Central Banks Will Be Forced To Practically Turn All Financial Assets Into Something Akin To Centralized Shitcoins


Do we have our financial house in order?

The valuations of stocks are fundamentally based on the price to earnings ratio and future opportunities to grow the business and increase earnings. When the price of a stock is low in a situation where earnings per share are high and/or the industry in which the company operates in has a bright future and the company is well positioned to grow, the stock is cheap. A stock is expensive, that is, its current value is on a shaky foundation, in the opposite situation.

The entire developed world is plagued by high levels of debt. National as well as local governments in large parts Europe are in a position where the only thing between them and bankruptcy is the European Central Bank that engages in large scale open market operations where it buys up sovereign bonds, keeping interest levels manageable for the time being. Stock markets are being propped up by central banks as well. To keep the debt situation under control, the ECB keeps its benchmark rates negative, that is, charges banks money for keeping their money. Those interest rates were negative in most of the euro zone countries in October 2019.

Because economic growth is still not stimulated enough to lower unemployment and help governments get their debt situation under control, the European Central Bank is forced to continue its extremely light monetary policy. As a result of the bad situation in the euro zone and the Chinese efforts to keep the renminbi low by continually buying foreign currencies to bolster its reserves, the US dollar has gained strength and the valuations of dollar denominated assets have gone up. Because of that, president Trump has been demanding that the Federal Reserve lighten its monetary policies, too, as Trump is ready and willing to respond to China's measures in full.

There is little reason to hope monetary policies would be effective at fueling growth in the developed world. With the exception of those countries in the developed world with high levels of immigration such as the USA, the aging of the populations is a major fundamental reason for sluggish economic growth as it limits the size of the work force and strains governments financially making tax cuts for most wage earners unfeasible. Another one is accelerating technological change that has led to the shrinkage of the middle class through a loss of white collar jobs without a commensurate increase in the supply of skills in high demand.

The debt situations is not getting any better particularly in Europe. The Japanese government has massive debt but it is owed mostly to Japanese individuals and corporations taxable by the Japanese government. The problem of work force shrinkage is, however, particularly bad in Japan and the Japanese work so much overtime that increasing hours worked cannot help. The Chinese manipulate their currency to attract foreign investment and to maximize the rate of technology transfer from overseas. The Fed is left with little choice but to lighten its monetary policies further to manage domestic debt problems and to hold its own in the trade war with China.

When the size of the working age population in working life is too small, helicopter money, which would be the overwhelmingly most effective way to bolster demand, is off the table for the time being. Instead, central banks will continue open market operations to buy sovereign debt and other financial assets to an increasing degree.

What the above will do to, say, stock prices is interesting. If consumer demand stays low, most businesses will have trouble turning profit. Despite that, new money constantly pumped to the financial markets by central banks will keep the prices of financial assets high.

If that process goes far enough, all stocks and other financial assets will begin to look like actual shitcoins in the sense that their valuations are based on nothing and that the source of that valuation will be controlled by a roomful of people in suits. Of course, they will also lack all the other good qualities afforded to cryptocurrencies by virtue of them using DLT technology such as censorship resistance.

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