Will there actually be a crisis?
We hear more and more often about the coming crisis.
Just look at what is happening in our immediate surroundings, e.g.:- irrational government actions,
- volatility of central bank policies,
- high asset prices,
- irrational behavior of investors.
The whole situation is very visible in the era of the coronavirus pandemic, which clearly shows what financial resources we have and what needs exist in the modern economy.
The coronavirus has shown problems such as:
- ogromne rozwarstwienie majątku na świecie,
- społeczeństwa są bardzo roszczeniowe oraz niezadowolone,
- ceny towarów i usług są wysokie z powodu ciągłego dodruku pieniędzy.
Pierre-Joseph Proudhon once said a very wise phrase:
"The rich get richer and the poor get poorer."
Why is this happening?
Those who own large companies, real estate and assets are becoming more and more wealthy and are also benefiting from money printing.However, people who have limited opportunities or no opportunities at all, sometimes due to lack of knowledge and other times due to laziness, cannot take advantage of the opportunities resulting from the current price increase.
Imagine a situation where the share of PKN (Polski Koncern Naftowy) increased from PLN 30 to PLN 60 in the last year.
The question is,
How did you benefit from it?
Inflation here is another hole in your pocket through which your money escapes.As Milton Friedman said,
"Inflation is a form of tax that can be imposed without a law"Currently, money printing is so large that fears related to the decline in the value of paper currency are fully justified. As history shows, such situations have happened before, many times.
History clearly shows that regardless of the times, specific countries have always been leaders in the global arena and the rest of the globe did not matter at all.
Of course, this has an impact when power is redirected, tensions arise, which is exactly what is happening now. The current US hegemon is threatened by China, which is seeking to take over. China is the only country that has set the goal of being a military and economic power on a global scale and is implementing this plan very precisely. It is possible that in 30 years, instead of the dollar, we will see the yuan as the global reserve currency.
Will this be a crisis in the end or not?
It's here!
A crisis is not a piece of cake.The most important thing is to understand that a crisis is a process that will last for years or even decades. And this is normal. At the same time, it is worth knowing that there are factors that can accelerate, intensify the crisis and shorten the entire process.
There can be many scenarios, ranging from a sudden crisis and collapse to hyperinflation or a long-term rescue of the situation by printing money.
Where to look for signals that this is happening?
As the Greek proverb says,
“The best way to judge what might happen in the future is to look into the past.”We don't know the future and we can't predict what will happen.
We can look into the past and look for answers there to the topic that bothers us.
Typically, many of today's problems have already occurred in history and are not unusual or new.
Problems related to money are as old as the world, or in fact, as old as the hero of this article, i.e. as old as money. We can find some similarities by going back just 100 years.
- the end of Japan's economic position as a hegemon in the 1980s,
- 40 years of the 20th century when Great Britain was replaced by the USA,
- the end of the 18th century, when the Dutch guilder was exchanged for the British pound, which took over the role of the world's reserve currency.
Of course, as you can guess, the above sentences from the perspective of distant times are just sentences. Remember, however, that such situations are accompanied by armed conflicts, transfers of huge amounts of money or transfers of wealth between social groups or between countries. You can be sure of one thing, it never happened right away. It was a process that took decades. No matter what we hear around us, it is worth digging into history and looking for answers. Crises, no matter how great they are, will not suddenly change the entire world!
3 things that influence the development of the economy
It is worth knowing that there are things that have a key impact on the ups and downs in the economy.
- Productivity is the relationship between how much we produce and how much we sell in a given period of time in relation to the amount of input resources used or consumed. Input resources are everything that is needed for production. It may be knowledge, technologies, production methods, education, experience, raw materials.
- Availability of loans – money from loans has a double-edged effect. The fact is that when used wisely, they can give companies enormous momentum. This principle also applies to the economy. When used wisely, debt drives companies and the entire economy. A situation in which the debt is too high creates economic problems and threats.
