If we go back in history, this is starting to look similar to the early days of the Great Depression.
The collapsing asset prices in 2022 with over 30 trillion US dollars slashed off investment portfolios as central banks attempted to contain inflation with breakneck tightening and pricked the everything bubble.
Last year, 2022, was the crash that mainstream brushed under the carpet.
Investors who lose the least in a Great Depression win
“We are invested in 9,000 companies in 70 countries. There is just nowhere to hide,” said Nicolai Tangen, who manages Norway’s 1.2 trillion US dollar pension wealth fund, one of the largest in the world. The fund posted record losses of $164.4 billion in 2022.
Norway pension fund losses are far from being an isolated case
So the most conservative experienced investors, pension fund managers, and banks are losing money.
Erratic monetary policy could have triggered another great depression
The period of easing from 2009 to 2021 resulted in trillions of dollars of currency creation and near-zero (some cases negative )interest policy.
So post Great Recession of 2009, to global pandemic lockdowns in 2021 money supply took a moonshot.
Exhibit 1; Chart of FRED ECONOMIC DATA M2 (money supply) shows M2 expansion over 80 years.
M2 has been on a relatively stable upward trajectory from the 1960s to 2000, then from 2009, 8.2 trillion USD to its 2022 peak M2 reached 21.7 trillion US dollars April 2022.
As Darren Winters points out; in the last 13 years, the Fed created 13.5 trillion USD. Previously, it took 50 years for the Fed 50 to create 8 trillion USD.
Unrestricted money creation leads to hyper-financialized markets, and excessive liquidity chasing too few assets created the everything bubble. The Fed’s greatest money-easing experiment spanning over a decade aided and abetted hyper-inflated asset prices across the entire risk asset spectrum.
Breakneck tightening could trigger another great depression, a crash in asset prices, a collapse in investing, spiralling unemployment,political instability and war
The fallout of seven Fed fund rate hikes in 2022, the most aggressive tightening in decades, has undermined the collateral base of Western finance.
So a decade-long of hyper-financialized markets led to excessive government and household debts.
The US national debt is fast approaching 32 trillion US dollars, which gets partly financed and monetized as treasuries.
With banks flush with cash and the Fed buying treasuries, a process known as quantitative easing, treasuries were perceived as a safe haven asset. The US government is least likely to default on its loan obligations since it can borrow from the Fed to make loan payments.
So in the age of zero and near-zero interest rates, even a 1% yield on a long-maturity treasury is viewed as attractive by conservative investors.
The Fed would buy treasuries putting a support floor price for treasuries. So banks, pension funds and insurance companies pile into safe haven treasuries, perceived better than gold as they attracted a yield and the Fed had your back covered.
Safe haven treasuries are perceived to be so solid commercial banks make loans to each other using treasuries as collateral to underwrite loans.
The great depression and the mother of all credit squeeze is on deck
Those who gave blind trust to the Fed believed that inflation was temporary, transitory, and maybe even sticky. So they continued buying safe haven treasuries, oblivious to the maturity risks of holding treasuries during inflation and rate hikes. But, as it became difficult to hide inflation, the Fed kept hiking and crashed the treasury market, which had its worst year in history, worse than the great depression.
Darren Winters explains; the mother of all credit squeeze is now on deck, as many lenders rebuild their collateral base as they realize safe haven treasuries with long maturity they piled into a few years ago are now deep in negative territory. It seems these days, the promise to pay a bundle of dollars in more than five years, with yields of nearly 4% is no longer sexy. The music stopped, and those scrambling for a chair were left holding long maturity bonds.
Great Depression with deflation mass unemployment or great pivot to loosening with hyperinflation
Inflation continues burning bright, and the Fed has almost blown the collateral chains of the financial system with consecutive rate hikes.
Fed’s inflation fight is over, the damage is done and if history is anything to go by the Fed will choose the path of least resistance and start loosening.
A great depression with hyperinflation looks more likely
But the great depression with WW3 is what could be the killer. Russia and US allies are engaging in a shooting war. The veneer of a proxy war has melted away, with two great nuclear powers openly fighting and dying in a war, daring each other to be the first to escalate the conflict into nuclear war.
While mainstream headlines were covered with UK PM Sunak saying 100% of women do not have penisis, the most important story of the month, if not year, flew under the radar.
A major NATO centre in Ukraine has been destroyed, three hundred people killed along with dozens of high-ranking NATO officials at the top level with a hypersonic Russian missile.
The attack was payback for NATO and Ukraine attacks inside Russia on residential non-military targets.
Two great nuclear powers are locked in an existential war with no higher authority. In the one corner, Russia, fighting for what it believes to be its survival sensing that it could be the next resource-rich country to be pillaged and plundered, and in the other corner, the hegemon struggling to keep its USD throne.
Two great nuclear powers are fighting for survival, daring each other to launch nukes.
For the growing jobless and partly employed, it already feels like a great depression, but depending on how this war pans out, there may be no winners.