The 50th anniversary of the Fiat Fiasco 1971–2021
Introduction-
I’ve long wanted to quantify the extent of the negative consequences that the past century of central banking has had on modern society. In this article we’ll explore how our current monetary regime is systemically built in a way to favour the 0.1% who hold all the assets. Meanwhile the other 99.9% of society has the purchasing power of their savings and income destroyed, as the value of the currency is sacrificed to inflate asset bubbles.
In researching and writing a piece on the long term debt cycle for my 5 part series titled ‘’The Final Cycle Series’’; this precursory article emerged. This should lay the bedrock for the series and highlight WHY it’s an imperative to transition to a monetary system that offers the same rules for every participant irrespective of their wealth or political ties.
Understanding the events of 1971 and the nixon shock , is pivotal in understanding how the 75–100 year long term debt cycle formed and why the deleveraging could have a different outcome in the 21st century.
Chapters-
1) WTF happened in 1971
2) 1970s inflation and CPI lie
3) Asset bubbles never seen before
4) Wealth Inequality
1) WTF HAPPENED IN 1971- The globally interconnected Fiat experiment.
The average lifespan of a fiat currency is on average 29 years. 2021 marks the 50th year anniversary of when the US implicitly defaulted on it’s obligations to maintain a gold peg and closed the gold window on the world in 1971. This event made it explicitly clear that the US dollar was no longer ‘’as good as gold’’ and for the first time in monetary history, the entire globe begun using free floating fiat currencies unbacked by goldw.
Now despite what Keynesian economists say about modern monetary theory- make no mistake, there’s nothing modern about a fiat currency. The debasement of money has been tried for millennia without success. Historical examples of currency collapses are thousands of years old and have brought the end to many great empires. The collapse of the Roman empire through the debasement of the Denarius, being the most famous and notable example, which we will analyze in more detail later in Part 2.
There are many varying estimates for how many fiat currencies have failed throughout history, but this website estimates there’s been 775 currencies in total. The British Pound is the longest lasting fiat currency and even that has lost 99.94% of it’s purchasing power.
Once the currency begins to be debased the temptation to stop the debasement is too strong. Once future demand is artificially brought forward from the future to the present, the end result is assured. You can only live beyond your means for so long until gravity brings you back to earth. This can only last so long until the currency inevitably collapses and the paper returns to it’s marginal cost of production.
Since 1971 individual nation states have been incentivized to devalue their currencies to attract foreign investment into the country. This has ignited a global competitive ‘’race to the bottom’’, as countries devalue their currencies in an attempt to attract foreign capital and increase their exports. This has notably played out in the media recently with the infamous trade war between the US and China being a major geopolitical talking point over the previous 5 years.
This power battle is not uncommon in history as rising global powers will challenge the controlling hegemony as their empire begins to crumble. The average length of a global reserve currency over the past 1000 years has been around 100 years and we’re currently 78 years into the US hegemonic reign.
As we’ll explore in this series I think this monetary reset is much bigger than just a battle over global reserve currency shift. The world is not just about to conclude an 80 year long term debt cycles, but also a 250 year empire cycle while we’ll explore in part 1.
Interestingly though, no country in the world is in good economic shape to take over the world. Each major currency is in the same dilemma as each other. With a globally interconnected financial system and every nation experiencing a debt crisis, once one domino falls, they’ll all fall.
The 1970s CPI lie vs the 2020s CPI lie
Many macroeconomic analysts are comparing the ‘’transitory inflation’’ we’re beginning to see here in early 2021 to the inflation of the 1970s. There’re a lot of the narratives and accounting tricks policy makers used in the 1970s that are making a comeback in the 2020’s, in an attempt to hide the inflation.
After the US implicitly defaulted on it’s obligations in 1971 the US experienced significant levels of inflation all through the decade. The table below shows the official government approved inflation measurements year on year through the 1970s. This was all despite FED chair Aurther Burnes manipulating how the CPI inflation metric was measured all throughout the decade in a desperate attempt to reinstate faith in the currency.
This article written by Stephen Roache, who was a FED insider in the 1970s, explains how the CPI inflation basket was manipulated through the 70s. Countless items such as energy, food and housing were all systematically removed from the official CPI inflation basket and by the end of the decade 75% of the items in the original basket had been removed.
