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  • Gerard Kavanagh

After the party, the hangover


For those of us of an elderly deposition (ie this scribbler), then we have been forged in the furnace of market dislocations and different political settings. That knowledge and experience are useful when dealing with an investment and macro regime change. For some perspective, we offer the following commentary from Russell Napier's interview with Schroders late last year: TD: Does that mean, in your role as a financial historian, you are increasingly interested in political relationships and how they might determine the pace and future of globalisation? And what does that mean for how you think about those political realities in various countries? RN: Absolutely. So my career has been marked by, if you like, governments stepping away and letting markets determine prices. And that was launched by Thatcher and Reagan, it spread to Europe, and even the British Labour Party, as New Labour, were endorsing it. And we have already been stepping away from that for some time now. Now, almost nobody is educated in what that means. Because certainly, if you have been to business school or studied economics, they do not talk about it. They talk about how economics works in a free market. But how does it work in a non-free market? Maybe we could ask the head of the IMF because she was educated in Bulgaria, at the Karl Marx University, so maybe she might understand how it works.

Anyway, the point is – we do know how it works because the history books are full of how non-market systems work. And I do not mean by that a communist society – I mean, the type of financial system we had after World War Two, where politicians decided to tell us the right prices of short-term rates, long-term interest rates. But we had price controls, we had wage controls, we had credit controls, we had capital controls. You know, it is hard for people who have been brought up in the current system to imagine that we can go back to that system and what it looks like but, ultimately, that is why politicians are important. And I associate the word ‘politician’ with the word ‘control’ – and we are going to see a lot more controls coming in. So you have to understand the nature of what drives politicians. Now, it is not ideology, it is pragmatism – debts have to be inflated away and the market system has, let’s just say, not been very good at that, because the debt-to-GDP ratio was soaring up, so there will be active means to do this. You raise the subject of globalisation – and that is important in terms of this wealth-inequality issue – but I think it is much, much bigger than that. It is where we are in the continuum – if one extreme is a laissez-faire market economy and the other extreme is a command economy, we are moving from the market economy towards the command economy. Not ‘to’ it, but ‘towards’ it. And that is 100% about politics. And if all your economics is based on market economics, and you want to invest money based on that, then I will be choosing a different fund manager." So we have enjoyed a 50+ year party - free markets and minimal regulation - and those long assets (the elderly) most certainly have been bolstered by that rising tide, and one of the major hangovers from the party has been global debt levels higher than even post WW2 - so the highest in history. Add the angle of deglobalisation into the mix, as the West seeks to end the hollowing out process it has allowed during the globalisation party: "The political divide rapidly developing in the world, that will change the rest of this century, is between China and the developed world. It entails a shift in trade and money that will profoundly change the global trading system, the global monetary system and the course of the 21st Century." Now you have a very large mess, the mother of all parties and someone has to pick up the pieces.

History teaches that can only occur with massive wealth and power transfer. What does that likely mean? As Russell addresses above it will mean Politicians taking charge of capital investment (overtly or covertly), taxes, capital controls, and financial repression. And coupled with allowing/creating inflation this will be the lesser of all evils (from a political standpoint) in terms of managing this situation - beats debt defaults, hyperinflation, etc It was used effectively after WW2 and lasted more than 15 years - this is a secular change - central banks are now irrelevant. Politicians have gained control of money supply and they will not give up this instrument anymore, Napier says. In his view, we are at the beginning of a new era of financial repression, in which politicians will make sure that inflation rates remain consistently above government bond yields for years. This is the only way to reduce the crushing levels of debt, argues Napier. Governments create broad money through the banking system. By exercising control over the commercial banking system, they can get money into the parts of the economy where central banks can’t get into. Banks are now under the control of the government. Politicians give credit guarantees, so of course the banks will freely give credit. They are now handing out the loans they did not give in the past ten years. This is the start. This is a politician's wet dream - a real-life money tree - and no more ineffectual pleading and verbal bullying of central bankers. So let's get back to repression: "Financial repression is a term that describes measures by which governments channel funds from the private sector to themselves as a form of debt reduction. The overall policy actions result in the government being able to borrow at extremely low interest rates, obtaining low-cost funding for government expenditures." - Investopedia Sounds benign doesn't it - well it isn't. "Financial repression is an indirect way for governments to have private industry dollars pay down public debts. A government steals growth from the economy with subtle tools like zero interest rates and inflationary policies to knock down its own debts. Some of the methods may actually be direct, such as outlawing the ownership of gold and limiting how much currency can be converted into foreign currency." - Investopedia Care of a Russell Napier interview: "The cornerstones of the last period of financial repression after World War II were capital controls and the forcing of domestic savings institutions to buy domestic government bonds. Do you expect both of these measures to be introduced again? Yes. Domestic savings institutions like pension funds can easily be forced to buy domestic government bonds at low interest rates. Are capital controls really feasible in today’s open financial world? Sure. There are two countries in the Eurozone that have had capital controls in recent history: Greece and Cyprus. They were both rather successful. Iceland had capital controls after the financial crisis, many emerging economies use them. If you can do it in Greece and Cyprus, which are members of the European Monetary Union, you can do it anywhere. Whenever a financial institution transfers money from one currency to another, it is heavily regulated." Repression basically means people's rights to preserve capital and make money from money will be seriously restricted. Politicians will force people to buy bonds with inflation and fixed yield curves (you ensure you steal or reallocate saver wealth to pay off debts). How can you do this, you ask - it's easy today, with all money effectively held by major regulated institutions (ETFs are no different) - so you will be regulated to do this or rather the institutions managing your pension, insurance, and investments will be. The elderly and their savings will be bled for the "greater good" of reducing debt. So what can you do, how do you protect against this and growing restrictions on your money/business and savings? Such situations lend themselves to arbitrage, dancing around restrictions and portable assets. Working outside the system - collectibles have been, historically (and successfully) a way to do that and the cryptoverse offers that opportunity too. So the protection you seek, that store of value, that noncorrelating hedge --- is encapsulated in digital fashion on a network outside of real-world restrictions, it is our (effectively asset-backed) collectible F-NFTs. All aboard the freedom express! For a short overview of the FIX00 project 🙂 please use this link: The Start of something new


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