Geopolitical issues have ripened to the point where it is possible to theoretically foresee and more clearly bring into focus a specific related potential global monetary and reserve currency reset scenario. Seeking Alpha is replete with commentary articulating various macroeconomic permutations and nuances of unsound monetary policies and the damaging effects of easy-money and fiat currencies. What has been absent and frustrating is the lack of a trigger event that can be used to hypothesize and explain how years of unsound money policies might start to unwind.
Now there appears to be a real near-term factual predicate based on geopolitical risk that could reverse the destructive positive feedback loop (reflexivity) of an easy-money Fed induced and enforced planned economy (and by extension – globally). Unfortunately, a new (reverse) positive feedback loop (reflexivity) triggered by geopolitical events will not simply, harmlessly and painlessly reverse years of misguided failed Fed monetary experiments. The effect of unwinding years of injected toxic debased currency into the economy will be that the new (reverse) positive feedback loop will drastically deflate asset values and result in a very painful period of realignment of expectations.
The extant moribund volatility of financial asset markets is finally now responding to the imminent risks presented by unfolding geopolitical events. Tensions have escalated in view of North Korea’s overt belligerent nuclear threats (BNT) directed specifically at the U.S. The world may have reached the tipping point regarding BNTs – and a “kicking the can down the road” approach may no longer be acceptable. If sanctions against North Korea do not work then one way or another the U.S. may be forced to act preemptively. One scenario probably includes occupation of North Korea until the BNT is made safe.
U.S. action and occupation of North Korea could create a new global BNT doctrine that could be relied upon by another country as justification to take preemptive action. Namely, China could use the newly minted BNT doctrine, and characterize India as a BNT and thereby justify occupation of India until the BNT is made safe. Tensions between India and China are already on the rise.
India is important because it has one of the largest (above ground/ mined) physical gold reserves in the world which might be second only to China’s reserves. It is estimated that India may have 20,000 tons of gold held by its citizens. The Indian government has only a relatively meager amount of reported gold reserves. If China ultimately anticipates a global reserve currency reset – away from the USD – it might want to lock-up the physical gold reserves held in India and therefore block the U.S. from potentially accessing the same.
For example, the U.S. might want to access the large stock pile of Indian gold via an asset swap mechanism (or some other approach) in order to help defend the USD – when ultimately China proceeds with backing the Yuan with China’s estimated 36,000 plus tons of physical gold (estimated combined citizen and government reserves). Please refer to Daily Coin, Alasdair Macleod: Gold is Money – An In Depth Review (Aug. 9, 2017) for a more detailed discussion of estimated physical gold reserve tonnage for India and China.
Obviously, such a scenario assumes that Indian citizens’ property rights in physical gold will be trampled. Expropriation and redistribution of wealth by sovereign authorities has occurred in the past and will occur in the future and is well known in the U.S. There is no reason to believe that Indian citizens will necessarily have a safe store of value in privately held gold and that it will not be appropriated by either the Indian government or appropriated directly or indirectly by some other sovereign authority – but I digress. In any case, a launch of a gold-backed Yuan currency would potentially euthanize most fiat currencies and render impotent the current paradigm of Fed and other central bank money printing.
Unfolding geopolitical issues may be the sharp needle that pricks the financial asset bubbles that have been blown by global central bank money printing. Geopolitical events may set in motion a new positive feed-back loop (reflexivity) that will quickly deflate financial asset valuations that will overwhelm any potential Fed attempts to “kick the can down the road” again with more easy-money.
The Fed lowering interest rates to zero, or/and more money printing is NOT going to demilitarize a belligerent North Korea or defuse the extant geopolitical crisis. Fed monetary policy will not be able to stop or prevent the inevitable boom-bust cycle from running its course – as predicted by Austrian economic theory. Crucial to understanding the nuances of Austrian economic theory is understanding the destructive power of easy-money.
The obvious effect of easy-money has been to hyperinflate financial assets without creating (net) real wealth. Eventually, the inflation currently/ temporarily locked into the financial markets will be re-distributed into the main street economy via consumer price inflation. The re-distribution of easy-money inflationary effect can be delayed or obscured temporarily by the Fed – but cannot be avoided longer-term. The inevitable hyper-stagflation that will come cannot be avoided because there is no mechanism for the Fed to reverse decades of damaging monetary policy that has promoted unproductive consumption, created large scale dependence from unproductive elements in the economy, and debased the USD beyond repair via the Fed money printing.
The Fed may not understand yet that it is powerless to stop a potential near-term monetary and currency reset that might be triggered by unfolding geopolitical conflicts. And therefore, the Fed may attempt to implement yet more misguided damaging monetary policy that will expedite the debasement of the USD and accelerate the boom-to-bust economic crisis. Fed actions have and probably will continue to set the stage for China to step-in and float a gold-backed Yuan currency that inexorably will depose the USD as the global reserve currency.
If the U.S. goes into North Korea – then China might go into India – and thereby lock-up gold reserves and ultimately seal the fate of the USD as a former global reserve currency – while at the same time establishing a new era “belligerent nuclear threat doctrine” and setting the stage for a global monetary and currency reset based on a gold-backed Yuan.
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