A Collapse In Fiat Currencies Within The Next 2 Years? | Alasdair Macleod

Commodity price volatility in fiat currency terms is actually volatility in fiat currency values, not commodity values. When priced in gold, commodity prices are remarkably stable across copper, oil, and lithium. This means currency instability is the real problem, not commodity price instability.

“when you look at the volatility in commodity prices and you compare the volatility in fiat currencies which obviously what we watch we watch the dollar price of copper for example dollar price of oil um compare it with the gold price for copper or whatever it is i mean it's been very very stable in gold terms all the volatility is actually in the fiat currencies which is completely the other way around from um where we think we think that actually it's the copper price being volatile or the oil price being volatile it's not it's our currency it's our currency against those individual uh commodities”

The most frightening aspect of the coming crisis is that unprepared friends and family will suffer terribly, and social bonds and institutional structures will be destroyed. The political consequences will be severe, likely including authoritarianism (Hayek's 'Road to Serfdom' dynamics).

“i think that really worries me um more than anything else about this is that we all have friends we have family who are not going to be prepared for this and um they're going to suffer terribly um and that's the aspect of it which really frightens me i mean i can protect myself to a degree of course i can um but it's friends family it's the societies the links that hold us all together that is what is going to be destroyed in this and of course the political consequences of all this later it's not going to be a sudden realization that actually what we should do is we should just have sound money um we should limit the amount of credit that banks issue we'll find some way of doing that and you know let's just get a stable currency and let's just get on with uh an economy with very little government just government making the laws making sure that um you know the the nation has got reasonable defense etc rather than ability to be offensive abroad um you know that would be wonderful if people just immediately thought of that but then you see hayek's road to septum and you realize that actually it is these conditions in germany in 1923 that eventually led to um hitler taking over the whole country and imposing his fascism on on the german nation”

During the 1923 German hyperinflation, a house in a swanky part of Berlin that cost roughly 5 ounces of gold (at the then-current exchange rate of 20.67 dollars per ounce) would cost thousands of ounces in gold equivalent today, demonstrating how severely property values decline in real (gold) terms during currency collapse.

“we saw this um in germany in 1923 when um you could have bought a house in a very swanky part of berlin um in 1923 you could have got that for a hundred dollars now in those days the dollar was exchangeable at twenty point six seven dollars so we're talking about just a little less than five ounces now that house today i would expect to be the equivalent of maybe two or three million dollars something like that six bedrooms decent house you know good address etc etc major you know major city yeah i would have thought two or three million dollars something you know that's probably a fair it could even be a bit more that's five ounces of gold that gives you an idea”

The monetary dynamics discussed apply universally and are not unique to the West—commodity-driven economies will similarly face inflation from central bank currency printing, but they have alternative currency solutions (gold-backing) that the West lacks.

“you don't necessarily need to be a terribly um you know i mean you don't get protection from being a very well-off country from uh the destruction of wealth that um modern macroeconomics can can read”

The Western bloc (America and allies) comprises approximately 43% of global population, while the Asian bloc (centered on Asia with commodity-driven economies) comprises approximately 57% of global population—making Asia more than twice the size in population terms.

“if you look at the populations involved i think in rough terms like america and its allies uh if you look at the asian bloc it works out about 57 of the global population so they're already sort of more or less twice the size of us in terms of people”

John Law's 1720 Mississippi venture provides a historical precedent: currency printing to support financial assets (shares) eventually destroyed the currency despite continued printing, demonstrating that the strategy ultimately fails.

“the the um prime example of this was john law in 1720 france when he printed credit in order to buy shares support shares in his mississippi venture um and it got to the stage where um it no longer began to work um the shares sank despite that but what happened was that he destroyed the currency in the process and we have a similar situation today where the central banks will try and keep the whole of the financial system going which basically is not just keeping the banks open for business but also stopping financial assets from sliding in value now that's going to require enough money printing to either destroy the currencies through quantity alone or more likely destroy the credibility of the fiat currencies that they issue in order to try and support markets”

Interest rates do not control the rate of money; they represent compensation for loss of money possession and purchasing power risk. Raising interest rates cannot manage the quantity of money or inflation meaningfully. The Bank of England has only two true weapons: controlling the quantity of money (quantitative easing) and cutting rates, not raising them during inflation.

