Payments Panic And The Ending Of Fiat Currencies

Payments Panic And The Ending Of Fiat Currencies

 By Alasdair Macleod Goldmoney Insights March 19, 2020

The unilateral response from governments to the coronavirus is to helicopter money to people and their businesses in unlimited quantities. Their priority is to keep the debt-driven Keynesian show on the road, and policy makers are approaching the task with unseemly gusto.

There was evidence that the credit cycle was already on the turn with the global economy entering its regular period of financial and economic crisis even before the coronavirus hit.

Thinking it is only a matter of dealing with the pandemic before returning to normal is therefore a common and fatal mistake. The combination of current events is leading to an infinite problem: central banks, and the Fed in particular, are trying to backstop everything and they will undoubtedly fail.

The central issue is the dawning inability of the Fed, in charge of the world’s reserve currency, to keep financial markets under control. The quantities of money required to rescue the US economy and dollar-centric supply chains abroad are potentially far greater than anyone realises and will destroy not just the dollar, but the whole fiat money system of rigged financial markets upon which debt financing depends. The EU is in a similar but more parochial fix with the addition of a banking system visibly on the verge of collapse.

The timescale for the demise of unsound fiat currencies is likely to be very short, by the end of 2020 – exactly three centuries since a similar fiat currency experiment failed in John Law’s Mississippi bubble.

Introduction

Doubting Thomases must surely realise by now that the central banks are in danger of losing control over financial market prices, not just for a short period of time, but more drastically than that. Besides a new round of quantitative easing announced last Sunday - $500bn into Treasuries and $200bn into agency debt – the new target for the Fed funds rate was lowered to 0 - ¼ %.

This 1% cut followed an earlier reduction in the funds rate of ½ % as well as last Thursday’s announcement of a $1.5 trillion cap on three-month and one-month repos. To these sums we must add the $60bn in purchases of coupon-bearing securities also announced last Thursday.

Taken together, that is a liquidity injection into the American banking system of $2.206 trillion, which in context will be the equivalent of a 59% increase in the Fed’s balance sheet since the repo crisis started in September.

A further source of monetary inflation is in the dollar swap lines with the Bank of Canada, Bank of England, Bank of Japan, the ECB and the Swiss National Bank.

Clearly, the Fed is doing everything it can to achieve a number of objectives simultaneously. It needs to ensure the funding is in place for the US Government, which is dramatically increasing its spending. It must ensure the banks have sufficient reserves so as not to foreclose on its customers, thereby preventing a deflationary contraction of bank credit.

It needs to inject liquidity into wholesale money markets to ensure no financial entity becomes insolvent. It is trying to anticipate future negative effects of the coronavirus, which are likely to be far greater than anyone dares admit in public.

Heroically, the Fed’s public mission is to rescue the American economy single-handedly by providing the money required. And last but not least, it must retain control over financial market pricing to deliver these objectives.

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