Thanks to the seemingly limitless monetary and fiscal expansion, financial markets are booming. However, structural headwinds are underway. The common belief is that governments and central banks implement their MMT-based policies to spur growth and support the recovery, but in fact, they are weakening the entire economic system and the very fabric of our western societies. The long-term results will be declining prosperity, social unrest, and the incremental loss of formerly inalienable rights.

We may never fully know where the coronavirus came from, or whether it was a natural or man-made phenomenon. We may never be certain whether the cocktail of government responses – the lockdowns, the masks, the vaccinations – were the best possible strategies to contain the pandemic. What we do know at this point is that some groups have benefitted as a result, while others suffered badly. What is also clear is that the era of “Big Government” is here to stay, with all the consequences and dangers that come with it...

Fundamental Headwinds Ahead

Years of ultra-loose monetary policies have fueled credit and financial market bubbles that expose the world economy to substantial risks, more so than is generally understood. These risks are not limited to financial markets. They will spill over into the political, regulatory, and social dimensions of our daily life.

In essence, the last decade or so of “Easy Money” has made EVERYTHING more abundant than it used to be. Liquidity was found at all levels: money, capital, goods, services, and consumption. So far, so good: wonderful, indeed…

However, the true problem emerges when that liquidity is accessible to all, without an adequate price tag attached to it – without a justified RISK PREMIUM. The result is MISALLOCATION. When the risk premium is too low, the quality of money allocation sinks. The quality of capital investment, goods, services, and consumption deteriorates. That is the big picture effect of all that easy money in terms of both private, as well as public, finances.

After the market volatility we witnessed last year, 2021 so far has appeared relatively "calm". Investor sentiment is generally positive and soothing statistics are dutifully reported. The result is a deceptive lull, a false sense of security. The general perception is that everything is getting back to normal. Politicians and central bankers have once again saved the world and they will continue to protect and manage our future. The party goes on...

«Our entire society has forgotten how to take responsibility. We have forgotten that life consists of setbacks and that you have to have safety margins for difficult times».

~ Felix W. Zulauf

Unfortunately, this lull may soon be over and central bankers and governments, if anything, have made things worse. At BFI, we expect more volatile territory ahead: as new covid variants result in another round of government restrictions, and as the fundamental issues, those that already existed before the pandemic, are “re-discovered”, the global economy is likely to slow down. The fundamental problems, namely the many flaws of the fiat currency system, the decades of loose monetary policies, and the effects of large-scale capital misallocation, are still the biggest challenges investors face today.

However, apart from the acute economic risks, there are also serious sociopolitical and regulatory issues linked to these expansionary policies that merit careful consideration as we head into the second half of 2021.

Big Uncle Sam, and His Fat European Buddies

Uncle Sam is a common national personification of the U.S. Federal Government. In Europe, the names may differ, possibly “Onkel Ludwig” or “Zio Giovanni”. However, no matter what they are called, all of them have very similar stories and characteristics.

Sam, for instance, was once a strong and athletic young man with good and idealistic intentions – to protect and support the people in his American village. Unfortunately, he did not keep up his exercise regime and discipline as his village flourished. Instead, he started getting a little complacent, a bit aloof, progressively overweight, and increasingly bossy.

Today, unfortunately, that athletic and idealistic young man is no more. He has turned into a fat, slow, inefficient, and autocratic village despot. He is piling up debt as if there was no tomorrow. And he still likes to get his daily meal served on time and as he likes it. He will get really grumpy and might even turn violent if his dinner – your tax dollars – is not served just right and on time. As for the village itself, it certainly looks like the good times are done and gone. Over the years, it has become increasingly difficult for the villagers to satisfy Big Sam’s voracious and constantly growing appetite.

At times, the villagers complain. Some even try to cheat. But Sam, Ludwig and Giovanni will not have any of that. Instead of getting into shape and helping the village get back onto a path of prosperity, all of them are now mainly interested in preserving their "kingdoms" and ensuring they get what they "rightfully deserve"!

It is against the backdrop of budgetary imbalances, record debt levels and fiscal irresponsibility that we have seen a widespread rise in new Big Brother regulations and intrusive government decrees over the past few years. As governments grow more and more desperate, faced with the consequences of their own actions, they are resorting to increasingly aggressive measures to enforce taxation and to effectuate large-scale transfers of wealth.

As social security and health care systems in Europe and America are rapidly deteriorating, as middle-class baby boomers grow older and will soon expect to receive what was promised to them, the failure of the system will become obvious. Pressures are growing on governments to fix the problem, but their "solutions" are largely based on "improving our monetary and fiscal policies", which, in practice, simply translates into "mo’ money and mo’ taxes".

Conclusions

Despite the mainstream narrative of the world economy “going back to normal”, the possibility of a global financial and geo-political crisis remains very high. Given the current debt levels, rising inflation combined with rising yields can lead to a credit crunch the likes of which we have never seen in modern times.

With public and private debt running rampant, a very fat and powerful Big Brother has resorted to employing repressive rules and stringent regulations. As an independent thinker, you absolutely need to recognize the implications of an increasingly fussy and egocentric Big Brother who puts himself ABOVE THE PEOPLE… AND ABOVE THE LAW.

Historically, this is the recipe for large-scale wealth transfer… and those investors who procrastinate on taking adequate measures will be on the losing side of that transfer. Those who prepare will survive and even benefit from what is coming. Now is the time to plan ahead and to contemplate the answers to the critical questions of WHY and HOW to best protect and grow your assets through solid, multi-jurisdictional strategies.