Weathering the perfect economic storm

 

In October 1991, somewhere in the North East of America, warm air from a low pressure weather system off the coast of Atlantic Canada collided with a high pressure weather system coming in from the opposite direction. Normally, this would seem like an unfortunate weather event (especially for those at sea) that caused your normal tropical cyclone. But this event wasn’t normal.

Just three days prior, off the coast of Florida, a Category 2 hurricane had developed, and it was headed straight towards this “normal” tropical cyclone. The three weather systems merged and formed what is known today as “The Perfect Storm of 1991”. At its peak, the storm generated winds of 120 kph that would blow for 1 minute straight, with waves of 18 metres high being recorded out at sea.

Fortunately, the storm developed so far out to sea that it had significantly weakened by the time it reached the USA’s shores. Even still, the weakened storm caused $200 million in damage along the North East coast. But if there had been anyone unfortunate enough to face the storm in all its fury, they wouldn’t have stood a chance.

There was tragically one such group of people: The crew of the famed fishing vessel “Andrea Gail”.

The ship was fishing in the wretched waters at the time the three weather systems collided, and made the ill-fated decision to try and power through the storm in order to get back to the safety of port quickly, instead of sailing away from the storm and wait it out. Facing 18 metre waves, the ship indeed didn’t stand a chance, and all six crew members were lost, with only a handful of wreckage ever recovered.

The ship had faced numerous cyclones, low pressure and high pressure systems in its 23 year history. But to the unfortunate fate of the vessel on that specific voyage, there had never been a collision of all three weather systems in recorded history.

An Economic Storm

I fear we are facing a similar series of unfortunate events.

I am however not referring to weather patterns and pressure systems. I am referring to a series of economic, political, and natural components that are combining to create what could quite possibly be the “perfect economic storm”.

As an entrepreneur and business owner, I have always been interested in the economic variables that impact our successes and shortcomings. Over the years I have consumed numerous resources in order to gain specific insight. Insight into how I should read various market cycles in order to prepare for famine in times of abundance. The more I read, the more I battled to comprehend the decisions made by many leading economists and bankers of the world.

Something seemed to be amiss.

Ominous Signs From 2008

This suspicion was confirmed when the Financial Crisis of 2008 almost toppled the entire system, but for some very swift moves by desperate regulators. What really baffled me was the number of banking executives who were prosecuted after the biggest financial crisis since the Great Depression: One.

These executives were willingly lending money to the highest risk borrowers known to the system, without collateral! But worse: They were classifying these loans as “AAA” rated.

A rating of “AAA” is the highest rating on a rating agency’s catalogue. By rating millions of uncollateralised loans against high risk borrowers, these agencies were essentially attracting more investment into this sector, and severely contributing to the enormous problem in America’s real estate market between 2002 and 2008. Investigations show that these agencies were incentivised to keep these investments labeled as “AAA” by their largest clients, the big global banks. Ratings structures are designed to protect investors, but by perpetuating this practice, they were doing the exact opposite.

We all know what happened after that. Those AAA investments came tumbling down like a house of cards, and millions of people not only lost jobs and houses, but their entire pensions and life savings too. Considering thousands of people have gone to jail in the last century after far less severe financial crises, wouldn’t you have expected at least a handful to be prosecuted for their role in the 2008 fiasco? Alas, no more than one sole banker was sent to jail in the subsequent investigations.

One.

He happened to be several rungs below the corporate executives of even a second-tier Wall Street financial institution. And while he did indeed commit crime, even the judge presiding over his case admitted that there were far more sinister culprits walking free.

After the 1987 financial crash, 1100 people were prosecuted. After the 2001 dotcom crash, top executives from WoldCom, Qwest, Tyco and numerous others all served time for their role. And yet the worst crisis to date has the paltry number of just one prosecuted second-rate banker.

One.

Stacked Against Us

The more I researched the structures of the global financial system, especially during and after the 2008 Financial Crisis, the more I realised the odds were stacked against us “normies”. Like the ill-fated Adrea Gail facing the Perfect Storm, we didn’t stand a chance. These bankers could swell entire national economies and put trillions of people’s dollars at risk, without risking even their jobs, let alone their livelihoods. The entire system is a complex behemoth of “too big to fail” corporations and regulators, sharing intimacy with one another in the form of kickbacks and gratuities.

