Don’t Underestimate This ‘Force’

Dear Reader,

Right now, the way I see it, there are two major forces at play against one another.

Centralisation and decentralisation.

One way centralisation can increase is through central bank digital currencies (CBDC).

As I wrote last week, 80% of central banks are looking at CBDCs to compete with other initiatives like bitcoin. Also because these give central banks more control on monetary policy, like the ability to apply negative rates, a way to bypass banks and even a tool to create inflation. You can read the full article here.

This week, US Fed Chairman Jerome Powell spared a minute for CBDCs by saying that:

‘[T]here are a number of ways a CBDC might improve the payment system, and it is this area that motivates our interest.

We can’t argue that economies have become more centralised since the pandemic. It’s a trend that has been continuing for a couple of decades now.

In order to keep the boom going, policies have included lowering interest rates to record lows — even negative — and central banks have increased their balance sheets to provide increasing amounts of stimulus.

The result has been a mass amount of debt, to the point that the debt isn’t creating much growth anymore.

All of these policies have created an economy that is a complete mirage. It’s a sham, an economy mostly driven by stimulus than by real demand from people.

In a fake economy, things don’t work the way they should. Amid all the ‘growth’ in recent years and low unemployment, we’ve barely seen any salary growth. Instead the growth has mostly come from inflation in asset prices like property.

But this increasing centralisation plays into another area that’s also playing a game of tug of war: deflation versus inflation.

On the one hand, we have high debt — and the pandemic will only amplify this.

There’s plenty of instability from the pandemic and unemployment is increasing. In a setting like this, households are saving more money.

In fact, people in the US saved 36% of their coronavirus stimulus package and should there be more, they say they intend to use it to increase their savings.

Along with this there’s other trends like automation and robotisation that increase productivity while reducing prices.

All of these push the balance towards deflation.

We’re heading into a more centralised world

On the other side, there’s deglobalisation. If for the last decade globalisation and cheaper imports decreased prices, deglobalisation and the pandemic affecting supply chains should increase costs.

And then there’s all the stimulus and increase in money supply. Central banks have plunged in trillions to fight off the pandemic but so far there’s been no inflation. Money velocity is decreasing.

It’s why investors have given up inflation for dead.

But interestingly this week, Claudio Borio from the Bank of International Settlements (BIS) spoke about this very subject in a speech titled ‘Is inflation dead or just hibernating?’, at the Barclays Annual Global Inflation Conference.

In it, he made a prediction…

While he thinks disinflation will be the trend in the short run, he thinks inflation could pick up in the long run (emphasis added):

It’s possible that in the longer term inflation should reappear, reemerge as a policy problem as the legacy of the pandemic accelerates previous trends.

So, imagine a world in which we have much higher private and above all public sector debt…

Imagine a world in which globalization is in full retreat. We have already seen some signs of that as firms have onshored part of their operations in order to reduce their vulnerability to global conditions.

Imagine a world in which the role of the state in the economy is much greater. Again, the pandemic is working in that direction and so is the progressive erosion of the policy room to maneuver.

Now, in such a world, there would be both the incentive and the ability to raise inflation. Incentive to generate high inflation but I would say in a less controlled fashion in order to inflate the debt away. Of course, coupled with financial repression which I think it’s important in order to prevent interest rates from increasing…

The environment that I’ve just described would not be much different than that of the 1970s…

If such a world materialized again, the winter of hibernation would have been quite a long, but just a winter nonetheless.

It’s very much looking like we’re heading into a more centralised, deglobalised world.

There isn’t much we can do to influence trends. All we can do is try to get ahead of them and protect ourselves. And one of those proven hedges against inflation is gold.


Selva Freigedo Signature

Selva Freigedo,
For The Rum Rebellion

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

The Rum Rebellion