Story At A Glance
- BRICS nations are actively working toward de-dollarization.
- The danger of bank bail-ins.
- Inflation continues to worsen as the Federal Reserve continues to print money, creating inflation. The government continues spending money it does not have, contributing to inflation.
- The Federal Reserve has unofficially restarted quantitative easing again, which means it has lost the war against inflation.
- A decade of easy money, they have forced people to look for higher yields elsewhere since they received zero percent interest in their savings accounts.
- U.S. government bonds are the new toxic asset countries will want to drop, seeing America’s financial troubles at home.
- The perfect economic storm leads to the Japanification of the United States economy, where inflation likely remains around 6%.
The reason why inflation won’t go away in 2023 is that the Federal Reserve will decide to continue to print. Central Banks are responsible for creating inflation by expanding the currency supply.
Why Inflation Won’t Go Away In 2023
De-dollarization
The geopolitical macro issue is the growing problem of de-dollarization. The United States’ policy of policing the world has justifiably made countries angry at the US. They are tired of the United States telling other countries and their governments what they can and cannot do to keep the dollar as the world reserve currency. Understandably, these countries are looking for a way to leave the dollar system. They also want out of the unipolar world of one dictated by the United States that revolved around American culture, politics, and economics. For this reason, they have been looking at options.
There is now a steady shift away from the dollar with the BRICS. The BRIC nations include Brazil, Russia, India, China, and South Africa. Mexico is looking to join the BRICS. The BRIC nations are creating an alternative to the US dollar’s SWIFT system. The BRICS system plans to be backed by hard assets such as commodities.
The BRICS are also setting the role to move away from the United States’ influence. As the United States transitions from the global power it is to a declining empire (its current state), it could move to a multipolar world. Many countries could trade with each other in their currencies, backed by commodities or the agreed-upon currency of trade between BRIC partner nations.
These countries could start to transact in another currency, not the dollar. India is purchasing Russian commodities and energy while exploring a rupee-ruble payment system. There is also the option of the Chinese yuan. Russia supports moving toward the Chinese yuan to trade with Asian, African, and South American countries. China is working to negotiate peace between Russia and Ukraine, not the United States. This is another sign that the United States is a declining empire that the world wants no part of, while China is a rising power. China is the want at the negotiation table, not the United States.
In a multipolar world, multiple currencies could be used to transact. The dollar could still be used as a currency but would primarily be used in the United States after losing its world reserve currency status. The yuan and ruble could be used with a currency built on the BRIC commodities. There are many different ways that it could end, but it means the end of the unipolar world controlled by the United States.
The danger for Americans is that as these countries transition away from the dollar, they sell their remaining US treasuries and dollars. China has specifically been selling its holdings of US treasuries since 2010. Once those dollars return to the United States, higher inflation in America will result. Inflation comes from an increase in the monetary supply. As more dollars are returned to the United States, inflation will continue to rise. Moving toward a multipolar world not dominated by the United States only encourages countries to drop dollars and adopt a new form of currency not controlled by the United States.
The United States dollar is only backed by confidence in the system. Once that is gone, what little value the dollar has left will be devalued, and the currency could go to zero. Foreign nations using the dollar and holding treasuries are incentivized to drop both.
Danger Of Bank Bail-Ins
There is also the added danger of bank bail-ins. The Dodd-Frank Act Wall Street Reform and Consumer Act legalized bank bail-ins in the United States. The United States transferred the risks onto the creditors with the Dodd-Frank Act was passed in January 2010 after the 2007-2009 Global Financial Crisis. While what is being discussed with Silver Valley Bank are bailouts, bail-ins remain on the table and are legal. Bail-ins are another risk that Americans must be aware of to protect their money in what could turn into another banking crisis.
Financial Troubles At Home
There continue to be financial problems in the United States. The United States continues to shoot itself in the foot. The Federal Reserve and the United States government continue to find ways to increase the money supply by printing money. The creation of money, which the Federal Reserve is responsible for, creates inflation is known as quantitative easing. The government also does this with programs that cost billions and trillions of dollars. Since the United States does not have the money to pay it off due to trillions of dollars in debt, the Federal Reserve must create the money that leads to inflation. Inflation is an indirect tax.