These cartels have continued to prop up and perpetuate a system that almost fell apart during the 2008 Crisis. They have stimulated record growth in the following 12 years, inflating, I believe, an even larger bubble than we could imagine.

This large bubble is made up of highly leveraged debt positions and risky speculations, which when required to be honoured stand the high risk of default, causing market prices to collapse and setting off a chain reaction of economic events that will leave a lot of people both bewildered and sadly jobless.

The Second And Third Components

This is only one of the components of this “perfect economic storm” we could possibly see in the near future.

The other two include an unprecedented global health pandemic, and its subsequent economic fallout. While dozens of health practitioners warned us about a potential health crisis that could strike at any moment, we did what most humans are wired to do: Ignore it and carry on regardless. Without “ignoring and carrying on”, we wouldn’t get anything done. Think of an impala on the African plains: If it worried about a predator being behind every bush, it would never eat. It is wired to be cautious, but to continue life as normal in order to eat, and only flee if there is danger eventually recognised.

Much like that impala, we are wired to acknowledge the threat of an impending global pandemic, but carry on regardless. Unlike the impala however, our ecosystem is exponentially more complex, and one shockwave to that ecosystem can wreak havoc on our entire way of living.

This is what has happened. Covid-19 has been a shockwave that has jolted modern society into an entirely new way of life. Trillions of dollars will be required to fund additional health care in this extremely trying time. Think of Covid-19 as the high pressure weather system in the South.

The sociological fallout of the lockdowns and social distancing we are seeing globally acts as the low pressure system coming in from the North. 90% of restaurants have shut down around the world, 90% of events have stopped, air and road travel is down 85%, oil consumption is so low that some refineries are actually paying clients to take their stock as they have no space for new barrels. This has wrought absolute havoc upon our economies. And Covid-19 was only declared a global Pandemic on 11 March 2020. We are barely six weeks into the Pandemic.

The hurricane in the deep South hurtling towards these two deadly ingredients is the current economic climate. Propped up by brittle sticks and wattle, over-extended beyond rescue, I believe the state of our global economic climate is extremely fragile.

How this all ends, I can’t tell you. I do believe humanity is capable of incredible things. We overcame the plague, World Wars 1 and 2, and we will overcome this. But things are likely to be very, very different indeed.

We just need to batten down the hatches and prepare ourselves.

Investment Protection

My research into economics and their market cycles led me to take important steps in protecting both my own and my company’s assets. I began to see that while your common low risk investment products were important aspects of an investor’s portfolio, safe haven assets were just as important. Especially considering what could be lurking over the horizon.

Gold, silver, platinum, and other commodities, all showed incredibly interesting patterns: Over a long time period, they held their value in relation to the boom and bust cycles of your more common equities markets. Real estate provided similar opportunity, and while also fairly complex, was equally a “wealth protection policy” of sorts.

But I have to say, of all the investment opportunities I have explored and researched in my decades of business, it was the introduction to the world’s first truly digital asset that got me most excited. As a founder in the IT space, it didn’t take long for my staff and those within the IT community to converse with me about Bitcoin and its potential. It was the first truly decentralised digital currency. Unlikely PayPal and other digital forms of value transfer, it was its own currency: A digital token running on an entirely decentralised network, much like the internet. This was the world’s first “money for the internet”.

I consumed all I could in understanding this new technology, and the code checked out. It was robust, intelligently constructed, and incredibly well communicated in its whitepaper. But what impressed me most was the philosophy upon which Satoshi Nakamoto designed Bitcoin: Sovereign money outside of the current financial system.

While many of you will be familiar with the famous UK Times headline “Chancellor on brink of second bailout of banks” stamped into Bitcoin’s very first hashed block, you may not be familiar with the paragraph that Nakamoto used to introduce the world to his invention:

“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.”

~ Satoshi Nakamoto, introductory post to P2P Foundation forum, February 11, 2009

These are not unfounded claims. The US Federal Reserve, the regulator for the world’s current reserve currency (the US Dollar), recently reduced the country’s reserve ratio as a way to cushion the economic impact of the Covid-19 outbreak. But in the Perfect Storm, when you’re falling off an 18 metre wave, it doesn’t really matter how big your cushion is.

