JP Janssen

Global currency collapse in 2020?

Can the current economic crisis spiral into a full-blown currency crisis? And if so, will multiple currencies fail simultaneously?

I do not pretend to know the answers, but here are my thoughts.

Summary

The bond market (debt market) is very fragile. Quantitative easing (QE) by central banks may have saved it from collapse during the 2008 banking crisis. This time around it’s not only banks, but everything from company junk bonds to government debt the central banks need to buy up to keep the bond market from crashing.

Add trillion dollar rescue packages to the mix, and it becomes obvious that all this money creates inflationary pressure.

On top of this the production of many, many goods is shut down. And this goes on all around the world.

We are flooded with new money chasing less goods. To me inflation seems inevitable. I think it possibly can get so bad that hyperinflation occurs this decade – maybe even all national currencies will collapse.

Okay, a bit more detailed notes:

(A) More money chasing less goods

  • Nations around the world are on lockdown. This means the production of goods are significantly reduced.
  • Governments are very eager to announce rescue packages. $2.2 trillion in the US. €1.1 trillion is the German equivalent. “Everyone” is happy – households will receive direct payments, the unemployed get enhanced aid, small businesses get grants, aid to airlines and big businesses, extra money for states, and tax cuts.
    • More money chasing less goods = inflation
    • Rescue packages seem to me a lot like throwing money out of a helicopter. As a result, misallocation of resources will harm the economy. If bad enough, a vicious circle could emerges where an addiction to further handouts develops. Hence severe inflation.

(B) The bond market is a house of cards

  • In 2008 the global banking system was near collapse (maybe the bailouts did prevent this from happening?). Is the system any better now?
  • Now it’s not just banks, but nations that will be unable to serve their debts. How do you expect Italy or Spain to pay their interests?
    • When some nations stop paying their debts to other nations, how will those affected pay their debts again, and so on? A domino collapse coming?
    • EUR the first currency to fall?
  • USD benefits as the world reserve currency. Should see increased demand as other currencies fail – in the short term. Will USD be the last currency to fail?

(C) Does the central bank have another ace up their sleeve?

  • Virtually all nations have a central bank. Fiat money with central banking, that is.
  • Quantitative Easing (QE) is the central bank buying assets (especially bonds) to spur economic activity. This increases the money supply, thus leads to inflation. In the US, this began in 2008 for the first time since the Great Depression of the 1930s. QE lasted until 2014 with a $4 trillion increase in the money supply. March this year a new round of QE was announced.
    • The central bank basically buys assets no one else wants to buy.
      • They issue new money to make these purchases, equivalent to printing money.
    • The QE of 2008-2014 boosted the bond market (i.e. lower interest rates), which helped pump the stock market, and arguably spilled over to the economy, boosting GDP and lowering unemployment.
    • This time they will likely buy junk bonds too, i.e. the FED bails out companies.
  • Whereas last decade the FED mainly inflated the stock market and bank bonuses, this time around the QE printing press is aimed more at the wider economy.
    • The same goes on around the world. Replace ‘FED’ with any other central bank.

Putting the pieces together

My point B (the bond market is fragile) was countered by C (QE) at the financial crisis a decade ago. Without QE back then, maybe currencies would indeed have collapsed. No one can ever know. What we do know is that QE was used and the economy did survive. It is therefore natural that governments, economists and (of course) central banks believe the same remedy will work this time around too.

My argument is that QE’s side effects will be too large this time. The inflationary backlash will hit the wider economy much harder. This is where A (less production) comes into play. Even businesses with no production shall sell their junk bonds to the FED. This may save businesses from bankruptcy – so that (effectively unemployed) employees can still collect their paychecks.

This time it’s global

The most difficult part is predicting how the different currencies will correlate to one another. I guess they will devalue in waves. Perhaps one currency, or the currencies of one region, will fall at the same time. “Everyone” sells the poor currencies for USD, with the exception of course, being their respective central banks buying up their worthless currencies.

As we speak, the Norwegian central bank is buying NOK to support its currency after it fell almost 30% to the USD in just two weeks.

Norway was hit by the oil price crashing, but with the economic problems piling up, most countries will, at some point, see their exports hit hard as the economic dominoes keep falling.

The USD is perceived a safe haven but remember the US is the largest debtor nation in the world. At the end, who will be around to buy US dollars?

As a final remark, I am an optimist. I just do not believe in fiat money or central banking. Something better will emerge out of this mess.

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