Why Crypto might be the best hedge against the next financial crisis (for dummies). PART 1
I will try to make this post as simple as possible so anyone can understand what’s coming and why everyone should allocate a small percentage of their wealth towards digital assets. People should mainly focus on Bitcoin if you are looking to hedge against this scam/ponzi scheme created by governments and central banks.
In order to understand the value proposition of Cryptocurrencies you have first to understand how corrupted and intervened the financial system is. We’ve been told by the media and governments that the 2008 crisis was due to deregulation and the jungle law of capitalism, however bailing out banks with tax payer’s money or the monopoly of money in hands of central bankers is far from being a free market society.
We will see how interventionism in the monetary policy creates financial bubbles and crashes and why I think we are about to experience a new financial crisis very soon.
Let’s see some signs of a possible financial crash :
- Low interest rates: Think about interest rates as the cost of money ( get financing ), as other asset class is tied to supply and demand. The more money is printed by central banks (supply) the cheaper and easier it is to get in debt (government debt, mortgages, corporate debt etc..) as supply increases. On the other hand, money printing punishes savers as the value of your hard earned government money shrinks over time due to inflation*.
Note: inflation is nothing more than the loss of purchasing power of a currency. Inflation can also be seen as the taxation of the poor, as inflation hurts the small pocket the most because they lack the financial mechanisms to protect themselves. Remember, rich people tend to have assets to hedge against inflation (real estate, stocks, commodities etc..) while the poor rely on fixed income (workers or retirees).
The true meaning of inflation is very important to understand, as many politicians will blame business owners for “raising prices” of products because of their “greed”, so price control politics will emerge which always leads to shortages (like in Venezuela). But it’s actually governments fault who indirectly steals the wealth of their citizens by printing paper money (think about what’s happening in Argentina when the Peso plunged 20% overnight this year) because it’s easier to steal the population through inflation rather than unpopular taxes.
Did you know excessive money printing by central banks is the cause of all of these financial bubbles?
Cheap money artificially incentivizes debt taking which leads people to take higher risk in investments: AKA malinvesting, while it punishes savings ( you don’t get interest in your money as it’s printed by millions a day, making it worthless).
Think about the housing bubbles of 2008 and 1929,anyone could easily get mortgages or the 1929 crash, also fueled by cheap credit since 1920.
The truth is, every single financial crisis is preceded by a credit expansion and to develop a better understanding of this concept, look into the Austrian Business Cycle Theory.
- Negative interest rates in Europe and Japan: Can you imagine living in a society where banks pay you to take out a mortgage? So you are paying back the bank less than the amount of money you borrowed, sounds like a good deal? That’s actually a real thing and it’s becoming more popular.
On the other hand, people will have to pay the bank to store their savings, when the role of banks is to be an intermediary between lenders and creditors, so their business model should rely on loans backed 100% by REAL savings, however as the whole economy is distorted by free credit to banks plus fractional reserve (means your bank can legally lend 10 times more the amount of your deposit, so essentially creating money out of thin air ) private banks has become an elite of cronysm at expenses of their clients and the tax payers (remember they have to bailout them when the whole scam is revealed)
If this is not enough for you to rethink your common knowledge, here is another example:
Imagine you have a business idea and you need financing, interest rates are at 1%, your projected revenue doesn’t cover the cost of the loan, which is considered as a bad investment right?.
Now interest rates are below 0% and your investment “makes sense” .What do the low interest rates suggest? Which kind of investments are central banks incentivizing ? Clearly they are promoting non profitable investments so the proliferation of non sustainable businesses that relies in debt, this is also called zombie companies or zombification (remember these words, you will hear it more often).
In other words, businesses unable to reduce what they owes but can repay the interest on its debts. However, if interest rates rose, it would probably cease functioning as a business.
This is a gigantic transfer of wealth from people that don’t have stocks, real estate and don´t have access to cheap debt to people who own stocks, invest in real estate and have access to cheap debt which they use to buy even more assets artificially driving prices up and beating inflation. It’s a bailout from savers to indebted.
Artificial cheap borrowing creates all kind of bubbles that could be the trigger of the next financial crash. In part 2 we will take a look at bubbles happening at the present moment.
Published at Thu, 12 Dec 2019 19:08:57 +0000
{flickr|100|campaign}