- Politicians - the "Trojan horse" of the entire system. The general assessment of the decisions made by governments in the eyes of societies is low.
Often, decisions made by governments are unclear and incomprehensible. History shows that decisions made in the past were often made without the customer being present, several thousand kilometers away.
This is where the enormous forces of the so-called hegemons, world economies that only see their own advantage during clashes!
However, this does not change the fact that during such changes in the transfer of wealth, even a small player has a chance to develop among the giants.
What is the state of the economy?
You already know what is the main driving force of the economy. Now it's time to analyze what condition the economy is actually in.
Productivity has been rising over the last decade. However, it is worth noting that the growth was slower and slower each year. Most people wonder what's going on?
After all, we hear about new technologies all around us, robotics is developing at a dizzying pace, so is the Internet, and the slogan "work smarter" is heard everywhere. Nowadays, most of us notice that there is a decline in productivity.
This is also confirmed by various compilations, analyzes and statistics.
As you can probably guess, this involves constant printing and increasing debt of the state treasury.
How to pay off debt?
Take another one!
These days provide us with so much information that sometimes we are unable to think rationally. Information noise is the reason why you should have your own filter.
The fact is that the state of the economy was already critical once in 2008.
Even then, the main information circulating around the world was too much consumption on credit.
People who couldn't afford it bought real estate on credit!
Even then, the debt amounted to approximately USD 180 trillion.
As you probably remember, all self-respecting bankers and politicians shouted together to reduce the debt! Today, despite all the hype, the debt is around $300 trillion.
Most countries have a debt that exceeds their own GDP by three times, which means that the country should produce three times more than it currently produces in a year to cover the debt.
What's the plan for all this?
Debt?
The global situation is poor. However, as it happens in life, someone gets richer and someone gets poorer. Companies or households can be formally debt-free, believing that there is no debt. The truth is that the debt is not yet legally settled.
Low interest rates are very conducive to citizens getting into debt. Credit is cheap and easily available, but this has no impact on the economy.
People who don't need a loan simply don't take it out. They are more prudent when making long-term commitments. Others assume that the loan is profitable because the bank's interest rate is lower than inflation. It is enough to have security against an increase in interest rates to repay the loan in one tranche.
Most companies have changed their policies and are more cautious in taking risks. Many of them took out a loan to buy their own shares, which is a good idea for a dynamically developing company. Good practice says that the best way to invest is to invest in your own company.
It was bad and it's even worse!
We have another newcomer who is not making life easier for our economy.
The coronavirus appeared suddenly and wants to stay with us for longer. The collapse was huge in the first months. Many different forms of government aid were intended to save individual industries, some succeeded, others were wiped out of the market.
Overall, debt has increased to monstrous amounts in the last 2 years.
You've probably heard that governments are going to take on huge amounts of debt, thereby increasing the debt of individual countries that were previously in smaller amounts of debt.
We have a signal that this is not the end of the same treatments. The wound is being reopened in order to stop the massive transfer of wealth from corporations to the middle class, which is increasingly aware of the situation.
Remember, debt in itself is not bad, as long as it is incurred for well-thought-out activities that contribute to the growth of the economy.
Debt period
As you already know, debt fluctuates in very long cycles. It is difficult to notice this for a person who is not involved in the financial market. Typically, the cycle lasts longer than the average human lifespan
As you may have guessed, at the beginning of such a period, the ability to take out debt is limited. The currency is strong, based on labor and raw materials, e.g. gold. Then, each decade brings new opportunities, e.g. easy access to money. Easy-to-obtain debt contributes to strong economic growth until the economy is unable to bear the debt or catch up with it. We have too much money! We are reaching a situation where interest rates, e.g. in Poland, have dropped from 25% in 1998 to 1% in 2020.
We are reaching a time when the economy is inflated with credit and money is very weak. Products are becoming more and more expensive, which is clearly visible in the prices of fuel and gold. The debt is so high that it affects the stratification of wealth, society is starting to see that something is up. Social divisions are also beginning.
