The Financial System is in a Death Spiral
Quantitative easing or interest rate hikes? It doesn’t matter which lever they pull – the people will suffer either way
It would seem we are trapped. The geniuses who run our economies have finally screwed the pooch and you don’t need to be an economist or a banker to understand the predicament.
Governments don’t produce anything; they have no means of raising capital other than through direct taxation or quantitative easing (printing money) which in fact is a form of taxation as it provides the government with cash at the cost of the taxpayers’ purchasing power. Governments employ this tool to drive growth and pay for unpopular spending programs that they’re unable to sell at the ballot box, but the creation of money out of thin air causes inflation, so periodically central banks raise interest rates to keep it in check. But it now appears that these two basic levers of monetary policy are broken.
We all know inflation is out of control – the official figures, depending on where you live, will claim that it’s somewhere in the realm of 7%. We all know it’s more like 30% or 40%. It’s true also that certain goods and services have increased in price by 100% or more.
I want to put this in perspective once more as to what this means in practical terms for the average person.
Let’s say you earned an after-tax salary of $100,000 in 2020.
Let’s now be conservative and assume the following inflation rates:
2021 =10%. 2022 = 20%. 2023 = 15%.
Let’s also assume you were given a 4% pay rise each of those years (I think this is about what I’ve been getting).
So, in 2021 your pay rise took you up to $104,000. But the rate of inflation decreased your purchasing power to $93,600.
Then in 2022 your pay rise took you up to $97,344. But the rate of inflation decreased your purchasing power to $77,875.
Now in 2023 your pay rise takes you up to $80,990. But the rate of inflation decreases your purchasing power to $68,841.
In the pre lockdown world (the pre ‘let’s print trillions of dollars to pay for a completely unnecessary economic shut down’ world) your pay rise would likely equal the inflation rate, or perhaps even outstrip it by a few percent. As such, at a stable rate of 2% inflation your pay would look more like this:
2021: Inflation takes you down to $98,000 but your pay rise lifts you up to $101,920.
2022: Inflation takes you down to $99,881 but your pay rise lifts you up to $103,876.
2023: Inflation takes you down to $101,799 but your pay rise lifts you up to $105,871.
Now, my figures are hypothetical, and everyone’s situation is different, but if anything, I think I have underestimated the total cost of living increase for the past three years and potentially overestimated the likely pay rises your average working/middle class person will have had. So I am confident that this math is reasonably representative of the situation people are facing.
$105,871 vs $68,841.
What we are effectively looking at here is the downward mobility of a middle-class person into the economic status of working-class. Apply the same math to a working-class wage over the same three-year period, and the implication is even bleaker.
I myself have experienced this in the last three years. The only saving grace for me personally is that I live in a two-income household and in these situations the negative effect is always cushioned as bills can be split down the middle. Many are not so lucky.
But I didn’t just come here to rant about how the politicians and bankers are screwing us all over – this should be obvious by now to anyone earning less than about $150,000, and we should all be as vocal as we can about the issue. But there is another aspect to all this, which makes the sick joke even sicker.
Since we embarked on our great adventure of fractional reserve banking, the only means central banks have had of controlling inflation was to raise interest rates. This they have employed with varying degrees of success over the decades, periodically cooling things off and allowing the money supply to stabilise.
In principle this works to damp down the credit markets, and in a reasonably leveraged economy this doesn’t cause too much pain. But what happens when your credit bubble is too big?
I caught a snippet of the Today Show the other morning as I was making a cup of tea (for more on this stellar specimen of establishment propaganda see my article Have You Lost a Loved One to Propaganda?). Usually Elizabeth turns the Today Show off when I come out for breakfast but on this occasion I approached the TV to watch as they were doing one of their hilarious ‘Financial Expert’ segments where they cart in some rubber-faced dingbat in a suit to dispense his expert wisdom on the ‘Cost of Living Crisis’, and to provide the viewers with a good shot of copium and hopium.
Only on this occasion, the drone in the suit was somewhat lost for words. The anchors were grilling him on the Reserve Bank of Australia’s interest rate hikes, and attempting, through their dazzling white smiles, to determine when the ‘Cost of Living Crisis’ would abate – not because they care, you understand, as they earn seven-figure salaries and inflation doesn’t bother them, but because somewhere in their vapid minds they are dimly aware that regular people might be concerned with this issue, and it is their nominal role as ‘newscasters’ to cover such topics.
The expert in the suit scratched his head and ummed and ahhed before sheepishly admitting that he’d never seen a situation quite like this before.
He went on to explain what many of us already know to be true but which I suspect may have alarmed many of Channel 9’s more credulous viewers:
The only way to arrest the massive inflation we are experiencing is to raise interest rates, thus halting the skyrocketing consumer prices and potentially rescuing the working classes from poverty. However, with interest rate hikes also come credit defaults, which will not only disproportionality affect overleveraged working people, but will necessitate further money printing which will just kickstart the whole inflation problem again.
The anchors hummed and hawed and activated their grave expressions – not the grave expressions they use when something particularly horrible has happened to a person, but the grave expressions they use when something particularly horrible is about to happen to millions of people (only not to them).
The puzzled android did not have much more to add – he only stood there uncomfortably looking like a man who’s just realised he may have said the quiet part out loud on national TV.
And what is that quiet part?
We are in a death spiral.
If we drop the rates and keep printing money, our money becomes worthless. And millions fall into poverty.
If we raise the rates, the bubble pops and millions fall into poverty.
Have I missed something? I’m no economist, but I don’t see an easy way out… Do you?
If you fancy a look at the current situation in the context of the recent US bank collapses, economist and former venture capitalist Dan Tubb provides valuable insight along with Connor Tomlinson on this episode of the Lotus Eaters podcast:
By way of epilog, my intention is not to drum up fear and panic. Well, not exactly. A pragmatic awareness of reality is a form of fear – a controlled form, that allows us to prepare and plan. The intention of my writing will always be to create this awareness and provide a catalyst that may encourage others to read further on these subjects – for I am by no means an expert.
One man who is an expert on the financial system though is Ray Dalio, founder of Bridgewater Associates. Ray’s short documentary Principles for Dealing with the Changing World Order came out last year and his predictions have since proven accurate. It’s worth a watch if you feel you need to understand a bit more about how the system works.
Speaking again on the subject with Chris Williamson last month Ray offers up to the minute analysis and advice which is also worth hearing.
Whether or not you believe there is a nefarious conspiracy at work to demolish the financial system, institute CBDCs and enslave humanity, the fundamental mechanics of the fractional reserve banking system are the same, and Ray’s practical, straightforward breakdown is a good primer for anyone wishing to hedge themselves against the coming storm.
Ray also finishes the Chris Williamson podcast with a simple and positive reminder to focus on the things that make us happy, and that the best things in life are, as ever, free. Certainty sound advice in these troubled times.