“The great financial crisis of 2007/08 will be eclipsed. In a nutshell, this time the quantity of new money required will likely lead to the destruction of the “full faith and credit” in the currencies themselves, which until now has been broadly unquestioned by ordinary members of the public.” — Alasdair Macleod
Basically, what Macleod is saying that when the Fed and the world’s other central banks are faced with another economic crisis, they will again resort to money printing and that will lead to a loss of confidence in currencies. That is not to say that everyone will abandon fiat currencies, but enough will that we will see a shift to commodity currencies, mainly gold and silver.
Obviously, Macleod is a student of Austrian economics. One of the major tenants of Austrian economic theory is that an economic boom sustained by currency manipulations (printing money to buy government bonds to lower interest rates being one of them) cover up the bad investments (malinvestments to Austrians) that would have been liquidated had the currency printing not continued. Said another way, there would have been a lot of bankruptcies and a recession/depression as the liquidated assets were reallocated to productive sectors of the economy.
Note the slight dip (debt liquidation) in 2008-2009, which has been dubbed The Great Recession. Next to no debt liquidation then, and afterwards the increase in debt continued. The red line in the graph shows total debt in the US at about $67 trillion. But, the graph has a more ominous warning.
Macleod notes that Fed increases in its federal funds rate have preceded sharp recessions. Notable are the 2000 and 2005-2006 peaks and the carnage they preceded are easily remembered. But the ’88 and ’82 peaks were also followed by recessions. He speculates that another increase of only one point could “all but guarantee a credit crisis.”
The reason successive interest rate peaks have been declining is because of the Fed has over the last forty years kept making money easier to borrow, by printing more of it and by lowering interest rates. Fed believers like to say that the business cycle has been eliminated. It has not; the Fed exacerbates the business cycle.
The current economic upswing in the second longest since the Fed came into existence in 1913, within months of being the longest. It is also one of the weakest. The Fed’s plan for hiking rates still higher and selling off some of the assets it bought bailing out the banks in the Great Recession will have a negative impact on the economy and the stock market.