“i mean basically they can only go one way and that is reduce interest rates and print debt that is the those are that's all it's got in this in its armory we now have a situation which is calling against that it's got to raise interest rates why not because interest rates control the rate of money but but for the very simple reason that what an interest rate is is it is compensation for the the loss of possession of money one in other words you give it to someone else like the bank so it's no longer in your possession it is loss of purchasing power over the period which um you part with your money and also lastly it is the risk that you entail by giving it to someone else that you're not actually going to get it back that is what it's about it's not the price of money as far as the depositor is concerned”

Gold is money, not an investment. It should be acquired with the intention to eventually spend it, not to trade it at higher prices. Most ETF and financial market gold traders treat it as a speculative asset (buying at 1,740 expecting to sell at 2,000), which is a misunderstanding of gold's purpose.

“gold is money it is not an investment now what i mean by that is that if you acquire physical gold it must be with the intention to eventually spend it not trade it in this is the this is a very important distinct distinction most people um who who buy gold in an etf or something like that they they view it as um a hedge maybe against um declining the declining situation but essentially what they're doing is they're doing exactly the same thing they do with bitcoin they're looking at it you know i can buy gold say currently at 1736 i think it's going to go to 2 000 so i'm going to buy it so i can sell it at 2 000. you know that is not the purpose of gold gold is money it is there to be spent”

The velocity of fiat currency rejection matters more than the quantity of money. If the public decides to dump currency completely in return for goods and services, the currency becomes worthless despite changes in monetary quantity. This is the Ludwig von Mises perspective on money demand.

“the second thing is the question as to what value does the average person place on uh currency relative to goods and this is a point which was made by ludwig von mises very much against the monetarist approach to the relationship between money and prices um as i'm sure most of your viewers will know um the relationship as far as the monetarists are concerned is that if you increase the quantity of money you decrease its purchasing power and um you know it should sort of happen maybe with a bit of a time lag but um it is a proportional um thing so if you double the quantity of money you sort of roughly harvest purchasing power um there is obviously some truth in uh the relationship between the quantity of money and his purchasing power but by far the bigger determinant is the use which the public um uh put on that money in terms of its use value so um to give you an example if they decide to dump the currency completely in return for goods and services then it becomes completely worthless despite uh um you know the changes in the quantity which may of money which may or may not happen”

Bankers become confident and leverage up their balance sheets when they see positive economic outlook; conversely, when outlook deteriorates, they contract balance sheets dramatically, which drives the boom-bust cycle and is predictable based on banker psychology.

“when bankers are confident about the economic outlook they leverage up their balance sheets... you can only really understand it if you understand the psychology of bankers”

Hayek's 'Road to Serfdom' showed that severe economic hardship (like Weimar 1923) eventually leads populations to support authoritarian political solutions rather than return to sound money and free markets, setting the stage for fascism.

“then you see hayek's road to septum and you realize that actually it is these conditions in germany in 1923 that eventually led to um hitler taking over the whole country and imposing his fascism on on the german nation”

China faces the same bank credit cyclicality as the West, but because the government owns/controls major banks (functionaries rather than profit-maximizing directors), China can expand credit when directed and has already made small interest rate cuts to support property markets. China can avoid Western deleveraging dynamics.

“china has got exactly the same uh cyclical bank credit problem there is a difference though and that is that the big banks in china are all um owned by the government or controlled by the government so that they can actually you know become because the executives in the banks are essentially functionaries rather than profit-seeking um uh directors or executives um then those banks will um expand credit uh if they're told to do so so um i can see that happening i can see i mean we've already had i think in the last week or two two cuts in in sort of fairly small cuts in interest rates in china to try and stop the slide in confidence in the property markets”

The bank credit contraction cycle occurs roughly every 10 years on average and has been responsible for major economic dislocations including the 1930s Great Depression and the 2008 financial crisis (Lehman failure). We are now 13-14 years since the last cycle downturn, so another is overdue.