After all those desperate attempts to hide the inflation Paul Volker was appointed FED chair and famously raised interest rates from around 6% to 20% between 1979 to 1981. Despite all those desperate attempts to manipulates the CPI basket and raise interest rates, the decade of the 1970’s experienced over 100% cumulative inflation. Anyone holding dollars lost half of their purchasing power in the decade.
The decision to raise rates tamed inflation temporarily and bought the US dollar more time. Since 1981 interest rates have been constantly lowered at the first sign of a slowdown of the business cycle. This secular downtrend in rates has encouraged and fuelled investors to go further and further into debt and has contributed to creating the largest asset bubble in history.
I wanted to illustrate the 1970s secular inflation because it seems to be mirroring what we’re experiencing in the current macroeconomic environment. In the 1970’s inflation was only ‘’transitory’’ and policy makers went to extreme lengths to manage the narrative as well as the inflation. It ultimately failed and ended with one of the sharpest interest rises in history.
Consequences of soft money- Asset bubbles.
In 2000 we had a bubble in technology stock valuations, in 2008 we had a private sector housing bubble followed by a European banking crisis, but now we have an everything bubble.
By any metric we can observe this fiat currency monetary experiment has created the largest bubble of recorded history.
Through the first 30 years of this fiat system the mispricing of assets was largely driven by the lowering of interest rates. Now as we’ve entered the final stages of the long term debt cycle, asset mispricing is being driven by QE and currency devaluation as the effectiveness of lowering rates declines as we approach the 0 bound.
Every drawdown or correction in the housing market or the stock market has been swiftly met with ever increasing levels of liquidity at an ever increasing rate. The FED was adamant in 2008 that bail outs was a one time occurrence and that they’d shrink the balance sheet when the economy was strong again. However since then we’ve seen QE 1, QE 2, QE 3 and now QE infinity.
In 2019 Jerome Powel tried to taper their QE programs and normalize the balance sheet to restore faith in capitalism and the currency. The chart above shows how the stock markets reacted and sold off 22% over the subsequent 3 weeks, forcing Jerome Powell to reverse course and prove you ‘’can’t taper a ponzi scheme’’.
There are so many charts that show central bank liquidity is very correlated with asset price appreciation, as much the central banks try to dispute this.
Another claim central banks make is their interfering with the free market helps to smooth the business cycle. This chart completely disproves that claim. It’s very clear that since 1913 and the creation of the FED, that markets have only continued to get more and more volatile. Each occasion there was a slowdown in the short-term business cycle the crash is larger and faster than the previous one. You can’t take away volatility out of the markets, you can only push it further into the future where it’s effects are compounded.
The other narrative that Keynesian economists use is that central banks are essential to help with reaching full unemployment. This chart below comes from Shadow Stats and shows how governments used to measure unemployment.
This particular chart highlights how real unemployment is far closer to 25%, measured in blue, as opposed to the 5%, highlighted in red, that governments claim the unemployment levels are.
Another consequence of this crony capitalistic system is that large businesses aren’t allowed to go bankrupt. Zombie corporations are companies that aren’t profitable and rely on bailouts and cheap debt to be able to service the interest repayments on their current existing debt.
The country that’s built it’s empire on capitalism has now drifted towards a form of crony capitalism, where it’s socialism for the rich and capitalism for the poor . Over 20% of all companies in the US are now classified as zombie corporations, who are only operational because of the massive amounts of capital they’re able to access at near 0% interest rates.
Another interesting accounting trick used by stock companies to kick this can even further down the road is the reintroduction of stock buybacks. Buybacks were actually illegal before 1982 until the SEC made them legal again. They’ve recently been used to drive more air into this asset bubble after the 2008 GFC.
Between 2010 and 2019 companies poured a record $5.3 trillion dollars into buying back their own shares. Companies are even taking on debt to purchase their own shares, which is contributing to fuelling the largest stock market bubble the worlds seen.
Here’s a long term chart of inflation through the late 1800s to present. When the world was on a gold standard in the late 1800s through to 1913, prices would naturally fluctuate as we experience periods of inflation and periods of deflation. However ever since the year 1960 the sea of blue highlights how the worlds only experienced constant inflation and debasement of the currency. At this stage of a long term debt cycle the inflationary monetary system is reliant on ever increasing prices.
Housing bubble bonanza-
The stock and bond markets aren’t the only asset classes having their price distorted due to easy monetary policy. The housing market bubble is another direct consequence of easy monetary policy, as the central banks buy the mortgage-backed securities directly in an attempt to prevent prices from normalizing.
