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.
With the news that China’s central bank is lowering interest rates, the bull market that began in 2009 is likely entering its final stage, which should carry it into at least the next year. Fears that the current global economic recovery is faltering led not just China’s central bank to cut rates, but the European Union to lower rates from 1 to 0.75 percent and the United Kingdom to increase its stimulus efforts. With a weak June jobs report, expectations of further monetary intervention by the United States also grew. But outside of China, monetary intervention is to a large degree pushing on a string. And even if China can give the world a temporary boost, the expansion of its economy will only provide a reprieve from the onset of the next downturn.
The Federal Reserve has painted itself into a corner, where there is no easy way out. The current global monetary system is headed for trouble. Dangers around rising inflation coupled with a weak employment environment, aka stagflation, are building. America already has the weak job market, and now as my previous post pointed out there are warning signs that the Fed’s latest policy moves are translating into inflationary forces. Having already focused on some of those signs, I am going to take a moment here to describe the dynamics of the problem. Although the leaders of the Fed not surprisingly argue there is nothing to worry about, there are three compelling reasons to believe otherwise.
It is increasingly clear that the arrangements at the center of the world’s monetary system are fraying. On Monday Standard & Poor’s cut its outlook on the credit rating of the United States to negative indicating there is a very real possibility for a downgrade. By Tuesday gold prices topped $1,500 an ounce. Also last Friday China admitted inflation was picking-up steam, as it announced an official annual uptick of 5.4 percent that almost surely understates the true amount. On the European front Moody’s downgraded Ireland’s credit rating last Friday. That action followed earlier comments from Germany’s finance minister that Greece may default on its debts. All of this came despite the world being in the midst of an economic recovery.