Tuesday, September 8, 2015

Heading into this Fall - What are Three Main Views?

As we head into this fall it is a good time to stop and review the various views on where things are headed with the financial and monetary system. This blog is devoted to events that can impact and cause change to these systems, so it is appropriate to review these views from time to time. Below are the three main views I see out there that are put forward by what most would consider to be credible analysts.


The Mainstream View - Held by most major mainstream financial media and those running the present system

The mainstream view is that the US economy is in a weak recovery mode that is expected to continue and perhaps strengthen in the months ahead. Everyone in the mainstream now looks to the US Fed for direction on this. If the US Fed raises interest rates as they keep talking about, it will taken as confirmation that the economy has recovered enough to allow this. The Fed itself has been very cagey about this. They have continued to suggest that interest rate hikes are just around the corner and inflation will reach their target even while always deferring a decision "pending the analysis of more data." How much longer everyone will accept this from the Fed is a topic of some debate. Also, based on what I can see from those inside the present system, there is an awareness that various systemic risks exist, but a confidence that sufficient tools exist to manage the risks as well. I do not find any indication that those inside the system feel any type of major crisis is coming soon.

The Deflation View - Held by those who feel debt will overwhelm the system

Those holding this view believe that there is already too much debt in the system now and that it is no longer possible to "grow our way out of debt" in the future. They believe at some point in the future (many think this fall) that we will a huge deflationary collapse that the central banks and global institutions will not be able to prevent. They don't think these institutions will be able to react quickly enough to stop the collapse. In this view we get stock market crashes, sharp drops in real estate values, falling commodity prices, and a big increase in unemployment (a major global depression). Many of those holding this view probably see the recent global stock market volatility as a sign that we are soon approaching this big deflationary event.

The Inflation View (or hyperinflation view for some) - Held by those who think the Deflationary event will lead to an emergency inflationary response by the central banks

Those holding this view agree that we are currently in a deflationary (or dis-inflationary) environment now. They differ from the Deflation View in that they believe the US Fed and other central banks will initiate another even bigger round of monetary easing in one form or another in an effort to once again try to stave off a big deflationary event. Those holding this view see continued falling stock markets, continued falling commodity prices and a continued decline in general economic activity leading to an emergency response from the central banks. They think these institutions will be able to react before there is a full collapse. They believe the emergency response will cause a sharp reversal in all markets upward due to a massive infusion of newly created money. They see precious metals as especially benefiting from all this. Those who hold to this view see gold eventually moving to at least $5,000/oz to as high as $50,000/ oz (Jim Sinclair). This would be based on the ratio of fiat currency and debt in the world to the available supplies of physical gold for people trying to protect themselves in this environment. If this view prevails, those who roll their eyes at the mention of gold will be among those first in line trying to get some.

Many people from both the Deflation View and the Inflation View believe we will see a "reset" of the present monetary system of one kind or another coming out of a crisis. Some also think that we might get either scenario leading into the reset so they don't care if you call it a deflationary collapse or a massive inflation event. They all see the end result as a transition to a new monetary system. They do argue over what will replace the US dollar as global reserve currency in the reset process.

So, Who will be Right?

I don't know. You can find highly intelligent and credible experts from all these views who can make a strong case for their point of view. All the scenarios are certainly possible. In relation to the two big questions we are following here:

1) Will there be another major global crisis worse than 2008?
2) Will the SDR used at the IMF eventually become a global reserve currency?

all of the scenarios above would impact the answers to our questions.

If the mainstream view prevails, I expect to see monetary system change evolve gradually over many years in increments. Payment systems would evolve digitally and some day may lead to a digital form of a global reserve currency.

First, we might see a global payments system where people can send money anywhere in the world across various currencies in real time at very low cost (step 1). 

Later, we might see this lead to a new global reserve currency (maybe a new digital version of the SDR) where people would have the option of holding their savings in that reserve currency instead of their local national currency (step 2). It could be an asset backed currency or partially asset backed currency (maybe including gold).

In between we might see a step 1(a) where regional reserve currencies spring up in various parts of the world prior to an actual global reserve currency.

If we get the mainstream view, this process likely takes years to decades to unfold.

If the Inflation or Deflation views prevail, then we get a yes answer to Question #1 above. In this case we would probably see monetary system change take place much more rapidly in response to the crisis. 

The sub question at that point will be:  what would the general public accept as the solution to the crisis?

If I were going to try and think like those running the present system, this is how I would approach all the above in order of what I would prefer to do:

1) I would plan to make desired changes to the monetary system gradually over many years in smaller steps so the average person would not feel an immediate direct impact or feel alarmed at changes. Most people would probably not even notice the change happening.

2) If a crisis did erupt, I would have a plan ready to implement much more quickly in response to the crisis. I would engage in a PR effort with the public to place blame for the crisis anywhere but on the global institutions needed to implement the monetary system changes I had in mind.

3) I would attempt to use the crisis conditions to get acceptance from the general public for major changes that they might not agree to under normal conditions (IMF as global central bank, SDR as global reserve currency, etc).

If changes take place gradually over time, it is less likely that the general public would be concerned about the changes or reject them. If they were proposed under crisis conditions, it becomes far less certain how the public might react. 

If we use Greece as an example, the public soundly rejected the solution plan at first.They eventually caved in when pressure was applied (they were cut off from their bank accounts). But Greece is still not fully resolved and there is still widespread public discontent and political instability in Greece.

What would happen on a global scale is unpredictable in a complex system in my view. It's much more complicated than Greece. We have the potential East/West split over how to go forward. We have a lot of growing distrust around the world in the existing institutions that run the monetary system. A lot would depend on who the public would blame for a major crisis which is an unknown. Only time will tell us which of the above views will prevail and how the public will react to whatever happens. This fall we will see if those predicting a major crisis by year end are right or wrong.


  1. Actually Hyperinflation occurs within deflation. HI is not inflationary. Credit expansion is inflationary. HI is the bond market losing any time value--the creditors realize they aren't getting paid and everything becomes MZM.

  2. Thanks for the comment. In this article I am mainly trying to distinguish between the two views that could lead to a monetary reset and one that does not regardless of how they are defined. But I get your point and appreciate it.

  3. Your welcome. Hyperinflation is a misnomer leading to a lot of confusion out there. It really should be called Monetary Aggregate Inversion.