It seems as though the asset bubble is out of control with governments shoring up their pandemic ravaged economies with more cash and unusually low interest rates. And a lot of the monetary influx is not even investment that will pay returns, it is mostly bridging ordinary people and businesses through this crisis. The unprecedented liquidity has pushed up stock and housing prices, sectors that were already quite inflated after the last major crisis in 2008 when the same liquid push was made by governments and central banks. And so the talk about impending monetary doom gain momentum: invest in gold, get bitcoin or find alternative assets that can weather a storm where our valued currencies stop being worth anything. And there is good stuff to read up on, the 1975 book ‘When Money Dies’ is a bestseller again. It explores the hyperinflation that contributed to the eventual collapse of the Weimar Republic.
There’s three questions that need to be addressed here: (1) can we keep on printing money; (2) what will actually happen in a real monetary crisis and (3) where do we store our funds if indeed or money starts to lose its value so very quickly ? I will skip the first question for now (as it seems we keep doing it anyway), but it is worthwhile to assess what happens if your dollar or euro becomes worthless overnight. A few year’s ago I read and reviewed Lionel Shriver’s ‘The Mandibles’ which is a work of fiction that explores a world where both Europe and China have had enough of lending to a bankrupt America and where the bill has become due. Forced repayments in physical assets that still have real value contribute to a total break down of US society and wipes out the fortunes of a family which Shriver tracks over a number of years.
What’s telling is how quickly a society collapses when some of its non-physical structures (and with that I mean money, laws, contracts etc) disappear. What is equally informative is how plausible this scenario is, a currency becoming worthless, a government under pressure and a population that is left to fend for itself, basically going into full subsistence mode. Chaos ensues and the Mandible family falls apart rapidly in a monetary sense, but they manage to bond as people that attempt to survive. That journey leads them to rural areas where they farm their own food and survive. Shriver herself said about he book:
"I wanted to write a dystopic novel set in the very near future … I didn't think there had been a lot of novels written about the dystopic economic future. Having, like the rest of us, gone through the whole 2008 financial debacle I thought I had plenty of material. My reading on what happened in 2008 is that we dodged a bullet. I feel as if that bullet is still whizzing around the planet"
Think about how that ‘bullet’ made its mark with the pandemic that we are going through right now. Now, what Shriver has done is formulate a compelling thought experiment and she analyzed what could happen. In effect, she has given us a framework to think through on how we should prepare for an impending monetary meltdown. Or: how to prepare and what assets to buy? So here’s my thought experiment. If money becomes worthless and our market economy collapses, useful hard assets will become extremely valuable. So with that in mind selling my highly inflated house in the Vancouver area today and buying a plot of land in a rural area (relatively cheap today) where I can grow vegetables and livestock to survive may be the smart move. It will also insulate my family and me from the chaos and crime that is guaranteed to envelop urban areas. Residual savings after the house sale are to be converted into a basket of value storing devices like gold, silver or bitcoin, as stock markets will have been wiped out. It is tempting to think about some equity positions in non-publicly traded companies that provide essential services or breakthrough tech that can play a role in a completely restructured society. And on a daily basis we barter goods.
Look, this is a a bit of thought experiment. I am interested to hear what people think. In all likelihood I will not sell my house, but it is time to start building a hedge against the rapid devaluation of money that we are witnessing today. In doing that we have to look for alternative assets. And read Shriver’s book, it’s really good.
We've seen the effects on nations when their currencies devalue (referencing non-hard currency nations like Venezuela). It brings dramatic inflation, violence, the limitation of movement, change in leaderships to strong-men leaders (democratically or non-democratically elected), etc. I think if there is a similar move in hard currencies (i.e. rapid devaluation), we'll probably see the same, with the effects amplified 10x fold.
I think the difference between hard currency nations (US, Euro, Japan) versus non-hard currency nations (besides wealth, productivity, GDP, etc.) is the essence of how things are moderated between internal institutions (i.e. from Canada post to Loblaws to the constitution to the fire & police department, schools, Nike, Google, etc.). These internal institutions are akin to pillars of society, that upholds free speech to the fabric of society, trust, reliability, dependency, perception of stability, sanity, etc. If that breaks down (devaluation of currency being the catalytic moment), then I would want to be as far away from big cities as possible and would wish our kids were the head of gangs/mafias/triads instead of banks/engineer firms/etc.. If that is the case, I think classic doomsday hedges are the best bet, which includes gold, silver, etc. to other types of commodities and things like access to sustainable freshwater, etc.
Either way, I personally don't think the pendulum will swing that far to the right (or left). So my economic bets NOW would be the typical hedges. Also, bets on dislocation of value through equity or bonds or even FX.
However, I think the QE that is going on, be it through lower interest rates to the printing of cash is a disturbing policy as that exaggerates asset prices, widens the rich/poor gap, limits the channel for wealth creation to creating zombie companies.
Aside from just economic bets, what I would like to see/invest, are companies that continue to strengthen the existing internal institutions. Maybe not just strengthen, but to better them. To make it more inclusive. To make society more inclusive, so that each community in itself, is an internal institution that upholds the fabric of society. I've seen so many companies being funded now, that are just about users. I have people asking me to buy into Bytedance at $50bn USD. Bytedance is so big that FB had to clone it with Lasso (now shut down) and add resources to further apps that are, arguably by some, weakening the internal institutions by playing to our emotions, rather than to our brains.
We all have a part, to fund startups to established enterprises, that are strengthening society as a whole (and not just to the wallets of some). Continue the mechanism of having governments that can change with society through peaceful means (i.e. voting) and peaceful channels (i.e. civic engagement). Continue to stabilize mandatory institutions to make them dependable, enriching trust rather than distrust. Make sustainable changes to society that can be far-reaching and endure generations.
With that, I'll read Shriver's book because I too need a reminder that there is one instance, of a parallel universe, where Shriver's book is reality.
Another part of this is to think through the long term implications of demographic change. Japan gives a good sense of one of the possible paths, and they have done some things very well (restructuring the economy to own critical high value value points in supply chains) and other things poorly (huge investments in infrastructure not needed by an evolving economy and politicians and industry leaders resisting necessary reforms). China will go through a dramatic demographic transition over the next 100 years that will bring population down to 400-600 million people. The same is true, on a slowe timeline, of India. Canada and the US can mute this, for a while, through immigration, but not forever. Anyone with long term responsibilities needs to be thinking out the different ways this could play out.