Manufactured inflation leads to QE’s failure, which ends in asset confiscation
The underpinnings of Quantitative Easing (QE) can only exist indefinitely in a low inflationary environment. I often think of the Bank of Japan’s ongoing 30-year experiment in this regard. But, with price inflation moving higher, I theorize that QE’s lifespan will be drastically shortened. If the monetary and fiscal authorities cannot, or refuse to, bring this manufactured price inflation under control, QE will fail by mid-decade as investors will begin to lose confidence in the central banks’ (CBs) abilities to continue maintaining the large gap between interest rates/ bond yields and price inflation.
I submit that the process that resulted in this inflationary mess was not from mismanagement or chance, but rather part of a well-calculated plan. Thus, if and when QE fails, the nations-states will resort to other means (e.g. de facto asset confiscations or heavy taxation) to fund their budget deficits. Let me explain.
The step-by-step process to deliberately destroy QE
But before we discuss asset confiscation, we need to analyze how the current inflationary dilemma was engineered using COVID as a cover.
1) The COVID stimulus and deficit spending packages differed from all other previous forms of deficit spending as the money was deliberately handed out directly to the end user. The money was not “sterilized” and offshored like in previous instances, but designed to cause a large uptick in aggregate demand, referred to as “demand-pull.”
2) Concurrently, the aggregate supply chain was intentionally constricted via the engineered COVID supply shock. Via QE as a wealth consolidation mechanism, the globalists now control all the primary factors of global production and distribution. I also observe how these truck convoy protests must be part of the plan as they only help to create the current supply-side pressures.
3) The Fed has been totally behind the curve with regards to mounting any true response to the massive runaway inflation. The longer it delays, the more difficult the inflationary problem becomes to solve without blowing up the markets and bankrupting the governments in the process.
4) There has been a conscious effort by the monetary authorities to relax the proper treatment of distressed debt, thus hiding the true rot in the debt markets.
5) Coincidently timed war and military pressures are threatening the supply chain further. War is often a great excuse for the monetary authorities.
Six months ago, I placed the odds of QEs failure at about 10-15%. Three months ago, I raised that to about 20%. Today, I say there is a solid 30-35% chance that QE will fail by mid-decade. Why? In order to tame this global inflation dilemma, we could see a scenario that may mirror the actions of the Paul Volcker-led Fed of the late 1970s-early 80s. In that situation, the Fed raised its overnight rate to as high as 20%. Volcker did tame inflation, but the world was much less indebted back then.
Also, how much longer can the 10-year UST be yielding five percentage points less than the rolling 12-month CPI? The longer this persists, the greater the odds of bond investors throwing in the towel.
The assets that will most likely be confiscated first
If QE dies, how will governments fund their fiscal deficits and stay in business? The most likely outcome will be some sort of asset confiscation and punishing ad valorem taxation scheme.
Recall the environment in 2008-2010. There were serious conversations in the political realm regarding the effective confiscation of pension money, as well as bank “bail-in’s.”
Except in a few circumstances, none of this ever came to fruition, because QE was promulgated, which made all of those conversations a moot point. In essence, there was no need to confiscate retirement money or bank deposits in exchange for sovereign debt securities or bank equity. QE solved the dilemma of fiscal deficit spending.
Fast forward to today, and it seems that QE is being set up for a planned demise. If that’s the case, how will the sovereign states continue to stay in business?
Based on prior political discussion, the asset confiscations will begin with the most liquid, marketable, or easily attachable assets (e.g. checking and savings deposits as well as pooled pension funds), and work its way down to IRAs and 401ks accounts. After that, the governments could heavily tax the assessed value of brokerage accounts. All these types of monies are the easiest to quantify and thus will be used first. With regards to brokerage accounts or holdings of individual equities, the government could impose an annual ad valorem tax on the owner.
The next types of assets in the crosshairs will be the less liquid ones, such as real estate and businesses. Governments may also wish to nationalise the banking sector to retain its rich cash flow and asset base. The governments may choose to effectively nationalize many manufacturing industries and retain their profits and cash flows to help fund deficits.
The governments will find confiscating illiquid assets like real estate more challenging and less practical. However, I predict the governments could levy all sorts of special national ad valorem taxes on many of these types of assets in lieu of outright confiscation. Ad valorem taxes are typically levied on real or personal property by local governments, but the Feds could get involved. Ad valorem means a tax on goods or property expressed as a percentage of the sales price or assessed value.
In other words, you can keep your house, but the taxes could become exorbitant.
We need to wrap our minds around the grim new reality of what the world was like back in 2008. Boring is profitable. I still like gold bullion and gemstones; for others, they will swear by bitcoin. I leave that up to you to determine.