How to shelter and even grow wealth in two very different economic downturns; deflationary depression or hyperinflationary depression.
So an economic downturn can be characterised by spiralling prices, which is known as a hyperinflationary depression.
As Darren Winters points out; five countries around the world are currently experiencing a hyperinflationary economic downturn; Argentina. Iran, Lebanon, South Sudan and Sudan.
Hyperinflationary economies have in common the erosion of the purchasing power of the local currency. In other words, the currency as a medium of exchange loses the confidence of investors, businesses, and households. Hyperinflationary economic downturns are particularly painful because the state can not borrow its way out of the depression
So an expansionary budget financed by borrowing to support welfare programs to elevate homelessness, and poverty and mend infrastructure to create jobs is no longer an option.
Hyperinflationary economic downturns result in the country’s sovereign debt being downgraded and rejected by investors
Top rating agency Fitch has downgraded the US’s credit rating over its rising debt and a “deterioration in standards of governance”, prompting protests from the White House. Fitch, one of the big three rating agencies, on Tuesday dropped the credit rating to AA+, down one notch from the highest rating AAA.
What do hyperinflationary economic downturns look like in the sovereign bond market?
This type of economic downturn results in a supply-demand imbalance.
The expanding public deficit correlates with an expanding supply of sovereign bonds. Meanwhile, investor demand declines at current prices because risks rise. Hyperinflation erodes the value of the currency.
A bond, a promise to receive a bunch of cash on maturity with yields, is no longer attractive to investors if inflation destroys the purchasing power of the currency. Investors who bought 30-year treasuries in August 2020 with yields near 1% are holding an illiquid asset. There is no market for long-maturity treasuries that were bought three years ago. Investors who underestimated the maturity risk of holding sovereign bonds have two options: hold the bond until maturity or sell into a depressed market and capping their losses.
Notice how the 10-year yield doesn’t stay above 5% for long.
So who is buying these treasuries?
The Fed is most likely suppressing yields by carrying out stealth quantitative easing, and bond buying.
Central banks are creating an artificial demand for sovereign bonds by expanding the money supply and buying bonds.
But this could accelerate the economic hyperinflationary downturn, particularly public spending financed with debt leading to more mal investments and no productive gains. War is inflationary. A 10 million dollar tank with a 4-week life span doesn’t create many goods and services that improve the living standards of its people.
So as central banks continue to expand the money supply by buying sovereign bonds, which investors reject, currency debasement continues until such a point that trust in the currency, backed by nothing intrinsic, collapses.
The economic downturn Hyperinflation in the Weimar Republic between 1921 and 1923, primarily in 1923 resulted in the currency becoming worthless
In a hyperinflationary depression, people resorted to bartering and even using cigarettes as currency to buy essentials.
So how is wealth sheltered and grown in a hyperinflationary economic downturn?
Cash is trash during a hyperinflation currency collapse, which means bonds become worthless paper. Tangible assets outperform as capital flows out of cash into hard assets. Fine art, precious metals, classic cars, machine tools and any company that provides necessary goods or services will perform better than cash during a hyperinflationary downturn. Highly leveraged assets where the price has been artificially propped up with low interest rates will perform poorly.
Availability of credit freezes during a hyperinflationary economic downturn
DarrenWinters is hearing stories about investors offering commercial landlords cash for just the value of the land.
How does a deflationary economic downturn differ?
If an economic downturn is being financially engineered with monetary tightening, central banks prefer a deflationary economic downturn because it doesn’t destroy the bond market and the currency.
The central bank with reserve currency has the luxury of opting for a less painful deflationary economic downturn.
Do you see people in the streets protesting over lower prices and the fact that their currency has increased in purchasing power?
However, deflation and lower prices lead to declining production, falling wages, decreased demand, continued price declines and a deflationary spiral.
Deflation can ripple through the economy, causing some consumers and companies to default on debt obligations.
So, a deflationary economic downturn comes with its unique challenges.
A deflationary economic downturn means holding cash is king.
Bonds outperform stocks in a deflationary economic downturn.
The weaker the currency is compared to other currencies, the more likely the economic downturn will be hyperinflationary
But will the US economy experience a deflationary or hyperinflationary economic downturn?
The 1929 Depression was a deflationary economic downturn. However, the USD gained reserve currency status in post-WW1 and enjoyed periods of public surpluses.
But in 2023, US hegemony unipolarity is challenged and a rising economic system BRICS is growing in economic and geopolitical importance. Nobody is playing by the old world-order rules of the game.
Ukraine, the geographical heart of Europe, has been invaded by Russia.
Israel is pounding the living daylights out of Gaza.
The waning hegemon looks on fecklessly into a new world disorder.
As new rising powers emerge independent of a dollar-centric system, de dollarization accelerates. Ukraine’s absorption into Russia’s yoke could result in Europe pivoting to BRICS, the beginning of the end of USD as a world reserve currency.
A US hyperinflationary economic downturn could be on the cards
Recent insider dealings could give us a heads-up.
Intel Corp. Chief Executive Pat Gelsinger scooped up nearly $250,000 of the stock.
Meanwhile, J P Morgan recently sold bank shares for the first time.
Reading between the lines, it says to sell credit and buy production, which could be the play in a hyperinflationary economic downturn.