Nothing but debt remains
The age of debt started way before the pandemic outbreak. The new disease exploits all health weaknesses in the same way as the resultant economic slowdown exploits all fragilities of modern capitalism. Scholars debate over good versus bad debt, but nobody came with a clear answer concerning the overwhelming debt. Currently, the only thing growing faster than the market indices is the level of public debt in developed countries. Is there a future beyond debt?
The prestigious French daily newspaper “Le Monde” published a controversial article signed by the avantgardist scholar Thomas Picketty. The tribune is lobbying for the writeoff of all public debt contracted by European countries from the European Central Bank. It represents nothing more than a European reset, a foreseeable debt-free world. The solution, as counterintuitive as it seems, does not sound utterly ludicrous in the current context.
If half a century ago, someone had said that fiat currencies do not need to be backed by gold, it would have sounded horrendous. If two decades ago someone believed that central banks could print currency with no limits, it would sound absurd. So, what if all public debt issued by central banks gets cancelled? Based on the classic economic theory, one would expect huge havoc, including hyperinflation, double-digit interest rates, massive unemployment. In the light of recent events, it could be that nothing happens, and a simple accounting line on banks’ ledgers may not have a significant impact on the day to day life.
Nevertheless, such speculations, as crazy as they seem, provide critical intelligence for retail investors. The bottom line is that fiat monies are losing their classical role. Monies have the key property to provide a thorough valuation for a wide range of assets and liabilities. How can something be valued in a fiat currency denominated metric when the supply of that currency is infinite?
If you are a retail investor that made “money” throughout the recent stock market rally, make sure that what you may have is not just dust in the wind!
How are States going to deal with the accumulation of public debt generated by the Covid crisis? For many, the answer is clear: central banks will take on their balance sheets a growing share of the debts, and everything will be settled. In reality, things are more complex. Money is part of the solution but will not be enough. Sooner or later, the wealthiest will have to be called upon. Thomas Piketty, French economist
Nasdaq had another week in positive territory. Is this a reason to chill out while we are contemplating our Robinhood accounts? We should be aware of the various mechanisms through which money raised by the issuance of public debt flows into the stock market. Governments issue debt sold to banks or central banks, while investment funds benefit from the injected liquidity. The venture capital is booming amid a global economic downturn and a few of the major IPOs in recent history took place over the past 12 months. Institutional investors play a key role in triggering the Nasdaq rally by leveraging the inflow of newly printed money.
Moderna’s share went through a significant rally in January, and seemingly
the young startup faces new challenges. Pfizer cannot deliver in time its
contract, while Astra Zeneca’ solution looks not efficient for the new
generation of coronavirus variants. Moderna has a unique opportunity to beat
the big players at their own game: supply chain management. If Moderna
manages to deliver in time and fill in the gap left by others, its rally
could find strong support over the foreseeable future.
Biden administration kept its electoral promises and came with a new
stimulus package that aims to fuel the domestic demand. While members of the
public are cheering this measure, what is the real impact on the leading
fiat currency. Fears of an inflationary process become reality and the
resultant rise in interest rates could generate additional problems. The
dollar is on a depreciation trend relative to the euro and the new inflow of
money will accelerate this trend.
After reaching almost 54,000 USD, Bitcoin passed the level of a glorified experiment. Both its detractors and sycophants need to undertake a pragmatic approach and to understand that the leading cryptocurrency is not anymore a garage gig for unemployed adults seeking financial redemption. Bitcoin’s monetary mass measure in fiat monies currently accounts for one trillion dollars, equivalent to the GDP of the Netherlands. Therefore, Bitcoin’s universe has reached the status of an average size developed economy. Under these circumstances, it is critical for the crypto-community to think forward and transform this successful experiment into a fully-fledged global parallel economic system. Contemplating the rising price of Bitcoin to fiat money is structurally a fallacy. Cryptocurrency works; we know that. But what about the crypto-economy? Who will be the voice for the myriad crypto-believers?
Bitcoin continued its rally and finished the week above 54,000. There are good reasons to believe that Bitcoin will find support above 50,000 USD in the long-run. But we could expect some technical correction over the next week.
The Gold ounce is currently oversold, and any bearish developments in the leading stock markets could bring a positive direction in the next quarter.