“it is inevitable and this is the cycle of bank credit i mean you know we've had this um ever since records really began um it was particularly violent in the first uh half of the 19th century it smoothed out a bit after the um the 1844 bank charter act which was a major piece of legislation and of course this is the thing which led to the post-war slump it led to the 1930s i mean this happens every 10 years on average and we are now what 13 14 years since the last um slump the last uh bank credit cycle downturn which um was essentially financial in nature and uh that was that led to the lehman failure”

Rising interest rates directly threaten banks' loan portfolios because many businesses (zombie companies and weaker firms) cannot service debt at higher rates, making banks nervous about new lending and increasing their desire to reduce asset bases and call in existing loans.

“you see interest rates beginning to rise now um we've got a huge great gap between where interest rates are and arguably where they should be because you've got inflation running at 10 or you know cpi inflation some say more some say it's cpi whatever it doesn't matter it's a huge gap and that's going to have to be closed somewhat maybe not totally but close somewhat now imagine that you're a director of a bank and you have got loans out to businesses in this environment and you know that quite a number of the businesses which you have lent money to cannot handle higher interest rates because they are well we i mean we could be really blunt and say that they're zombie companies which you've been keeping going because you didn't want to write off your loans”

Asian economies are in the midst of an industrial revolution despite property sector problems in China, meaning Asia's economic development is ongoing and creating real economic wealth independent of Western financial markets. This contrasts with Western reliance on financial markets.

“you've got communications which have been set up that's developing those economies are in an industrial revolution which is ongoing despite the problems we see in china in the property sector that is still it's still ongoing um”

A banking crisis will likely cause gold prices to fall initially as investors liquidate positions to cover margin calls and move into dollar-denominated assets (as happened in 2008), before the gold price rises substantially as currency debasement accelerates. This whipsaw should discourage those viewing gold as an investment.

“the first reaction to a banking crisis is probably for money to go into the dollar and short-term u.s government paper not gold and we saw this indeed um when um the lehman brothers failed we saw the price of gold fall i can't remember the figures but i think it went down from something like 830 to 680 or something like that i mean it was a fairly sharp fall before it then went up to 1920 um over the next couple of years”

When consumers are paid and face shortages of key supplies like fuel and food combined with currency debasement, they rush to exchange depreciated currency for limited physical supplies, creating a self-reinforcing hyperinflation cycle similar to Argentina and Venezuela.

“if they're in an environment where key essentials like fuel and food are in shorter supply than it you would expect you know what we've seen in a lot of other countries let's just take in argentina or whatever you know where people will just rush out when they get paid to exchange that paper for those key limited supplies which basically just you know continues the cycle of the the hyperinflation”

GDP is driven by bank credit, not by real economic activity. Five percent of circulating media is cash; 95% is bank credit. When banks contract their balance sheets, GDP contracts accordingly, and a contraction of bank credit to normal historical levels would result in a 4-6 trillion dollar GDP contraction in the US.

“gdp is actually the it's driven by bank credit it is the spending of bank credit the amount of cash spend because you've got two elements of credit in the economy in terms of circulating media you've got uh dollar notes and coin which are token coin they're not real they're not real coins and you've got um bank credit and um if you take out the overseas portion and funnily enough i was looking at the numbers this morning you can pretty much halve the level of of uh cash notes on the on the fed's balance sheet as liabilities to arrive at a cash figure for the domestic u.s economy now that being the case then five percent of it is cash 95 of it is bank credit so what happens when you get a contraction of bank credit gdp contracts”

Russia's primary weakness is in property rights and arbitrary state enforcement (claiming citizens owe taxes to destroy their businesses), which undermines economic activity. However, Russia's banking system is secure partly because Western sanctions have isolated it from Western financial problems.

“if only they would smarten up in terms of property rights and if they'd smarten up against the state's propensity to remove people it doesn't like through claiming that they owe tax or whatever whatever i mean they destroy businesses they're quite happy to destroy people and their businesses that is not good i mean property rights should be respected and that's one lesson that they haven't learned but other than that you know i would say that russia is in a far better position than many many western nations and particularly when you take into account that their banking system is pretty secure um thanks to us we've isolated them from our problems which i don't think was quite the intention but anyway that's that's the effect of it”

Peter Hambro, who worked in bullion markets since the late 1970s, stated that the Bank for International Settlements pursued a campaign with major central banks to suppress gold prices after Bretton Woods ended. The futures markets and LBMA forward market were created to generate artificial supply and reduce demand for gold.