[bctt tweet=”The inflation tax affects the poor and middle class the most because they often don’t have assets that appreciate with inflation.” username=”@secure_single”]
The cost of real estate to food means you must pay higher property taxes than a sales tax. The government likes this, and it does not have to increase taxes on its own, which would result in people getting mad at politicians and the government. The politicians then blame the businesses because politicians never take responsibility for anything and don’t understand basic economics.
Federal Reserve And Quantitative Easing
Barron’s summarizes what led to the banking crisis due to the combination of quantitative easing and low-interest rates:
“In sum, quantitative easing and the long period of low interest rates have increased vulnerabilities in the financial system that are emerging as the Fed tightens. The larger the scale of quantitative easing and the longer its duration, the more liquidity the banking system and financial markets get used to. Ideally, this means the Fed should take longer to normalize its balance sheet (and ideally, also interest rates).”
Now there is the growing problem of the concern of more bank collapses after Silver Valley Bank. The Federal Reserve has not helped to ease the public that it can manage and control the economy given its past actions of getting so many things wrong, from saying “inflation is transitory” to “there will be a soft landing.” That soft landing is starting to look potentially like a collapse of the banking system.
The Federal Reserve creates inflation through Quantitative Easing, increasing the money supply. It then tries to decrease inflation through Quantitative Tightening by reducing the monetary supply. The Federal Reserve has unofficially started doing QE again. They may call it something else, but just because you change the definition of a word does not change the word.
Peter Schiff explains what the Federal Reserve is informally restarting quantitive easing in podcast Episode 880:
“What [the Federal Reserve has] done is, in effect, quantitive easing. There’s no difference. What the Fed is doing is they are taking mortgages and government securities onto their balance sheet, giving the banks cash. Well, what did they do when they were doing QE? They took government securities and mortgage-backed securities onto their balance sheets, and they gave the banks cash.”
If it walks like a duck and quacks like a duck, it is a duck. A duck is still a duck. The same applies to quantitative easing. The Federal Reserve has unofficially started QE5.
Ultimately, the Federal Reserve has two hard choices: inflation or recession, and it cannot do both. It looks like it is choosing recession, and an inflationary depression is another realistic option.
A Decade Of Easy Money
As a consequence of a decade of easy money with low-interest rates, it forced people to take on more risk to attain more yield. They were not getting any returns in their savings accounts, forcing them to look for higher yields elsewhere. This meant that people who usually would not be in the financial markets, from the stock market to the crypto market, were forced to become retail traders. They were forced to take risks by getting involved in startups or figuring out how to work a business. The period of easy money resulted in ordinary people not being sophisticated enough to jump into spheres they were not knowledgeable about to receive a little higher yield.
The decade of easy money was directed toward startups, IPOs, and SPACs. The cheap money was funneled toward finding a higher yield. This led to the creation of zombie companies which never made a profit because they would receive capital from speculators looking to be the next big thing. Zombie companies have also become rampant in the stock market. The rise of zombie companies and the SPAC phenomenon is a consequence of the period of low to zero interest rates.
Young people grew up in a decade of easy money. They were not accustomed to getting a decent yield in their savings account for most of their working lives. They adapted by taking risky bets to find ways to make ends meet, from crypto trends with Shiba Inu to meme stocks like GameStop. After a decade of easy money, they made the economic system into a financial casino, from everyone getting involved in startups to speculating in the crypto and stock markets.
US Government Bonds Are The New Toxic Security
[bctt tweet=”The banking crisis is the start of the next financial crisis. Bonds are the new toxic assets.” username=”@secure_single”]
Government bonds, particularly United States treasuries, have long been considered safe-haven assets. The problem is that banks have gone long government treasuries. This is what happened to Silver Valley Bank. They held long-term bonds. As the interest rates increased, the bank was taking on more risk. This eventually led to the collapse of Silver Valley Bank.
Banks do not keep depositors’ money locked up in a safe. The United States has a fractional reserve currency system. This means that only banks need only to keep a very minimal amount of money on hand at any time. The rest they invest in various types of investments until their depositors need their money. Banks calculate that the risk of all of their depositors needing their money simultaneously that would facilitate a bank run is very low. Banks view government bonds are the safest investment for banks to put their customers’ money.
If the US treasuries are now a toxic asset, this is evident by the FDIC, which is supposed to insure bank deposits. The FDIC manages the Deposit Insurance Fund (DIF) throughout the United States to ensure customers’ deposits. The now-collapsed Silver Valley Bank utilized DIF for its customers’ deposits.
