Quote:
Originally Posted by kwoldtimer
Based on what?  |
The end result is unknown, you have to put the pieces together for yourself and figure out what you think is going to happen. I'm just saying how I think it's going to add up when all is said and done. My thinking is the result of the following factors.
We already know that central banks of developed and middle economies across the world are buying tons of gold at a record pace (
source). A lot of lower income countries seem to going towards bitcoin (legal tender El Selvador, Central African Republic. Bhutan has been secretly mining Bitcoin for years). What this tells me is that countries are starting to get ready for the non-fiat new world order and are making their bets. It's going to be gold vs bitcoin for a few years. My hope is that bitcoin wins, but we will see.
That said, for now we still have fiat currencies, and we are headed to a recession that most countries can't afford. Governments are bloated, productivity has declined. There is a lot of unproductive debt in the system that relied on low interest rates, and this debt is going into default. Raising interest rates triggered this recession and we are only starting to see the results of this. This doesn't just affect private citizens and corporations - it affects governments as well. They have to pay higher interest on their debt as well. The only way for nations to pay their bills is to run large deficits, which is just printed money. For some perspective though, the current banking crisis has already surpassed the one from 2008 in nominal terms, and this is just from 3 banks failing at the very start of the banking crisis. This recession is going to be a lot worse than 2008. We are likely headed for a depression.
The exact details of how governments handle this recession has yet to be written, but what usually happens is some combination of the following:
1. drop interest rates
2. print a lot of money
3. bail out banks/corporations/citizens/themselves using said printed money
I don't expect their handling of this recession to be any different, but what is going to be different is the magnitude. Debt across the world is so high and productivity so low, that they're going to have to print an astronomic amount of money just to avoid defaults. Think CERB on steroids.
Ultimately what I expect to happen is governments are going to end up give money to people and businesses to keep up with inflation, ultimately making inflation worse. This will be printed money, and will lead to higher prices. This is different than the past where new money went into assets, (although I'm sure there will be plenty of that as well). This is already happening on a small scale in Canada (eg. Alberta inflation relief payments, Grocery rebates). There will also be much more wealth redistribution, which has already started as well on a small scale (the way the carbon tax operates is a form of this).
Currencies will devalue, debt will be repaid with printed money, prices will keep going up, and once this process is over our debt-to-GDP will be back to a more "healthy" level. But because there will have been so much inflation people are going to lose their faith in fiat currencies, and there will be a major push for sound money that is backed by something, which is when I would expect the gold vs. bitcoin debate to kick into higher gear. Governments are already trying to get rid of bitcoin without much success.
Anyhow since a lot of the inflation will likely be at the CPI level, wages will go up by default, and housing as a percentage of peoples' incomes will start to come down. I still expect housing to go up in nominal terms, but in real terms it will come down. Ultimately once incomes catch up and an average household income is say $300K, a $1.5M average house might not be as out of reach anymore. Obviously there are more factors that play into housing prices (it's not just debt but also supply), but generally this is how I expect housing to become affordable again - through inflation of everything else.
While we're on the topic of housing, I should add that there is a very high risk of a lot of boomers selling their houses in relatively short window to pay for their retirements, and if that happens we are going to see a massive housing crash and very high CPI. I would only expect this to happen if there is some sort of event to trigger a massive sell-off. The most likely candidate in my eyes are a massive surge in supply (construction), or a massive reduction in demand (population decline). If this were to happen though, this would cause consumer prices to go up significantly. Most of the new money created over the past 30 years went into housing. As soon as people start selling off in droves, this money will become liquid and will get spent on stuff, at which point inflation will incredibly hard to contain. It's going to happen at some point we just don't know when. No bubble lasts forever though, and this one is absolutely massive.
There's a strong chance the US will have it worse than us, since a large part of their economy is dependent on them being the world reserve currency, but this is in the process of ending. What happened over the past few decades is that US companies would borrow cheap money and use it to import products from the rest of the world. The borrowed money is printed (typed into existence), and then paid off using local dollars when they sell product in the US. However all that printed money is still out there, it's just circulating in the rest of the world, and used to settle international contracts that have nothing to do with the US. We already know that this is coming to an end though. For the first time ever, the last few months the Chinese Yuan was used for more Chinese exports than the US dollar (
source). BRICS nations intend on making their own currency so they don't have to use the dollar anymore either (
source). So if the world de-dollarizes, what's going to happen is that all the printed dollars that were sent overseas to import stuff to the US, is going to end up making it back to the US, at which point the US will start seeing massive inflation.
Canada doesn't have that problem at least since the CDN dollar isn't a widely used global currency - most dollars that were printed are already in our national economy (mainly housing). But I don't for a second think that the money printing is over yet. As soon as this recession gets really bad and unemployment ticks up we're going to see CERB on steroids - Trudeau has already hinted at this. (
source)
Ultimately once this decade is over I think it's going to look like this:
1. Currencies backed by either gold or bitcoin
2. Tons of inflation will result in prices of everything looking very different
3. Asset prices including houses will be more in line with whatever incomes are at that point, although this may take longer to correct
4. Unproductive debt paid off through inflation
5. The lack of debt in the system will allow more money to be spent on capital, which will ultimately unleash actual productivity, which is how the next boom is going to start.
Prev
Linear Mode