“we saw something which came out from um uh peter hambro uh who worked in um the bullion markets going back i think into the late 70s um and uh he stated quite clearly and he was in the loop and he knew all about this uh that uh the bank of international settlements um you know following the end of the bretton woods um uh pursued a campaign um working with major central banks to suppress the price of gold the whole reason that uh futures markets and the the lbma ford market evolved was to create artificial supply to take out demand for gold”

Putin's primary objective is not to conquer all of Ukraine but to remove American influence from Europe and establish Russian dominance over European trade. He is pursuing this by squeezing Europe on energy, forcing it to reconsider its relationship with the US.

“right from the start we have known that putin did not want to see america anywhere near his western borders um and that plainly is the objective i mean it's not to win you know to completely take over the whole of ukraine i mean you could say that he wants to um you know consolidate his position in the donetsk and so on you know on that sort of eastern end of the ukraine i can understand that i mean it's the russian speakers and so on and so forth but actually really what he wants to do is he just wants to get america out of europe in terms of telling europe what to do because in the longer term um russia has the potential for enormous trade with europe it doesn't want to lose that but you know the way in which it maintains it the way in which it will pursue its objectives getting america out of europe is basically to squeeze europe”

The Fed's primary mandate to maintain full employment and avoid recession, combined with pressure from government, means the Fed will be forced to inject currency into the economy through increased government spending (financed via quantitative easing) if bank credit contracts severely, regardless of inflationary consequences.

“because the fed's mandate basically is to try and maintain as one of its two mandates reasonably full employment and because undoubtedly the government doesn't want to see um a slump a recession whatever we call it then any severe contraction in the in bank credit is bound to be met by um uh if you like um raw currency being injected into in into the economy now i would guess that the easy way for the fed to do that would be through financing um an increased budget deficit”

London is the financial center for the rest of the world (alongside New York) and clears virtually all interbank euro transactions for the commercial banking network. This means London has all eurozone banks as counterparties, placing it at the center of the coming financial stress as foreign leverage unwinds.

“london is the financial center x new york for the rest of the world and particularly we clear pretty much all the um interbank uh euro transactions for the commercial banking network not not the the central banking network the euro system um and that's all done through london which basically means that london has all the eurozone uh commercial banks as its counterparties it also has uh the japanese banks it also has quite a lot of the american banks but london has a huge great problem in so far as this financial world wind to which the world is now exposed is likely to center on london so i'm not hopeful really for the immediate outlook in london”

Saudi Arabia, one of the two founding partners of the petrodollar (the other being America), is now flirting with joining BRICS and has strategically concluded its future is with Asia rather than America and Europe, especially given Western decarbonization policies that signal hydrocarbon producers have no future in the West.

“we even see that um one of the two founding partner partners of the um of the petrodollar saudi arabia the other one obviously being america but saudi arabia is now flirting with the idea of joining brics and i have known for some time that in terms of long-term strategic planning the arab world have increasingly taken the view that their future is with asia and not with america and europe and apart from anything else i mean we're pursuing this um decarbonization um thing um very aggressively so that sends a signal to all the hydrocarbon producers that their future is not with us”

Central banks worldwide are reluctant to part with gold, which signals they understand gold's true monetary value. They resist gold repatriation and demand (public statements of gold being unnecessary) while quietly accumulating, which suggests gold will be central to future monetary arrangements.

“i just noticed there is a mock reluctance of every central bank in the world to part with any gold whatsoever they seem it's it's all right for them but it's not all right for us”

JP Morgan stated that 'Money is gold and nothing else; all the rest is credit,' which was a statement of legal fact in 1912 and remains legally true today. This statement encapsulates the correct view of gold's monetary status.

“as jp morgan himself said and uh i think uh in in congress in speech to congress in 1912 [Music] money is gold and nothing else though all the rest is credit and he wasn't stating an opinion he was stating a legal fact which is still true today”