The Next Dollar Problem Has Just Arrived
It is not for no reason that cryptos are roaring, and precious metals are playing catch-up. In the last month there have been developments that point to a new phase of accelerating monetary inflation for the dollar, and fiat money is only just beginning to be exchanged for these inflation hedges at an increasing pace.
Hyper-inflation of the dollar is now becoming obvious to a growing cohort of investors. It is driven by factors on both sides of bank balance sheets, with evidence that large depositors are reducing their term deposits and increasing their instant access checking accounts. This appears to be behind the increase in M1 money supply fuelled out of a shift from the M2 statistic, which includes savings deposits.
It amounts to a hidden run against bank balance sheets. Meanwhile, increasing supply chain problems against a background of covid lockdowns are leading to the withdrawal of bank credit from non-financial businesses, potentially imploding bank balance sheets as a bank credit contracts.
Foreign support for both the dollar and dollar-denominated fixed interest assets are being withdrawn, which is sure to lead to rising bond yields and dollar interest rates in the New Year, undermining the equity market bubble.
The Fed is now faced with not only financing ballooning federal budget deficits, but underwriting US supply chains in their entirety, which is corroborated by ongoing global logistical problems, tying up an annualised $34 trillion of intra-business payments in America alone. The Fed’s unwavering commitment to Keynesian monetary policies will lead the Fed to attempt to offset these supply chain problems, to rescue banks that fail to survive the inevitable contraction in bank credit, and to defray the bad debts that will arise.
It is a momentous task encompassing the whole US economy, requiring even faster money-printing, and is impossible without destroying the unbacked dollar.
Since May, I have been warning of a dollar collapse. I showed that commodities, stocks, cryptocurrencies and precious metals were all rising because of the dollar’s loss of purchasing power.
The media is still reporting on the economic effects solely of Covid-19. In doing so, they have consistently underestimated them and ignored other factors. To return to a normality was always there as a beacon of hope — the spring of hope in a winter of despair. And it has only been a small minority who have pointed out that far from being a solution, inflationary financing has negative consequences. And even fewer of us who have tried to demonstrate that instead of stimulating economic activity, debasing the currency actually kills it.
The pace of monetary destruction is making a new leap. Figure 1 is the money supply of the world’s reserve currency, which is soaring at a new pace. In the last two weeks of November, M1 money supply jumped by over 14% — an annualised rate of 367%.
The hyperinflationary trend of US M1 money supply is clear. But everyone has become so bemused by these developments that they have taken to disregarding them, while prices in stocks, commodities and cryptocurrencies console them by rising. These developments must not be ignored by anyone who wishes to preserve their wealth, and they give important clues to the road ahead.
US savings deposits are being encashed
According to the most recent figures, the sum of total checkable deposits and the currency component of M1 increased in November by $435.7bn, a rise of 11.6%, while total savings deposits fell by $88.5bn (0.75%). The difference between the former two and the latter is instant access. It represents a turnaround from rapidly increasing savings deposits between April and June, to increasing cash and checking accounts instead. It is a new trend which differs from the relationship between instant access and savings accounts at the time of cash contributions to families from the Treasury. To the extent that the helicopter-drop bolstered savings accounts, that effect has faded, and following the slowing of the rate of increase in savings deposits, total savings deposits in November actually fell for the first time this year.
The reasons for this turnaround reflect a new reluctance by depositors to tie up funds in the banking system. To be clear, with smaller depositors protected by the FDIC, the shifts in deposits are sure to be mostly in balances larger than the insured amounts of $250,000, almost certainly reflecting a financially informed class of depositor, likely to be trading in financial assets. The apparent suddenness of the change in attitude among large depositors should pique our interest.
We cannot blame zero interest rates on this development, because there were massive inflows totalling $1.24 trillion into total savings deposits in March April and May, when interest rates were also zero. The most likely reason time deposits are not being renewed is because it is a first step for bank customers who intend to reduce their overall currency exposure relative to the assets, goods and services they normally buy, which for them will embrace all their bank balances, including comparatively illiquid savings accounts.
In the context of a combination of monetary inflation and the effect on asset prices, encashment of savings deposits makes sense. There is no point in lending money to the bank for zero interest, when prices of the assets and goods you buy are rising. And if you sell them, there is then no point in tying up the proceeds in time deposits — better to buy something else. Even though this change of behaviour appears to signal that the depositors concerned are increasingly aware that prices are rising, and that assets and goods should be bought sooner rather than later, they are yet to appreciate that the phenomenon is of the purchasing power of the currency falling rather than prices rising.
This gives us an indication on where we are in the hyperinflation process. The signal we are being given by the rise in money M1, including the extent that it is now fuelled out of savings deposits, is that it will eventually lead to an acceleration of the disposal of money by all bank depositors. But we are not there yet.
In the past, hyperinflations of the money quantity have led through rising prices to an increase in demand for currency in the form of notes. In the Germany of 1922—23, wage earners had to encash their salaries in order to spend them immediately, which led to a rapid increase in demand for paper marks while their purchasing power collapsed. This is why the printing presses were running at full tilt. In the modern economy where cash notes and coin play only a small role, the raising of spending liquidity at the banks creates a reservoir of funds, which when a shock comes, is poised to flow rapidly into anything which is not fiat money.
If that condition is triggered, it will drive the dollar’s purchasing power over a cliff-edge. An adjustment on these lines will lead to a more sudden increase of consumer goods prices measured in declining fiat than occurs in an economy where cash notes are the principal means of payment. But we are not there yet.
For commercial banks the initial effect of a reduction of savings accounts increases their exposure to the temporal mismatch between funding and their loan books. In the past, this has ended up with bank runs, such as that of Northern Rock in the UK in 2008, a warning of what was to come. A more apt laboratory example, perhaps, is the collapse of the whole Cypriot banking system in 2012. This is getting closer to where we are.
The assumption in financial circles is that the soft ban on cash and improved communication between banks and their regulators make bank runs a thing of the past. The trouble will lie with banking customers who have fail
Article from LewRockwell