Corona Virus, Covid-19, or as I like to call it, the CCP Virus has already wreaked havoc on global stock markets, forced thousands of businesses to shut down, tens of millions have lost their jobs, and hundreds of millions are now “social distancing” at home. As we watch positive cases and fatalities rise on a daily basis, the future looks bleak – and that’s because it is. The 2008 Global Financial Crisis was a mere speed bump compared to the steel-reinforced brick wall we’re about to hit.
Based on current news and social media, it seems that few people have really thought through the economic consequences of what’s unfolding around us, so let me spell it out: bars, restaurants, schools, cinemas and gyms are all closing down globally at an unprecedented rate, and it’s not just SME’s, entire industries have suspended or virtually ceased operations – airlines, sports franchises, live music (concerts etc) and more. This will soon have a knock-on effect over ancillary services such as transport, daycare, cleaning services, pest control, and so on.
Unemployment will very likely increase to 30% or more.
As businesses close, they stop paying rent, which means landlords have no income to repay their mortgages unless they’re wealthy enough to have a diversified portfolio of stocks… wait, those are tanking too! So, mortgage defaults will inevitably rise, but there’s no need to panic and start a bank run by withdrawing all your cash, because the banks already packaged and sold their mortgages to… pension funds!
Now, even before the CCP caused this global cluster—-, many pension funds were already underfunded e.g. their liabilities, or the obligations to pay pensions, exceeded the assets they had accumulated to fund those payments. In other words, they were broke even before the stock market crashed, and the coming decimation of their equity and real estate securities will only make things worse.
All this at a time when baby-boomer retirements are about to peak! As they retire in increasing numbers and their pension funds are unable to support them, they’ll be forced to sell assets to finance retirement, putting further downward pressure on stocks and real estate, assets that are already getting hammered. Things will only get worse – much worse. The Dow could easily drop another 50% from its current level, taking it all the way back to the $8-10k range.
What about the unprecedented stimulus packages that are currently being rolled out? The US has just rolled out a $2 trillion plus stimulus package, more than double the size of the Emergency Economic Stabilization Act that was used to bail out banks in 2008. It worked back then, surely it can work again? No. It didn’t work in 2008 and it won’t work now.
The bailouts in 2008 didn’t fix any of the underlying structural problems in the financial system, it merely paper-taped over its fragile foundations to keep the house of cards standing a few more years. In those years we’ve seen the weakest recovery in history, with anemic growth becoming the “new normal” according to many economists. What they fail to recognize or understand is that all of this is an inevitable consequence of the monetary system we’ve had since 1971. A monetary system without money!
Post-recession growth has been getting progressively weaker since 1971 when money (gold) was removed from the monetary system, leaving us with a global credit system that has, by necessity, driven asset prices up to a point where it’s no longer sustainable. Governments and their “economists” will likely blame the CCP Virus for mess we’re about to find ourselves in, but in reality it’s fundamentally the result of a structurally flawed monetary system that is coming to an end. The CCP Virus is just the pin that’s popping the ponzi credit system bubble.
How bad can things get?
Pretty freaking bad is the short answer. Most major cities have been under some degree of lock-down for a couple of weeks now and already social unrest is beginning to emerge. Give it another few of weeks and this could easily escalate to widespread looting and violent crime as people get desperate for food, and when that happens, cities will soon find out that their police forces aren’t large enough to control pervasive crime sprees.
Included in the US Government’s $2 trillion stimulus package is a $1,200 “helicopter money” payment to every adult citizen. This will put food on the table for the first month of isolation, but what about non-citizens? Illegal immigrants often live paycheck to paycheck, occupying many of the low-qualification jobs that have or will soon be eliminated. It’s only a matter of time before they run out of money and are left with no choice but to beg or steal to survive.
Other benefits of the package include extended unemployment benefits, sick leave, family leave and loan relief. These measures will all help their respective beneficiaries over the next 3-6 months, but what happens after that? Many will remain jobless while all that cash has filtered through the economy, and will end up doing nothing more than cushioning the blow to financial assets.
And it’s a pretty soft cushion at that… since Trump’s 2016 election victory, the US stock market has gained over $11 trillion, all of which has been wiped out in the last few weeks. $2 trillion will do little to reflate the bubble, particularly in the face of peaking pensions claims which would have likely pricked the global asset bubble if the CCP Virus hadn’t got in first.
A 2nd stimulus package will likely follow in the coming months, probably in the $3-6 trillion range, and even that won’t be enough to reflate the bubble. What will help though, is the $6 trillion plus of foreign-owned US debt that will likely be redeemed for stocks as the dollar loses value. $1 trillion of this debt is owned by China, but don’t expect Trump to allow them to buy up US stocks on the cheap.
Instead, the aggressive option that Trump is known for, would be to freeze the sale of China’s US Treasury holdings, and the holdings of all its debtors, then strike a deal to cancel the debts as compensation for the CCP’s negligent handling and global spread of Covid-19. This would relieve the US of the vast majority of its foreign owned debt, while also freeing many countries from China’s debt trap.
Action this aggressive would be difficult to negotiate much less execute, and could easily escalate into a military confrontation, but regardless of whether or not this path is chosen, another likely economic consequence of the CCP Virus is the unmitigated collapse of the “monetary” system. With all major economies running their metaphorical printing presses at full speed, and unemployment hitting levels not seen since the Great Depression, stagflation will be the next phenomenon to rear its ugly head.
Stagflation occurs when growth falls while the cost of living rises. Growth is an absolute certainty to fall, and fall dramatically, with such a large chunk of the workforce out of action. Inflation is a trickier phenomenon to understand as its very measurement has been manipulated so much over the years that looking at inflation statistics is virtually pointless.
This time, no amount of manipulation will be able to hide what’s coming. Factories around the world have already shut down and supply chains are in disarray. This won’t matter in the short run as inventories can absorb demand. However, in the longer run, relatively stable demand and a dramatic fall in supply means prices skyrocket as consumers flock to get their hands on fewer available goods. Couple that with all the additional cash that’ll be sloshing around the economy as funds from the $2 trillion stimulus package is disbursed, and you have a lot of extra cash demanding a smaller pool of goods – a combination that is certain to cause inflation as the economy contracts.
Stagflation will destroy the current monetary system, as the system requires perpetual debt creation to survive. This will ultimately lead to the International Monetary Fund being forced to come together and agree on how to salvage or restructure the entire global monetary system. Yes, that’s how bad this is going to be.