The History of Gold and Silver, and Their Value Protection Properties

As you may be aware, Satoshi Nakamoto designed Bitcoin to be a “deflationary” currency. A currency with a limited supply, slowly released to the economy much like gold is slowly mined out of the Earth. There will only ever be 21 million Bitcoins, and no-one can change that rule. Bitcoin is more of a mathematical equation than it is a digital currency, and this makes it one of the soundest monies I have ever come across. Its prices may be volatile and unpredictable now, but I sincerely believe it will discover a stable value once it has reached peak dissemination into public understanding.

Bitcoin made sense to me because Gold and Silver made sense to me. Having investigated the history of money and economics, I saw how both Gold and Silver had been used even in the very earliest civilisations. The very first coin, invented by the Lydians in 700 BC, was a Gold (65%) and Silver (35%) alloy.

Throughout history, Gold and Silver have stood the test of time as sound monetary constituents. The Lydians came and went, the Persians arose and declined, the Romans rose and fell, the Ottomans, the Dutch, the British… all conquered and divided, and all waned in complacency. However, the fundamental form of their trade remained: Gold and Silver. These commodities continued to be adopted by each of these great Empires throughout history as the tool with which their governments could facilitate economic activity. Even the great American Empire that replaced the British in the early 1900’s based their economy on a Gold standard that lasted right up until 1971.

Devaluation of a Currency

What is interesting to note is that these empires all share one commonality in their complacency: As their economies became inflated and overextended, their politicians and rulers gradually diminished the content of Gold and Silver in their currency. The word “debase” actually comes from the Roman Emperor Nero reducing the amount of Silver in the Roman Denarius in order to reduce the government’s cost of minting new coins. He literally debased the coins of his people.

Even the British Pound derived its name from the weight of an ounce of Sterling Silver under King Offa in the 700’s. By 1816 the British government, like the Roman Empire before it, made the decision to reduce the amount of Silver in their Pound. Not long after this, their Empire had shrunk and their global domination had been surpassed by the USA.

This is not to say that debasing a currency causes an empire to fall. Rather, it is an ominous sign of an empire’s weakness. Throughout history we see the debasement of the dominating empire’s currency preceding the rise of the next dominant empire.

If this pattern is to continue, then the 1971 “Nixon Shock” should be an ominous move for the American Empire. Then President Richard Nixon announced that the Federal Government would no longer convert US Dollars to Gold at a fixed value, abandoning the Gold Standard entirely. From that day forward, the US Dollar became an entirely “fiat” currency based on the Federal Reserve’s supply and accounting policies.

Does this mean we are entering an age of a new empire? That’s not for me to say. I’m not a historian. I am simply a business man with a passion for economics and success. And from my years of exhaustive research, I am convinced that hard assets that cannot be affected by government interference like Gold and Silver have historically proven their resilience. Resilience to government control, economic weakness, and even war.

This is why last year we at AltCoinTrader built an engine that allowed any user to buy, sell, trade and invest in Gold and Silver Krugerrands digitally. Based on actual commodity reserves in vaults in undisclosed locations (but verifiable by our auditors), every digital token is redeemable and can be delivered to the very door of our customers. I was tired of seeing the Coin and Jewelry shops always filled with the affluent of our society. I wanted to provide access to the wealth preservation aspects of these commodities by implementing the same mathematical powers of Bitcoin and offering them for sale on our platform.

So What’s Next?

I can’t be sure of what is to come. All I know is that there seems to be a powerful economic storm brewing right overhead, and I want us all to take heed. I am no financial advisor, but I do prefer to do my own research before taking any of my advisor’s advice.

I am an everyday man, like you, who wants to weather this Perfect Storm. I’m battening down the hatches, reducing spending, shifting wealth into harder assets, and knuckling down to work harder than I ever have before. By doing so, I am convinced that my team and I will get through this storm, and we’ll come out stronger.

Much like society itself.

The post Weathering the perfect economic storm appeared first on Fintech News.

Source: fintechnews.org

Search