to quill this amount of noise. This ultimately will affect the value of “money” we carry in our wallet.
The big question that nearly everyone will be asking is, “how do I prevent the value of what little I have in my wallet from going to near zero in value?” The answer depends on who you ask. Almost everyone will agree that hard assets (tangible, finite or limited in quantity, useful or desirable assets) will be the best things to hold in place of currencies while this whole fiasco is taking place. I am a “gold bug” as I have recently confessed in one of my previous articles. To me, the asset of choice to hold is precious metals (Gold and Silver). I would urge everyone to go and find out for yourself what is happening around us. It seems to me that we are now in the calm just before a big storm. At least knowing about what is coming is better than being caught unaware. I am not providing financial advice here as I am merely sharing what I am doing and my thoughts behind what we are going through now.
Stay safe everyone. Be generous to those who are less fortunate. God bless everyone.