We Are Now on the Edge of a Global Currency Apocalypse
The comments below are an edited and abridged synopsis of an article by Alasdair Macleod
While interest rates were in decline, the consequences of increasing state dominance appeared benign. So long as falling interest rates were driving financial asset values higher, the global investment community turned a blind eye to the inevitable consequences of Keynesian macroeconomics. Investors were content to buy government debt in the knowledge that values were underwritten by monetary policy.
Now that the inflationary consequences are here in the form of consumer and producer prices rising out of control, the spell of zero/negative interest rates has been shattered, and investors face growing losses and a widespread loss of confidence in the future.
Banks have entered a phase of rising interest rates and falling asset values with overleveraged balance sheets. They have to protect their shareholders from these changed circumstances, and have started to do so by reducing their exposure to financial assets, notably bonds and collateralized loan obligations. They have also reduced their exposure to margin accounts used by speculators to leverage gains.
Activity in the $600-trillion mountain of OTC derivatives is being curtailed. Troubled banks are axing trading desks and looking at selling structured products units. The withdrawal of OTC paper supply will have profound effects on markets and commodities. Market participants will have to find other strategies for hedging risk. The removal of paper supply of energy and commodities will divert demand into physical stocks, driving prices higher. Failure to meet margin calls will become a serious problem.
Macleod discusses Main Street bankers being reluctant to extend loan and overdraft facilities; contracting GDP; rapidly contracting bank credit; the US dollar’s illusory strength; and what happens after the currency collapse.