This is how it usually looked before. The current times are similar. The conclusion is that the period is coming to an end.
All signs in heaven and on earth indicate that possible debt reduction may begin much later than we think. The scenario of printing and indebting states may be a realistic solution used by central banks and governments.
Will there be a great crisis?
It is worth looking for answers in history.Tensions like today's have occurred many times throughout history. There are many books on this topic, e.g. Ray Dalio, who describes how to get through a crisis with dry feet.
The author describes the mechanisms that govern world economies. He also argues that getting through the next crisis will depend on having our own currency and politicians who are not afraid of unpopular moves.
It also shows that crises are long-term. Crises also do not have to end in a crash, hyperinflation or war.
There was a view on social media and even in people's minds that the coronavirus would be a factor that would cause the collapse of world economies. There were also people who said it was over. They had solid grounds for doing so. Finally, we see for ourselves what happened. Instead of reducing debt, there are already plans for further debt.
No matter what tactics central banks and global economies use, the time for debt stabilization will eventually come.
How will this all shape up?
It depends.
However, it is worth following a few rules.
Do your thing, focus on what you can control!
You can rest your hands on the windowsill and watch the crisis out the window, or you can roll up your sleeves and start working.
How to get rid of debt?
The debt will certainly be stopped or the debt relative to GDP will be reduced. 3 possible strategies:
- Inflation and a decline in the value of a commodity or good, as happened in Germany in 1919-1933.
- This is what we see now, i.e. a lower debt servicing cost relative to the growth of the economy and the generated income growth with relatively low inflation.
- Deflationary – bankruptcies and debt restructuring as was the case in the past.
Deflation
This scenario may affect countries that are heavily indebted. At the same time, they are dependent on world powers. Usually, the creditor tries to postpone the repayment, because if an independent country, e.g. Russia, declares bankruptcy, the debt will be zeroed and the only person affected will be the creditor. It is in the creditor's interest to lend and receive interest on the debt.
This was visible several years ago, e.g. in Greece, Spain, Euro zone countries, where politicians showed that they would do everything to prevent the countries from going bankrupt. There are people who clearly claim that if this happened, societies would notice the facade of the entire European Union, which could translate into unrest or even riots. The author of the book "The End of Paper Money" writes more on this topic. Roland Baader argues that the government will do everything to maintain power.
This scenario is unlikely, but possible. Most people think that you have to do whatever it takes to save the system. However, it is worth emphasizing that everything is cyclical. The system is old and already exploited to the maximum by central banks and governments.
Deflation
Currently, a big problem that is downplayed is demography. Societies are aging. Most of the capital remains in the hands of the generations born in 1946-1970. At the same time, these generations spend less.Another thing is very poor money turnover. Money is printed, but it does not change hands. It happens that people who have a lot of money do not spend it at all. Of course, as you probably guessed, they invest it.
The middle class also spends less, trying to save a certain amount, creating the so-called a financial cushion that will allow you to survive in the event of some unforeseen event.
Government actions justified by the pandemic have also had a negative impact on the need to meet needs (demand). Closed industries, the inability to use services such as purchasing dinner in a restaurant or even the inability to train at the gym have had a negative impact on the well-being of citizens.
Let us also remember that some jobs will never return.
It is worth noting that the government projects offered produce poor results. Stimulating the economy with government projects practically does not work. It only creates a certain disease. There are institutions emerging that are good at receiving this money.
After all, most of the funds from projects are directed to specific activities. Often the real need is different, but most people are guided by common sense and assume that when they give something, they should take it.
Another thing worth remembering - every project ends at some point and begins to burden the economy. Then taxes are usually raised and cuts in budget expenditure are introduced in order to reduce the negative budget balance.
This phenomenon is called the "fiscal cliff" in economics.
In addition, every government program comes to an end and if it is not extended, its absence begins to weigh on economic growth in the next period. This is the so-called fiscal cliff phenomenon. The most common example of this situation is Japan over the last 30 years, where no government stimulus package has brought the economy back on track. Let's also not forget that some jobs will never return after the pandemic and more people will remain out of the labor force.
