UnStoppable Rise In Interest Rates By Alasdair Macleod for Gold Money
In recent articles I have argued that the era of a financialised fiat dollar standard is ending. This article takes my hypothesis further and explains that it is not just the emergence of new commodity backed currencies in Asia that will threaten the dominance of Western currencies, but the Fed’s failing monetary policies and those of the other major central banks. An unstoppable rise in interest rates will in large part be responsible for their demise.
Financial markets in thrall to the state underestimate the forces collapsing the financial bubble. Even the existence of the bubble is disputed by those within its envelope. But financial assets represent most of the collateral securing the banking system, and their collapse triggered by higher interest rates will take out businesses, banks, even central banks and make financing of soaring government deficits impossible without accelerated currency debasement.
Will central banks try to preserve financial asset values to stop the West’s financial system from imploding? Keynesian theory demands increased deficit spending to counteract the contraction of bank credit.
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As long as this is the case, the planners will destroy their currencies — confirmed by the John Law episode in 1715-1720 France. It is from this fate that China, Russia, and the architects planning a new Central Asian trade currency are planning their escape.
End of an era and how it all started
It’s all about interest rates. Rising interest rates undermine financial asset values and falling rates increase them. From 1981 until March 2020, the trend has been for the inflation of prices to subside and interest rates to decline with them. And following Paul Volcker’s interest rate hikes at that time, this is when the era of economic financialisation commenced.
In the early eighties, London underwent a financial revolution with banks taking over stockbrokers and jobbers. It was the end of single capacity, whereby you were either a principal or agent, but never both.
America responded to London’s big-bang by rescinding the Glass-Steagall Act, which separated investment from commercial banking following the 1929—1932 Wall Street Crash. Money-centre banking was about to go all-in on financialisation. Increasingly, manufacturing of consumer goods was moving from America and Europe to China and the Far East. The Wall Street megabanks had less of this business as a proportion of total American and European economic activities to finance. Small, local banks, particularly in Europe, continued to be the financing backbone for small enterprises.
