Is there really no limit?

Saturday, 7 August 2021 — Melbourne, Australia

[3 min read]

Dear Reader,

Michael, a businessman, couldn’t believe his luck.

His new son-in-law, George, was a successful bank manager full of ideas on how to make money. So, on George’s expert advice, he bought an apartment in a brand-new residential complex 30 minutes from the city.

The area was still in development, but at the rate the country was booming and construction expanding to the outskirts of the capital, the property could double or triple in price soon. Or that was what George had said.

George’s second scoop had massive potential too.

You see, a small province on the seaside was planning to boost tourism by building a new theme park…and an airport to go with it.

So Michael bought not one but two commercial properties inside the airport while it was still under construction.

But this was Spain, 2007.

In 2008, the global financial crisis hit and everything came to a standstill.

Prices for apartments in the residential complex near the capital where Michael bought collapsed to a third.

And in regards to the commercial property in the airport…well, it took quite a while to get that going. Let’s just say that after spending 200 million euros on building it, the only plane in the place for the next few years was a 24-metre statue dedicated to the builder.

George and Michael are fictional; they are the characters from the Spanish movie We Need to Talk. But the actual investments are real.

I was living in Spain at the time, and let me tell you, the entire thing was crazy. One minute the whole country was booming, and the property market was in a frenzy.

Spaniards, like Australians, love property. And during this huge economic boom, many saw the possibility of owning their own home or buying an investment property.

But then, suddenly, Spain went from a booming European economy to PIIGS (Portugal, Italy, Ireland, Greece, and Spain), the Euro’s weakest members.

It all deflated very quickly.

In my mind the unravelling was all to do with credit…or lack thereof.

Banks just closed the taps on mortgages and loans, and the whole thing collapsed very quickly.

On this, I heard a great interview this week with economist Richard Duncan, who I met a few years back. I really enjoy listening to Richard; he always offers very interesting views.

And, he is a bit of a contrarian when it comes to central banks. Basically, his view is that it’s a good thing that central banks applied unconventional policies in 2008 like quantitative easing, because the alternative, a collapse, would have been much worse.

Remember the good old days when growth came from people saving and investing? Those days are gone.

What Richard said was that the collapse of the Bretton Woods system in 1971 basically changed our economy, because back then gold limited how much credit government could create.

His argument is that our economic system works differently since. It’s not driven by savings or investment but by credit creation and consumer spending, which create much faster economic growth. Something he calls ‘creditism’, an economy that no longer has those restrictions.

If you want to listen to the interview, you can do so here. He offers a great summary of what’s happened in the last 50 years.

At around the same time as Bretton Woods, we also saw globalisation, where the workforce expanded to include the whole world.

Central banks now seem to have figured out how to create insane amounts of money and run deficits without creating inflation.

Except for inflation showing up on assets, we haven’t seen much of it. That is until recently when we saw it in things like food and construction materials.

Richard expects this inflation to be transitory because he says the big government spending phase has already happened.

The caveat here is that this is as long as globalisation keeps going and there is no major war.

Have we cracked it then? Is this time different?

I’m not so sure. On one hand, I think we are already seeing some sort of an unwinding of globalisation.

On the other, I think we will keep seeing some more inflation popping up, even if it’s hidden. It’s the only way to make debt smaller.

How long can we really keep kicking the can down the road? Is there really no limit?

I think at some point we may see a crack, a point where we run out of money, or financial institutions get spooked and close the credit taps, much like it happened in 2008.

But so far, every time the market has gotten scared the Fed has pumped in more money and prevented it. We may see even more stimulus soon with the Delta variant worrying governments, so it doesn’t look like they are taking stimulus away any time soon.

There are still massive amounts of liquidity out there. I mean, property is up, stocks, Bitcoin [BTC], gold. There is a lot of money sloshing around.

Obviously, with caution and keeping in mind that this is all a mirage that could vanish at any time, as long as central banks keep pumping liquidity into the system, it’s not a bad time to look for opportunities out there.

Best,

Selva Freigedo,
For The Rum Rebellion

Selva is also the Editor of New Energy Investor, a newsletter that looks for opportunities in the energy transition. For information on how to subscribe, click here.