There Is No Financial Bubble, Hyperinflation Is Already Here
The money printer goes brrr, and the hyperinflation is hiding under our noses. Since the global financial crisis, 2007 — 2008, money is printed on an unknown scale. Initially, this was done to give us time to solve our financial markets’ problems, but that never happened. I will explain what is happening with the financial system now from my perspective and present it so that people without an economics degree also can understand what is happening. I restrict myself to the US and Europe, and nothing in this article should be used as investment advice.
How Much Money Are We Talking About
The global financial crisis has never been really solved. We are now in another financial crisis because of the measures taken because of COVID-19, and we made our money printers print even more money. The scale is almost beyond imagination; estimates are that 22% of the circulating US dollar was printed in 2020. The US Federal Reserve has injected more than $ 9 trillion (10^12, 1,000,000,000,000) into the market since September 2019. The European Central Bank has put up a €750 billion Pandemic Emergency Purchase Program (PEPP). This is all added to the trillions already put into our economies because of quantitive easing programs since 2008–2009.
How Is It Possible That We Can Just Print Money?
The `gold exchange standard´ was established in 1944 by the Bretton Woods Agreements. Under this system, many countries fixed their exchange rates relative to the US dollar, and central banks could exchange dollar holdings into gold. All currencies pegged to the dollar had a fixed value in terms of gold. In 1971, US President Richard Nixon ended the US dollar’s international convertibility to gold (the `Nixon Shock´). The consequence is that there is no relation anymore between your money and gold. Before, to print money, there had to be a backup of gold, with automatically made that there was a limit on what countries could print. After 1971 this relation did not exist anymore, making it possible to print money without any backup. And this is why now the printer goes brrr, and there is no limit to what the Federal Reserve or European Central Bank can print.
Can This Printing Go on Without Consequences?
Short answer, No! I will not discuss all possible effects but will highlight one. Inflation, or hyperinflation, is when the general price level rises, and each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money, a loss of real value in the medium of exchange, and unit of account within the economy. To put it simple, your money is losing its worth. If gold is scarce, the value is high; if there were an unlimited amount of gold, the price would go down. By printing money, the supply of money gets bigger, as a result of this devaluating the money which is already there. During the Great Depression in the ’30s, especially in Germany, there was hyperinflation. To buy bread, you needed 200.000 German marks, and inflation was so rapid that this could already be higher within hours. If we look at food prices now, we see some inflation, but considering the amount of money printed, it seems not out of the ordinary. So why worry?
Hyperinflation is Here
Every crisis is different from the former crisis. Crises come and go; there is nothing new about that, but every time the crisis shows itself differently, and other solutions need to be used. We see now that hyperinflation doesn´t show up in our groceries or daily spending, at least not in a significant way. So where is it?
US National Home Price Index
Housing Index in European Union
Housing has never been so expensive. We saw a dip in the prices during the global financial crisis, but now we see that prices are still skyrocketing.
S&P 500
DAX, German Stock Index
The stock market reaches all-time highs. Again we see the dip during the global financial crisis, but no drop now.
Gold Price
Gold is a traditional hedge against inflation. After the global financial crisis, the price went up significantly. In 2020 we also saw the price of gold rise, but not as much (yet) as after the former crisis.
Bitcoin (BTC) Price
Bitcoin was invented as a reaction to the global financial crisis. Bitcoin is a decentralized digital currency without a central bank or single administrator. BTC is now also called Gold 2.0 or the Digital Gold. The price in 2020 went to the moon.
What are we looking at?
We saw that house prices went down during the global financial crisis, and the stock market had significant losses. We see the opposite happening now, and it is not a surprise that people think there is a bubble because it doesn´t make sense. The fundamentals of most companies in the S&P 500 did not improve because of the COVID-19 crisis, but still, their value went up. The fundamentals for BTC might have improved, but the increase in value is unprecedented.
What if we change our point of view? Remember the definition of inflation; inflation reflects a reduction in the purchasing power per unit of money. What we see is hyperinflation. It is not the increase in worth of S&P 500 companies, houses, or BTC, but is the loss of value of our dollars and euros that we are seeing. This is the result of the almost unlimited printing of dollars and euros. Our dollars and euros are losing value rapidly, it doesn´t show in your groceries, but it shows in other things this time. There is no bubble; there is hyperinflation.
Interesting links:
The Trap of Digital Currencies and How Bitcoin Can Save You
Is The Euro Dead?
Why BTC Will Survive CBDCs
You think this is a worthy blog and you want to read more?