As Money Supply Contracts, US, EU/EEC Economic 'Downturn' Imminent
As the US$ gobbles up the €'s Share in the Bond Markets, the Crash of 2023 May Destroy the Eurozone
This is a brief update on things that I’ve been writing about for some time, namely the impending economic crash in ‘the West’. Last summer, I penned two pieces:
The ‘time of consequence’ I was referring to has arrived, and I’m not saying this to fear-monger; to the contrary, I’m writing these lines to indicate that ‘change’ is coming.
How do I know?
We need to talk about ‘inflation’
Well, prices have been going up for some time now, and this isn’t so much a feature of supply-chain issues (although these may play a role); it is the consequence of what is commonly referred to as ‘inflation’.
‘Inflation’ is often misunderstood, and most politicians, economists, and journalists seem to be rather blissfully unaware what it is. It is a measure of purchasing power per unit of currency.
Inflation is, simply put, the loss of purchasing power per unit of currency.
Why would any one unit of currency’s purchasing power go down? Easy—because there’s more and more units of currency going around, which is commonly referred to as ‘money printing’. Have you ever asked yourself who is doing the ‘printing’?
We must, therefore, talk about those instances that ‘manage’ the money supply, i.e., central banks and how their business model (ahem) runs.
Seignorage refers to the right to produce ‘currency’; currently, this is done by what is called ‘central banks’, such as the Federal Reserve, the ECB, and the like. They produce ‘currency’, such as (few) coins and banknotes and more ‘digital’ currency that shows up in your bank account.
And this is how central banks ‘make’ money:
The cost of production of ‘currency’ is essentially near-zero both for physical currency (cash) or its ‘digital’ version (except for utility bills, I suppose).
What is the rub?
There is something called the ‘Cantillon Effect’, which provides an advantage to those closer to the issuer of currency than you and me: as every new unit of ‘currency’ produced lowers the purchasing power of the existing units of currency, those with preferential access—such as ‘too big to fail’ institutions—may use said currency before you and I get to do it.
Hence, we may also state that ‘inflation’ is a kind of Inverse Robin Hood Tax in that it provides additional benefits to those at the top, which it takes from everyone else.
How will that play out in the next months?
Both the Federal Reserve and the European Central Bank have run out of runway to use extra ‘currency’ to ‘stimulate’ the economy:
Here is a comparable data graph from the ECB:
Note that M2 is down in negative territory in both cases for the first time since the early 1980s.
That is to say—all those politicos, ‘experts™’, and journos have never experienced anything like what is happening right now in their (professional) lifetime.
When they state something—in Austria, for instance, some ‘expert™’ blabbered something about a ‘mild recession’ (perhaps he was thinking about similarly ‘mild’, jab-induced myocarditis?)—which, to me, clearly shows the intellectual bankruptcy.
Here’s a biting comment from the Hal Turner Show (original emphases):
As of July 2023, M2 money supply was 3.69% below the all-time high recorded in July 2022. This marks the first time since the Great Depression that we've witnessed a meaningful decline in U.S. money supply…
Multiple rounds of fiscal stimulus during the COVID-19 pandemic led M2 money supply to catapult higher by 26% on a year-over-year basis. It's always possible that the decline we're witnessing now of 3.69% represents nothing more than a return to some sort of mean after a historic expansion of M2.
However, history has been unkind to meaningful M2 money supply declines. With the core inflation rate more than double the Fed's long-term target of 2%, less capital in circulation would more than likely lead to a deflationary recession.
What’s the difference between ‘now’ and 2007/08?
Here, it gets really hairy, esp. for those in the EU/EEC. While the US is more powerful than the EU/Euro régime, trouble is on the horizon, as ‘splained by the ECB earlier this year in its brief ‘The international role of the euro, June 2023’ (emphases mine):
Granular data on international issuance of foreign currency-denominated bonds suggest that the volume of international bond issuance decreased markedly in 2022…
The issuance of euro-denominated bonds decreased by about 30% in 2022 compared with the previous year…Issuance of US dollar-denominated bonds (USD 930 billion in 2022) fell more markedly, by around 36% year on year, reducing the share of the dollar in international bond issuance by 5 percentage points…
The retrenchment in euro-denominated international bond issuance was mainly driven by lower issuance in the United Kingdom, the United States and emerging markets. Issuance of euro-denominated international bonds contracted by 72% among emerging market economies in 2022 and by more than 40% in the United States, the United Kingdom and Japan…
This makes for a marked difference to the preceding year (June 2022), when the ECB proudly announced the following (my emphases):
The increase in euro-denominated international bond issuance was broad-based, with issuance from borrowers resident in the United Kingdom being particularly dynamic, where it increased by 77% in 2021, and in emerging market economies, where it increased by 53% compared with the previous year. As a result, residents of the United Kingdom are now the largest issuers of euro-denominated international bonds, ahead of US residents.
Please allow me to translate from government to plain lingo:
Demand for debt denominated in euros is dovetailing right now.
This means that once the next ‘crisis’ or ‘downturn’ comes around (any time now), Eurozone governments in particular will face less enthusiastic buyers of yet more debt than in 2007/08.
Remember that demand for euro-denominated government debt instruments (bonds) is crucial for deficit spending on the economy.
Drastically less reduced demand for such euro-denominated bonds will make interest rates for many European countries shoot up, thereby adding further fuel to the already-smouldering economic fire.
You know what that means—think: ‘Greece’ a decade ago, but with implications for the entire eurozone.
Will the € survive the coming onslaught?
Hard to say, but the history of the Latin Monetary Union of the 19th century makes for interesting reading…
Being close to the printers so to speak also means you can get richer by causing inflation. You have a greater value to your money than others but you also have a greater suplly, meaning you can first invest in real estate and tangible assets, then borrow against this and buy out/up from those who feel inflation harder, especially if interest rates are raised.
Or even simpler: the casino exists to make the owners richer, not the punters and rubes.
What's always amazed me re: inflation and the causes of it, is this:
Inflation is more money put into existence without corresponding increase in production of goods, increase in resources et c. Creating money out of nothing essentially.
If that is so, then what of the stock market and the rest of the financial sector where you make money on exchange rates, derivatives, borrowing using debt as security, and so on? Every such transaction is done to increase the monetary value of said/other monetary assets, right?
Where's the increase in value coming from? From other investors thinking they too will be able to make money from the same transactions, basically making it a big confidence game, pyramid scheme and chain letter all at once.
If Krupp makes 10 Dicke Bertha at 100k Mark/unit in cost, and sell them to the Heer for 150k/unit, they've made 50k profit, right? They've made -created- 50k more money, but it is connected to something real, both at the producer and consumer points on the axis.
But if Krupp sells 10 units of stock for 10k/unit, and these shares are re-sold at 15k/unit, all the while producing 5 Dicke Bertha per annum due to cut-backs and downsizing - what creates the extra 50k profit for shareowners/sellers?
Confidence, interest and trust in the system - while creating inflation, inflation which has to be combatted with interest rates, taxation and increasing the pool of potential workers.
Why? To ensure the richest 1/1 000 citizen doesn't lose their owenrship of 90%+ of everything.
Gee whiz, capitalism sure is much different from communism in regards to who owns things, yes?
Great discussion!