There are plenty of people betting on financial trouble ahead.
The money managers expect large falls across most asset classes as the weight of the world’s money woes become apparent.
The latest catalyst is the collapse of Evergrande, China’s second-largest property development group.
Their failure is a really big deal as it’s expected they will default on more than US$300 billion in loans. Some have said it’s more significant than the Lehman Brothers collapse that triggered the 2008 financial crisis.
They could be right.
However, there is another scenario that one can speculate on.
That is, the world will keep doing what it has been doing since 2008 to keep the financial fairy tale alive. Printing money!
The voodoo magic of Modern Monetary Theory (MMT) has caught on in governments around the world. That’s the notion that you can print up as many dollars, yuan, rubles, or yen as you need whenever you need them with no real consequence.
Sure, it devalues the currency. But if it keeps the shell game of prosperity for all alive, then it’s worth it.
The most immediate consequence of MMT is asset price inflation. That’s where these extra dollars race to find a home in investments. This drives the dollar-denominated price of the asset up and those who hold them feel richer as a result.
However, despite the nominal rise in worth, the purchasing power of each dollar has also declined. This doesn’t matter to the investor. As long as their holdings have grown by more than the inflation rate, they will be better off.
However, those without assets are worse off because their pay cheque buys less every month.
Normally, wages would rise to compensate. But as technology drives wages pressure downwards, the asset poor are trapped in a seemingly perpetual underclass.
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The only way out is to own assets that will protect the purchasing power of your savings.
That in itself is a challenge to do prudently. Most asset classes are considered to be overinflated in value, that’s why the professional punter is betting on a serious correction.
However, history shows that bubble-like values can last much longer than most expect. When trillions of dollars are being created out of thin air, the investment party probably still has a way to go before the music stops.
When it does, the hangover will be monumental — but that knowledge rarely stops those enjoying the good times while it is happening.
So with that cautionary note, the prudent course of action is to get your savings out of depreciating fiat currencies and into assets that will inflate with the bubble.
The challenge is choosing those that will survive the inevitable dawn that will expose just how ugly this decade-long debt binge has been.
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