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Economics-101

Stock market not the worry

Three weeks ago, I penned a column, It’s Later Than You Think, to discuss what I felt was a significant economic event likely to occur before the end of this calendar year. It appears that things are moving faster than I expected, as the unwinding of our global financial system is underway already. 

I’m surprised to see this in the last couple of weeks of August. Typically, the Powers That Be do not allow significant events to unfold until we are well into September or October. I’m not going to list all the statistics here: these can easily be accessed by doing a little research on your own. Suffice to say, the Chinese stock market is down 40% since June of this year, the U.S. stock market is down 10% in ten days, and Canada just announced that we are officially in a recession . . . that was shocking news.

So where do we go from here? 

Well, I think the future is clear. The U.S. Federal Reserve will defend the stock market to the bitter end. A sinking stock market is the final sign that an economy is imploding, therefore we will likely hear an announcement of further quantitative easing out of the U.S..

Now, I doubt they will simply call this QE4, since QE1, QE2 and QE3 all failed miserably. The Powers That Be are likely working right now on a fancy new patriotic name for this new round of money printing. I should mention this new injection of money will probably be bigger than all of the previous rounds of money printing combined.  The result will be a rallying stock market, at which point the U.S. Government and U.S. Federal Reserve will point to the stock market and say, “Look, all is well, the stock market is rebounding . . . aren’t we brilliant”? 

Of course, the unintended consequence of all of this money printing will be hyperinflation. Sure, the DOW may be be trading at 20,000, but that 20,000 will buy you less than a 10,000 DOW would have bought you ten years ago. 

Yes, the final battle of the global financial meltdown will be fought in the currency arena. Who will win? Simple:  The U.S.. But remember, the winner of a currency is the biggest loser, as the central bank has depreciated the currency more than all other central banks. 

Many people and financial analysts will argue that hyperinflation simply cannot occur in the U.S.. The funny thing is, what the U.S. Federal Reserve is doing right now with money printing is exactly what Germany did in 1923, Zimbabwe in 2008, and hundreds of other countries have done throughout history. 

Each time resulted in the same outcome: Hyperinflation. However, when the U.S. repeats these same actions, for some reason it is supposed to result in a different outcome. This logic is like saying that combining magnesium and water in any country in the world will have an identical chemical reaction. However, if you combine these elements within the borders of the U.S., there will be no reaction whatsoever. 

That's financial logic for you.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.



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About the Author

Derrick Nicholson is a Currency Strategist. He has been in the industry for the past 20 years, and specializes in mitigating currency risk for companies doing business outside of Canada.

Questions and inquiries can be directed to Derrick at [email protected].

 



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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