From towering debt to bitcoin’s boom, why 2021 is the year of living dangerously
- Vaccination is unshackling major developed economies and money is flowing into real economies, sparking overheating and inflation
- This may spell the end of the speculative boom in both traditional financial markets and new products like cryptocurrencies and NFTs
In 2020, four major central banks added US$7.8 trillion in quantitative easing and, according to the Institute for International Finance (IIF), governments of the top 61 major economies expanded debt to 105 per cent of gross domestic product – from 88 per cent in 2019 – an increase of US$12 trillion, in response to the Covid-19 pandemic.
Financial markets could face the double whammy of funds being diverted away from speculation to the real economy, combined with diminishing aggregate money supply. It’s clear 2021 is the year of living dangerously.
Now this phenomenon is affecting the US, Britain and many other major economies. Property inflation has a shorter path to consumer price inflation than pure financial inflation. It affects living and production costs.
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Given the combined impact of real estate and commodity price inflation, high-single-digit consumer inflation seems to be baked in for 2021.
The same governments appear ready to add another US$10 trillion in government debt in 2021, which would increase inflationary pressure.
It would then be too late to avoid a financial crisis. Now is the golden era of financial frauds. When the tide goes out, few will be decently clothed, and the global financial market might resemble a nudist beach.
Archegos reportedly lost US$20 billion in a booming market, while the banks that served it lost over US$10 billion. It appears that big banks are flying too close to the sun again.
Financial sector debt has topped 2007 levels globally, increasing by US$4 trillion globally last year alone. It must be leverage provided to speculators by big banks.
No other smelly socks, even worn by you, would smell exactly the same. Hence, they are essentially NFTs. If you are famous, and you can make a digital version of them, that could sell for a tidy sum.
NFTs open up a channel for the unlimited creation of financial value, as long as central banks keep pumping in liquidity. This democratisation of creating bubbles anywhere and by anybody is highly destabilising for the financial system.
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You never know how much liquidity someone or something could suck away from main markets for trading in, say, a digital rendition of Cristiano Ronaldo’s smelly socks and football boots.
A trillion here and a trillion there soon add up to real money. As potential demand for money for speculation is unlimited and fast, can central banks keep playing the same game?
World debt, according to the IIF, reached US$281 trillion or 355 per cent of GDP in 2020. It increased from US$142 trillion in 2007, which preceded the 2008 global financial crisis. Low interest rates have made high indebtedness more stable, because it becomes easier to borrow more to pay off old loans.
This year is a turning point one way or another. The inflationary trend is keeping central banks from adding more liquidity, even if they don’t unwind their assets, while the real economy demands more money to keep pace with inflation and more speculative assets compete for liquidity, too. The party is passing midnight, just wait for the big bang.
Andy Xie is an independent economist