Inflation
This is nothing more than a sacrifice of money.
Imagine that in 2020 you had PLN 100,000, a year later the same money was PLN 96,000, i.e. PLN 4,000 has evaporated somewhere.
Inflation is a hidden tax that gradually alleviates the national debt and increases budget revenues.
It is worth quoting the words of Ernest Hemingway,
“The first remedy for a mismanaged state is inflation, the second is war. Both solutions bring a temporary improvement in the economic situation, both lead to permanent ruin. But both are a refuge for political and economic opportunists.”Currently, we hear about inflation at 4%, the only source of this information is the Central Statistical Office. It's like taking one width measurement along the length of the Vistula and saying that the Vistula is 40 meters wide.
A good measure of inflation is the price of fuel or precious metals, e.g. gold.
We may encounter a situation where the best solution is a new currency system. This solution has already been used in history.
It is difficult to say how this will be implemented, history shows various scenarios, e.g. ban on owning gold, confiscation and then resale at twice the price. This situation occurred in the USA during the rule of President Roosevelt.
The market abhors a vacuum
The big one gets more and more at the expense of the little one
Of course, the decline in the value of money can also be slow. Most often, it is a process spread over time. Impoverishment is a side-process of various activities, e.g. printing, purchasing government bonds by central banks. Bonds are not very profitable for an ordinary person, so there is no interest in purchasing them. The central bank buys such bonds, increasing its share in the bond market. It can be said that in this way the government has a constant inflow of money that finances the budget. In economics, we call such activities monetization.This practice leads to a decline in the value of money. After some time, it is not worth saving money because it quickly loses its value.
To sum up, when we save money, we lose it.
Such purchases of government bonds also automatically reduce the real value of the debt.
This means that assistance to debtors comes at the expense of savers.
We hear about a direct line of credit for the government, we hear about benefits, financial vouchers to be used for some purpose. Fiscal programs will appear more and more often.
In the Polish People's Republic, it was often heard that
"whether you stand or lie down, you deserve two thousand..."
Currently, we hear a lot about Basic Income, but the date is not yet specific. A citizen should receive money as is!The money will probably be raised by issuing bonds, which are automatically purchased by banks and included in the central banks' statements.
This action, of course, results in high inflation. It is worth mentioning the reduction in interest rates, which affect the cost of the loan.
Governments may consider solutions such as "basic income" because they can easily finance such programs thanks to the certainty that any bond issued will be purchased by the central bank.
How long is this beneficial?
One term... two terms of government... - it depends.
Human psyche
Inflation is a visible factor that impoverishes citizens. On the one hand, there is an aid program, a basic income proposal, and on the other, increasingly higher inflation resulting in the inability to save. What is certain is that governments do what citizens allow.
High inflation?
Currently, inflation does not cause turbulence, it is moderate according to the statistics of the Central Statistical Office. Many people wonder how this is possible.
There is reprinting, there is also the purchase of worthless bonds, and the inflation is the same?
The reduction in the value of money comes in many different forms. This is influenced by various factors, e.g. time. Trials can last for decades.
Low interest rates translate into a line of credit. Currently, borrowers also include lending companies, hedge funds and investment funds purchasing securities.
It is worth remembering that information is important nowadays. The knowledge of central banks and world governments will rarely see the light of day. It is worth considering the information that reaches us.
There will be a decline in the value of money, but it will be a slow decline.
Slowly Slowly and even slower…..
Usually people don't remember things for a long time. Processes taking place over decades are rarely noticed by societies. Government actions are correlated with faster economic growth relative to debt and higher revenues than debt servicing costs.
This is very difficult to do. Printing and lack of agreement between states are the main enemies of this plan. Changes should be systematic and slow so as not to cause social unrest. It is worth mentioning here that the term of office of governments does not make the task easier.