#edgeforex #trading #market #stocks #money #forex #experts #global #macro #gold #usd #cryptocurrency #capitalisation #bitcoin macro

We frequently speculate on what the markets will do next month or this year. We appreciate the sensation of having control over asset class performance: after all, maintaining consistent alpha year after year has long been a challenge for many. As a result, we must attempt. 

This fixation on short-term market success exposes investors to a high risk of missing the forest for the trees. 

The Gold Standard essentially ended in 1971. 

President Nixon essentially terminated USD convertibility into gold at a fixed price, ushering in the totally elastic fiat economy we have been living with since then.

That is how it works: commercial banks and governments may now issue credit out of thin air and add net worth to the private sector without having to worry about the inherent value of the freshly minted money – the gold peg is no longer in place. 

The primary sources of long-term economic development peaked in the 1980s, and governments find slower economic growth unappealing. 

Especially because they have a monetary system that allows for entirely elastic credit creation: let’s leverage it up, people! 

Working-age population growth and productivity growth, both of which peaked in the 1980s, are the long-run drivers of economic expansion.

After the 1980s, long-run potential growth began to veer inexorably south, and what did we do? World Inc. began to employ debt, as any corporation wanting to increase earnings and activity would. 

Healthy private-sector balance sheets enabled private-sector debt expansion, and governments throughout the world began running larger budget deficits as well. 

Borrowers should consider inflation-adjusted servicing costs because, while you pay nominal interest rates to service your loan, inflation decreases the real amount of your due future liabilities. As a result, real interest rates are the key statistic to consider. 

The approach is simple but brilliant: decrease real interest rates. 

It is critical that you grasp the declining trend in (real) interest rates.

Since the 1980s, it has been a characteristic of our monetary system rather than a product of monetary policy activities. 

True, Central Banks have gone above and beyond by lowering short-term nominal interest rates and implementing hitherto unorthodox monetary policy (e.g., QE), but equilibrium real interest rates would be very low in any case. 

The crucial term here is “equilibrium.”

The problem & the options

Many individuals feel that the debt/GDP ratio is the source of the system’s problems. 

Not at all, particularly when it comes to the public sector. 

The government balance sheet is not like a household’s: because governments are the monopoly issuers of money, they can always refinance as long as the general public has faith in their abilities to assure the stability of the currency they are producing. 

The actual issue here is that incremental leverage must be available at ever lower real interest rates in order for the existing system to flourish. 

This insures the “affordability” of gradually rising debt levels, as well as the perpetuation of the “wealth illusion” paradigm.

Now, how can we assure that actual yields continue to fall? Either through lower nominal rates or higher inflation (expectations). Or both, in combination. 

Because nominal rates are so close to the lower limit, they can’t fall much more – if nominal yields go below -1 percent, holding physical cash in a vault becomes a somewhat plausible option, notwithstanding insurance and transferability concerns. 

In certain countries (notably Japan and, to a lesser extent, the United States), there is also strong political resistance to negative nominal interest rates in the first place.

In most industrialised nations, inflation expectations are already around 1-2 percent, and trying to push them higher may a) prove impossible, and b) at some point perilous, since a de-anchoring on the upside of inflation expectations is not tolerable for Central Banks’ price stability mission. 

Japan leads the way in this experiment, with the EU trailing by around 8 years and the US trailing by about 15 years. 

In Japan, real yields have failed to fall further.

Options Ahead

• Deleveraging is politically unviable. If producing credit is the same as printing money, deleveraging is the same as destroying money. An excruciatingly painful process that wreaks havoc on two generations of individuals who have lived and flourished as a result of the wealth illusion effect. The establishment would never volunteer for this political hara-kiri. 
• Kick the can down the road: preferred by the establishment, but it will fail. As a former G10 Prime Minister once told me, the establishment loves the status quo and wants to be re-elected.

The wealth illusion paradigm can be extended a little farther, but the economic disparity is increasing, and subsequent bouts of social unrest are becoming more prevalent. CBDCs are part of the “kick the can down the road” initiative (see Doomberg’s thought-provoking post here), which aims to impose lower and lower real interest rates in order to work around the lower bound problem. 

As we kick the can down the road, we make the system more unstable and vulnerable to the butterfly effect: a tiny butterfly moving her wings (e.g., real yields rising slightly or a modest recession) is enough to cause a tornado in markets.

The Macro End Game is thus a monetary system reset: the traditional gold standard lasted for more than 50 years until WWI and WWII destroyed it, and we strove to restore it from the mid-1940s to 1971. 

The existing monetary regime has been in existence for more than 50 years, and while no one knows when The Macro End Game will occur, there is one prudent thing we can all do to be better prepared: hold assets with a convex reward to this occurrence. 

A convex payout is defined by asymmetric compensation in your favour: the holder of the instrument with a convex payoff would enjoy the upside but would not suffer significant losses if the downside occurred.

Gold.

Gold would be seen as the go-to hard asset for attempting to create a new monetary system: it has previously fulfilled that role, and it is already on the balance sheets of all the world’s top financial institutions. 

However, a new gold standard has intrinsic limitations: gold has storage and insurance expenses, as well as transferability concerns. 

Other hard assets that are naturally scarce and have indispensable value to human civilization, such as farmland or residential real estate, might also be included (without an underlying mortgage). However, the government can certainly tax those huge times.