By JC Collins
The post was originally published on January 20, 2015. Revisiting this material will give further insight on the present deflationary period.
It has become common knowledge in the mining industry here in Canada that the large oil companies began holding strategy sessions over a year ago to address this downturn in the market. The “sustainable cost reduction strategies” were slow in coming at first but are now being developed and implemented from one day to the next.
The industry is witnessing layoffs in the tens of thousands with more to come. For each energy sector job lost there will be 4 or more service industry jobs lost as well. This spider web of cause and effect will mean a slow down in the broader economy with reduced revenues for everything from local pubs and restaurants, to clothing stores and regional manufacturers.
The planning sessions which began a year ago tell us that this market turn was not happenstance. The communication lines between the heads of the energy companies and trans-border banks have intersected with the mandates of the international institutions which are engineering and implementing the economic transition to a multilateral framework.
The deflation which we have discussed throughout the last year is now descending in full force. This deflation is allowing for a massive contraction of the money supply to facilitate the transformation of each segment of the international monetary system.
Massive deflation leads to massive liquidation for the purpose of increasing cash balances. As everything from real estate to commodities decrease in valuation we are witnessing a large liquidation of physical assets, such as mining and construction equipment, recreational vehicles, televisions, and everything else that companies and individuals can sell for cash in hand.
This increase in cash balances can be considered an increase in the quality of money. An increase in the quality of money will likely facilitate the transformation of our current fiat based money system to a commodity based system. Quality of money based on commodities as opposed to fiat issuance will lead to an eventual flood of savings from stocks and bonds to savings accounts.
The danger in this natural progression of quality capital from stocks and bonds to saving accounts is underscored by the bail-in threat posed by the larger institutions and governments. But it is these same banking and investment institutions and governments which deflation will harm the most. Though innocent “losers” will be sacrificed during the deflationary period, the imbalances in the system which have been built over the decades, when corrected, will ensure that corruption will be dramatically reduced, if only for a few years before the imbalances begin to manifest in the system once again.
The imbalances as defined in the Triffin Paradox, or more appropriately, the USD global reserve system, has allowed for a gross misalignment and mutation of the global monetary structures. These imbalances have manifested throughout the international architecture as large stock market increases, unsustainable energy costs, such as oil, as well as real estate valuations, and easy access to capital.
The deflation which is now taking place will level these imbalances and allow for the rise of high quality capital. This quality capital will make the transition to a commodity based multilateral monetary structure more efficient and timely.
Every monetary policy which has been implemented by the central banks and financial institutions since the crisis of 2008 has been for the purpose of holding back deflation. Now that those tools, such as QE, are being retracted from the system, we are witnessing the deflation which is required to correct the imbalances and allow for the transition to the multilateral structure.
The storyline is also beginning to be distributed amongst the global media outlets that monetary stimuli by central banks is no longer working and that the accountability and mandates of the central banks will need to be more aligned with the macro economic mandates of the multilateral institutions.
In the post The Globalization of Central Banks we reviewed how the architecture of central banks will be consolidated within this larger mandate. No longer will domestic growth be the only objective of central banks. The larger imbalances created within the international monetary structure by promoting only domestic monetary policies will no longer be allowed.
Managing Director of the International Monetary Fund Christine Lagarde has again called for the implementation of a multilateral framework, and the financial and geopolitical strategies which are now unfolding support this process.
The recent moves by Russia and its central bank are remarkable when considered as methods of disengaging from the USD system. Converting the USD held in its foreign reserve accounts for rubles is diversifying the global monetary structure, and is more about facilitating the multilateral transition and reforming the monetary framework as opposed to replacing the existing USD framework.
The geopolitical move by Russia to change the natural gas routes into Europe is primarily concerned with decreasing the violence in Ukraine by removing the need for that particular strategic position. The attempts of America to maintain economic and geopolitical control over regions of the world which it has controlled under the USD system, such as Europe and Saudi Arabia, as well as Korea, among others, are fraught with the dysfunction of continuing unsuccessful isolationist policies.
The coup yesterday which took place in Yemen is very telling of the geopolitical positioning which has been allowed to take place. Think of it like a company having to reduce its operating costs. The CEO and CFO of the company state that $2 billion has to be cut from the operating budget and the internal policies of the company have to be adjusted to facilitate joint venture projects in regions of the world which are normally outside of it’s existing growth structure.
Each division within the company is responsible for their own cost reductions and policy adjustments. Yet each division is primarily focused on an industry sector which can no longer operate independently from the larger whole.
The larger monetary mandates which are being handed down by the Bank for International Settlements are being implemented much like an international corporation would transform itself while attempting to grow as it becomes a part of a multilateral framework.
The flex allowed in the transition has been taken advantage of by western interests as America attempts to stop Europe from being ripped away from its strategic influence. The inevitable fragmentation of the euro, and potentially even the European Union, should be obvious to most at this point. European countries will position themselves with their eastern trade partners as represented in the Eurasian trade union, with the United Kingdom ultimately maintaining its allegiance with the North American continent.
The moving parts of this transition, along with the implementation schedule, is difficult to capture in one single post, but the gears keep moving and deflation pushes deeper. The fact that gold and the USD are both appreciating together is the harbinger of the multilateral. The fundamentals of the monetary system are now being directed by the multilateral structure as it begins to push up from underneath the ruinous imbalances of the fragmenting USD system. – JC