The monetary system’ Harakiri

The biological trigger of an economic nightmare

The coronavirus crisis is a world-changing event. It is the biggest health crisis we have faced since the beginning of the 20st century and is now cutting a swath through the economy. Nor our parents or grandparents has ever faced such an economic and sanitary chock, which is now highlighting the lack of preparation of the world’s major economic powers and challenging our certainties.

The current sharp slowdown has triggered the great economic crisis that had been expected - and feared - for several years now. For sure, a sharp recession and/or depression will hit most countries in the coming weeks and months with disastrous social consequences. What are our best moves?

Again, the "super" monetary system, does "what ever it takes"…

The current crisis has been feared for several reasons, but the major source of anxiety is the situation of central banks and the weakening of effective monetary levers.

At the time the coronavirus began to spread around the world, the monetary and financial system was far from being in good health. Financial markets were at record highs and everyone agreed that they had been artificially inflated since 2015 by the policies of central banks. The value of companies had been also artificially inflated by the central banks and the companies themselves, who had been buying back their own shares for several years, rather than building up a sufficient cash reserve for hard times.

On the other hand, most economies have continued to accumulate debt since the 2008 crisis to such an extent that countries' public and private debt reached record highs at the beginning of 2020. Why not ? Cheap money everywhere…

Facing the new crisis, the Fed has decided to engage in an unlimited quantitative easing program, while taking care to lower interest rates by 150 basis points during March 2020 and the reserve requirement rate to zero for American banks, etc. This easy money policy is supposed to provide a monetary stimulus to the US economy. Around the world, the other central banks are following the same path as the Fed : BCE says "ready for anything" and Bank of England is directly financing UK government Covid-19 crisis spending - "temporary short-term source of additional funding" the UK government said.

At the cost of trust

Ok, now what all the announced dizzying figures mean ? Free money for everyone, everywhere ? What is money anyway ?

There's objective reasons for everyone - not only economists - to say that those measures plus those undertaken since 2015 would produce a significant currency devaluation - inflation blow up. Especially, by taking into account measures/effects of the COVID-19 crisis : deglobalization, productivity losses, etc.

On the other hand, many serious economists argue that inflation would stay low, especially because of the deflationary effect of new technological enablers : a “supply side shocks" and a growing trust in the future making financial market a huge money sponge - and by the way creating many zombie companies.

Though, money is a collective belief. Money has value as long as we, all together, trust the system. The problem with trust is that it takes a very long time to be built and only a few minutes, hours or days to be completely - irreversibly - lost. In all the cases, the monetary system is risking trust - its existence - to prolong the survival of an economy that has already been kept artificially standing for a while - with the "liquidity injections" drug. Burning trust would save "honor" and avoid a complete chaos : the monetary system' Harakiri.

Therefore, this time could be remembered in history as the turning point toward a new monetary system.

The turning point for a new monetary system ?

Like never before, flaws in the monetary and financial system are highlighted. In the “subprime” debt crises, the risks were high but so were the returns. Since 2015 and with the dizzying monetary actions, the risks have been high, but the returns low and the production of money is blowing up : the US dollar money supply could even rise from $16T to $30T by the end of 2020 at this pace. How to trust the value of the piece of paper ?

Any alternatives? Nothing reliable at this point. However, new monetary systems seem to acquire more credibility than the standard one.

In fact, in this month the daily production of new Bitcoins will be halved. From that date onwards, there will only be 900 new Bitcoins produced each day, which is a real shock on the supply. Bitcoin has a protective monetary policy for its users since the maximum supply in circulation is already known to everyone. 

The monetary policy of Bitcoin insures a constant decrease of inflation over time, to reach zero in 2140 when all Bitcoins will be produced. By 2021, Bitcoin supply inflation will fall below 2% for the first time in its history to be at 1.8%.

Remember money is a collective belief, and its value measures the trust in a system. The "standard" - 200 years old - monetary system is killing - trust - itself to avoid chaos. This could be the starting point for a new era.