Surviving in the Imperial Economy & Its Coming Meltdown

What the Financial Apocalypse Looks Like

Let’s briefly review what the financial apocalypse might look like.  First, understand that it is driven by the incessant desire of the government to spend other people’s money.  The federal government has appropriated trillions of dollars and spread it out into the economy in a variety of ways.  The purpose is not to examine all the minute ways that this program has worked its way into the financial and business ecosystem.  Rather the purpose here is to step back and look at the larger context and see what longer-term effects this policy may have on the entire economy.

First, we need to understand how the government is financing all this spending.  The federal government is issuing massive amounts of new debt in the form of government bonds.  Clearly, if the government issues a substantial number of new debt instruments this will cause an increase in the interest rate.  This is because of simple supply and demand.  The more bonds that are issued the less each one is worth, therefore the issuer (government) must entice buyers to purchase them.  This is done when the government raises the interest rate.  Yet, we have not seen rates rise terribly high.  This is easily explained by the fact that the Federal Reserve has been “monetizing” the debt issued by the federal government.  They do this by creating money out of thin air and using the newly created money to purchase the additional governmental debt (I need not go into the specific mechanism the Fed uses to do this).  In addition to this, the Federal Reserve will be buying the bonds of corporations as well as those of the federal government.  The immediate effect of this policy is to artificially maintain a lower interest rate, which impacts investors.

The longer-term effect of an inflationary policy on investors is to create a condition of capital consumption.  Capital is simply another name for the tools used to produce goods and services.  The more capital (tools) we have the more goods and services we can produce.  This increase in productivity is the basis of an economy that is expanding and a society growing wealthier.  If the economy is consuming capital, then that economy will be able to produce less goods and services and will grow poorer.  This process is the financial equivalent of eating your seed corn.  This occurs because in an inflationary environment, prices will always be higher than they would be otherwise.  This causes businesses to mistake paper “profits” for actual profits and to then underinvest in capital expansion or even maintenance.  This process is summed up nicely here.

Of course, all this inflation and artificial lowering of interest rates causes the boom-and-bust cycle of the economy.  However, this boom-and-bust cycle cannot go on forever.  The endgame, for investors, to all of this is not pretty.

In recent years, most central banks have concentrated on policies that push down selected types of market yields, particularly those in the funding markets for government debt, mortgage debt, and bank debt. However, this has a large impact in other asset markets. In a search for yields, investors increasingly use their funds to purchase, say, stocks and real estate.  As a result, these asset prices rise, thereby lowering their future returns. In other words: the zero-interest rate policy of the central banks drags down basically all kinds of yields with it. This may go on for quite a while, as investors have seen.

But once all market interest rates hit zero, the real trouble starts: the boom turns to complete bust. Credit markets shut down, borrowers can no longer roll over their maturing debt, and no investor is willing to lend new funds. To prevent credit defaults and the collapse of the debt pyramid, central banks would presumably step in as “lenders of last resort,” refinancing basically all kinds of borrowers in need (this is where we are currently). An outright inflation policy would begin.  Nevertheless, capital consumption and economic regression would set in (as outlined above). The nation’s living standards would nosedive; this policy then throws many people into outright misery. 

Applying the Austrian Business Cycle Theory to real-world developments yields the following insights: Central banks have done nothing to put an end to the boom-and-bust cycle. Instead, their unscrupulous interventions in credit markets just prolong the boom. However, it would be mistaken to assume that by bringing market interest rates to zero, a perpetual boom could be created. Such a policy is self-defeating: once the government has forced all market interest rates down to zero, the capitalistic economic system will collapse.  Then—at the latest—the boom will completely turn into bust.

The bust at this point will last for a very long time.  If the policy is not reversed the currency will eventually implode.  The choices at this point are rather stark.  Either the government institutes a new monetary regime, or the economy completely collapses.  In either case, the dollar would likely lose its reserve status in favor of another currency or perhaps gold.  This would leave the United States with no choice but to live within its means and would likely result in a general default of U.S. debt.

Before then you may very well see the U.S., government institute capital controls and engage in activities that will resemble those of less developed nations.  Restrictions on capital movement, banning cash transactions, confiscating gold (they did this in 1933), and mandating a Central Bank Digital Currency (which allows for maximum surveillance and control) are tell tale signs the end is near.