Major central banks of the world have set in motion a chain of events likely to result in their own decline and the eventual demise of fiat money. Of late there has been growing concerns about the risk of bankruptcy to central banks, due to the trillions of dollars in debt instruments being carried on the balance sheets of the Federal Reserve, European Central Bank, Bank of Japan and Bank of England. Recently the chairman of the Federal Reserve for the United States had to answer a growing number of questions about how he could exit these immense positions, which are poised to grow beyond four trillion dollars on the Fed’s balance sheet alone. Ben Bernanke’s responses should give no one comfort. Yet focusing on the risk of bankruptcy to central banks, actually ignores the real risks around the demise of the world’s fiat money system. Nor are market observers appreciating how the current central banking conundrum is likely to eventually give rise to a return to hard money.
For the current secular bear market asset inflation trouble comes in threes. Too much liquidity in the global economy in the late 90’s fueled the Internet bubble of bad corporate investments that popped in 2000. To avoid the necessary restructuring pain around a recession, more liquidity was injected into the global economy leading to unsustainable growth around the residential real estate bubble that popped along with related credit markets in 2007. In another attempt to avoid restructuring pain and alleviate the following recession more liquidity is being injected into the global economy notably by the U.S. and Chinese governments. Today that capital is fueling more unsustainable price appreciation or levels in bonds, emerging markets and commodities.