The End of Fiat Money Hoving into View…
Tragic though the situation in Ukraine has become, the real war which started out as financial in character some time ago has now become both financial and about commodities. Putin made a huge mistake invading Ukraine but the West’s reaction by seeking to isolate Russia and its commodity exports from the global marketplace is an even greater one.
Furthermore, with Ukraine being Europe’s breadbasket and a major exporter of fertiliser, this summer will bring acute food shortages, worsened by China having already accumulated the bulk of the world’s grains for its own population. Inflation measured by consumer prices has only just commenced an accelerated rise.
Because they discount falling purchasing power for currencies, rising interest rates, and collapsing bond prices are now inevitable. Being loaded up with bonds and financial assets as collateral, the consequences for the global banking system are so significant that it is virtually impossible to see how it can survive. And if the banking system faces collapse, being unbacked by anything other than rapidly disappearing faith in them fiat currencies will fail as well.
Unforeseen financial and economic consequences
Back in the 1960s, Harold Wilson as an embattled British Prime Minister declared that a week is a long time in politics. Today, we can also comment it is a long time in commodity markets, stock markets, geopolitics, and almost anything else we care to think of. The rapidity of change may not be captured in just seven calendar days, but in recent weeks we have seen the initial pricking of the fiat currency bubble and all that floats with it.
This is turning out to be an extreme financial event. The background to it is unwinding of economic distortions. Through a combination of currency and credit expansion and market suppression, the difference between state-controlled pricing and market reality has never been greater. Zero and negative interest rates, deeply negative real bond yields, and a deliberate policy of artificial wealth creation by fostering a financial asset bubble to divert attention from a deepening economic crisis in recent years have all contributed to the gap between bullish expectations and market reality.
Today, almost no one thinks that our blessèd central banks and their governments can fail, let alone lose control over markets. And if you walk like a Keynesian, talk like a Keynesian you are a Keynesian. Everyone does — even the gait of mathematical monetarists is indistinguishable from them in their support of inflationism. And Keynesians believe in the state theory of everything, despising markets and now fearing their reality.
This week sees growing concerns that American-led attempts to kick Putin’s ass comes with consequences. Put to one side the destruction wreaked on the Ukrainian people as the two major military nations wage yet another proxy war. This one is in Europe’s breadbasket, driving wheat prices over 50% higher so far this year. Having laid waste over successive Arab nations since Saddam Hussein invaded Kuwait in 1990, the people who have survived American-led wars in the Middle East and North Africa and not emigrated as refugees are now going to face starvation.
Fuelled by the expansion of currency and credit, it is not just wheat prices which are soaring. Other foodstuffs are as well. And we learn through various sources that the Chinese have been prescient enough to stockpile enormous quantities of grains and other comestible materials to protect their citizens from a summer food crisis. Twenty per cent of the world’s population has secured more than half the globe’s maize and other grains (Nikkei Asia, 23 December – see Figure 1). And that was two months before Putin ordered the invasion of Ukraine, which has made the position over global food supplies even worse. And China’s dominant position in maize will hit sub-Saharan Africa especially hard, while global shortages of rice will hit Southern and East Asian nations.
All we need now is crop failures. Speaking of which, fertiliser shortages, exacerbated by the Ukraine war and high gas prices, are bound to affect global food production adversely for this year’s harvest. And well done to our elected Leaders for imposing sanctions on Russian exports of fertiliser, which added to China’s conservation of its supplies will ensure our poor, and everyone else’s poor, face soaring food prices and even starvation in 2022.
Yet, few seem aware of this developing crisis. While Ukraine is an obvious factor driving up food and energy prices, the root cause has been and will continue to be monetary policies driving the leading currencies. History is littered with examples of currency debasement leading to a food crisis and civil unrest: the Emperor Diocletian’s edict controlling prices in 301AD; coin debasement leading to soaring food prices in 1124AD at the time of England’s Henry I; the collapse of John Law’s livre in 1720 France, to name but a few.
From the dollar as the reserve currency, to euros, yen, pounds, and the rest, all of them have been debased in what used to be called the civilised world. And an understanding of money and the empirical evidence both point to a consequential food crisis this summer.
How will we pay for the higher prices? Well, no one need go without, because it will be a Keynesian designated slump. And the authorities will be onto it. Your central bank will simply issue more currency and you might even get some helicoptered to you. Price controls will prove irresistible to our leaders, and just as Diocletian penalised butchers and bakers who raised their prices under pain of death, today’s providers of life’s essentials will be accused of profiteering and taxed accordingly.
And how do we ensure our lifestyles will be not undermined? We can borrow more to pay for cars and holidays. And how do we ensure we preserve our wealth? Your central bank will suppress interest rates to keep stock markets bubbling.
It is, in essence, a trick played on us all by using fiat currency masquerading as traditional money. The risk is that the investing public, and then the public on Main Street, will twig it. First the financial asset bubble pops and then we will be unable to feed ourselves. Those who vaguely see the danger by projecting known factors think that decline is a gradual process. The mistake they make is a human element, which results in unforeseen consequences in the form of a sudden financial and economic crisis.
This article is about the approaching financial and banking crises, which we can now say will likely overwhelm us sooner rather than later. We start with a reality check on the current state of the commodity, financial and economic war. That is raging now, and it will almost certainly destabilise the current world order. And the consequences for interest rates will require the entire global financial system to be recapitalised, starting with the central banks.
The developing commodity and financial crisis
If Putin had stuck to his original objective of driving a wedge between Europe and America, he would have been able to push up natural gas prices in Western Europe without resorting to any other economic weapons. Events have dictated otherwise. And now America in kick-ass mode has united its NATO European members to drive up energy prices beyond Europe and food prices globally by proscribing all financial payments with Russia. The wider economic concern is that soaring commodi
Article from LewRockwell