The DIF currently has a balance sheet of $128 billion. In total, that means that the Federal Reserve is also insolvent. The growing unrealized losses across the banking system are estimated to be $620 billion at the end of 2022. The Deposit Insurance Fund invests $128 billion in government bonds. This means that the FDIC’s insurance fund is suffering unrealized losses. The FDIC is supposed to be the one who ensures the banks. This is a significant problem once people catch on.
According to its Q1 financial statement in 2022, the Federal Reserve reported unrealized losses of $330 billion. That means that the Federal Reserve is insolvent. America’s entire financial system, which is entirely fake anyway, is now exposed as bankrupt to the American people. People are already losing confidence in the banking system. Once this catches on, the Federal Reserve will continue to lose credibility. Whatever credibility it still has left.
The U.S. Treasury, which holds funds at the Federal Reserve, only has operating funds of $208 billion. The combined funds between the Treasury and Federal Reserve are not enough to deal with what could become a major banking crisis resulting from the Fed raising interest rates.
As a result of America’s financial system now being in danger due to banks holding government bonds and the Federal Reserve, which was established to monitor banks’ activities being insolvent. There is now nowhere else left to run. The government’s debt is now a liability, and foreign countries acknowledge this. Once enough Americans realize this, confidence could be lost in the dollar. The public’s confidence is the only thing that has prevented the dollar from losing all of the little remaining value it has left as a currency. The best options are in real assets. You can also be non-traditional assets that can be transacted outside the dollar currency system.
Foreign countries that recognize what is going on and the connections between bonds from banks holding them to the situation of the Federal Reserve now see the American dollar as a liability. They want to get out of bonds as fast as possible because bonds are the new toxic assets. Those bonds will return to the United States, making inflation worse for Americans.
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The Perfect Storm Leads To Japanification
The perfect storm to create inflation last forever is here. There is also the added danger of bail-ins. Countries have every incentive to drop the dollar and leave the unipolar world that the United States has dominated since World War Two. In fact, given the financial risks connected to the dollar, from the United States’ debt to bank runs, it is in these countries’ interests to find a currency outside of the dollar.
They also recognize that the United States is a declining empire from its many failed foreign policy debacles to the many economic issues left unresolved at home.
As more countries join the BRICS or use the Chinese Yuan, dollars, and treasuries will return to the United States. Shadow Stats currently reports inflation to be closer to 15%. That is more than double the Federal Reserve inflation rate of 6%. As the Federal Reserve starts quantitative easing again, it will only worsen inflation for Americans.
Americans must know that the institutions such as the Federal Reserve, banks, and the government look out for their self-interest. They are there for their benefit, not the ordinary person’s benefit. It had become especially evident over the past three years when the government told people to lockdown, stay inside, and declared people “essential” or “non-essential” while the Federal Reserve printed money to create inflation. The system has created the perfect storm to harm everyday Americans struggling to get by worse with the inflation tax.
Japanification is a likely scenario that the Federal Reserve will have to compromise on since it could not achieve its 2% inflation target. Japanification will have the CPI record inflation of around 6%. There would continue to be moderate economic growth of about 2%. The S&P could then continue to hover around 4,900 to please the people in the stock market. Japanification would allow the Federal Reserve to maintain a version of the status quo, allowing most Americans to work, pay their bills, and make some interest in their savings account and from holding bonds. This option would also allow for moderate inflation, which could resolve some of the United States’ debt problems by inflating it away. It would make people feel like their lives are improving due to a steady wage rise.
Summary
It is best to prepare that inflation will not go away. It will likely not dramatically decrease to the Federal Reserve’s original arbitrarily chosen number of 2% inflation. You will need to find ways to maintain and improve your standard of living in a highly inflationary environment. An inflationary depression and bank bail-ins are a probability. The Japanification of the United States economy is the most likely scenario since the Federal Reserve has already lost the war against inflation.
Inflation won’t go away because countries will eventually send back dollars, the Federal Reserve has lost the war against inflation, US treasuries are the new toxic asset, and the United States economy is moving toward Japanification. All these issues point to inflation remaining around its current estimated rate according to the Federal Reserve’s CPI numbers, which are always lower than the actual inflation rate.