Since the 2008 housing bubble crash, which morphed into a global financial crisis, the above chart shows the FED have been buying massive amounts of mortgage-backed securities.
The FED now owns around 30% of the total mortgage-backed security market. Today in 2021, after the largest bailout in history in early 2020, the FED continues to buy $40 billion in MBS’s each month in pursuit of it’s QE infinity monetary policies.
The housing bubble is a massive example of how wealth inequality grows and festers through asset price inflation. The long term average cost of a house has historically moved in lockstep with wages until the 1970s.
Since 1971 this all changed as we begun the global fiat currency experiment. In most countries and cities prior to the 1970s house prices tended to cost around 2–3 times an average annual income. Since the unprecedented monetary policy embarked by central banks globally, homes in London now cost around 12.2 times an annual income and 12.2 and 9.2 in Sydney and Melbourne respectively.
No, that’s not a typo, average home prices in Sydney in 1973 were $19,000 and in 2020 they’re now over $1.1 million, which is an 9.02% compounded annual growth rate. Similarly in Melbourne, the average house cost $13,000 in 1973 and now costs over $850,000 in 2020 having risen at over 9.2% over the past 47 years. Meanwhile the RBA claims ‘’official CPI inflation’’ has averaged below 4% for the same time period.
The illusion becomes a lot clearer when you chart real estate in gold and not in a money that’s having it’s supply expanded by 5–10% per year.
Interestingly when you measure property prices in gold, Sydney real estate is actually down over 50% since the 2008 GFC housing bubble bust and Melbourne real estate is also down near 50%. This highlights how the value of the fiat currency is being sacrificed in an attempt to push the nominal price of houses higher to fuel the inflationary debt bubble that requires ever increasing prices.
You can see that a dollar back in the day went a lot further — around 11 times further according to the Reserve Bank’s (RBA) inflation calculator. The prices displayed in this Woolworths catalogue from 1973 highlight just how badly our money has been debased.
Wealth inequality
Wealth inequality is widening as the currency is sacraficed to inflate asset bubbles at an accelerated pace. The divergence in wealth inequality since the 1960’s is a clear example of how asset price dislocations contributes to the growing wealth inequality.
The top 1% understand how this inflationary monetary system works. Naturally they hold all their wealth in assets that act as an inflation hedge as they benefit from the continuous easy monetary policy.
As easy monetary policy pushes the price of assets higher while the average wage is stagnant, the dream of owning a home continues to get further and further out of the reach of the average person. This article shows that 69% of Americans don’t even have $1000 in savings let alone the money to be able to invest in assets to protect their purchasing power.
The rich get richer, the poor get poorer.
Lets look at another specific example of how the poor disproportionally suffer from easy monetary policy. For the US ‘’coronavirus relief’’ stimulus package the FED printed roughly 3 trillion dollars and with a 328 million population of Americans we can do some simple maths.
If the money would’ve been distributed evenly $3T/328M= 9.15K per person.
However the everyday person got sent a $1200, 3 months after their jobs and small business got closed and deemed ‘’unessential’’.
On the flip side the cantillionaire class received their liquidity nearly immediately when the FED announced the largest bailout in history on the 22nd of March.
The Stock markets had their fastest 30% crash in history and the FED responded by announcing the largest and fastest bailout to pump the price of stocks back up.
Two recent studies are particularly chilling; one Study shows that the top 1% of the US’s richest people own 34% of the wealth while the bottom 50% combined own less than 1.9% of the countries wealth.
Another study by the Federal Reserve Board’s Survey of Consumer Finances found that the top 10% of U.S. households owned 84% of all U.S. equities, whereas the bottom 50% of households held just 1%.
Sometimes a picture paints a 1000 words.
At this stage of the long term debt cycle the debasement of the currency has to grow at an exponential rate. As the debasement grows, so does wealth inequality and dangerous societal and political ideas begin to grow. This kind of economic system can only continue so long as the everyday person is unaware of how this system truely works. The everyday person feels there’s something not quiet right with the world, they work too hard while their purchasing power is consistently diminishing. The money has never been more broken than it is today as we reach the conclusion of this inflationary monetary experiment.
The time to opt out and store your monetary energy in a savings protocol that can’t be debased has never been more imperative as we accelerate towards the conclusion of the long term debt cycle.
Acknowledgements- Massive thanks to Ben and Colin, the creators of https://wtfhappenedin1971.com/ which is my #1 orange pilling weapon.
