Silver: The Macroeconomic Fundamentals Explained, Due Diligence
https://libredd.it/r/Wallstreetsilver/comment...explained/
I am writing this piece to lay out my case for silver and explain the incredible macroeconomic fundamentals that encouraged me to invest in this space years ago.
To my understanding, there are three primary reasons to buy silver at this time:
The Federal Reserve is caught in an inflationary loop as they attempt to thwart the credit cycle.
The squeeze, which has historical precedent and potentially extreme upside.
How these two combined will create incredible demand for this undervalued asset (buy when undervalued, sell when overvalued).
I want to focus on reason 1. in this piece.
In my view, we are in an inflationary positive feedback loop.
To understand this, we have to first establish how Keynesian economics responds to inflation and deflation. Second, we will describe how this policy approach has shaped the current macroeconomic environment. Lastly, we will discuss how stagflation presents an especially difficult problem for monetary policy, and how this is leading is toward the aforementioned inflationary positive feedback loop.
Keynesian economics proposes that when the economy enters a recession, policy makers should respond by deficit spending to create demand in the economy.
US Debt to GDP - Chart
https://libredd.it/r/Wallstreetsilver/comment...urce=share
But why suggest this response? Because recessions can be viewed as shortages of demand. As people lose income from a large-scale event (such as a famine or pandemic), they stop buying goods and services. Everything else being equal, net demand in the economy falls.
Money that one person spends is another person's income. That means as each income stream disappears, there is a knock-on effect of lost income somewhere else in the economy. If this happens at a large enough scale, a recession results.
US Unemployment Rate - Chart
https://libredd.it/r/Wallstreetsilver/comment...urce=share
This is where credit comes in and makes everything worse.
Most of the currency circulating in an economy is actually credit lent by banks. That is to say, a lot of the currency was created through lending and borrowing. If I deposit dollars into a bank, the bank can lend those dollars to someone else. This process creates more demand in the economy because credit allows the dollars to be in two places at once - both in my account, and lent to someone else who will spend them in the economy (such as buying a boat). The more money that is deposited, the more credit is issued, creating a credit expansion where there is more money in the economy.
If the credit supply collapses due to a series of bankruptcies, demand starts to collapse with it because much of that demand was credit. When demand evaporates, someone's future income is lost. As income disappears, more debtors cannot service their debts, which leads to more collapsing credit and lost demand.
Credit collapses are effectively deflationary positive feedback loops. A positive feedback loop is when a cause and effect feed into each other, reinforcing and magnifying each other in a cycle. To steal an example I read elsewhere, imagine holding up a microphone to a speaker and tapping it. The sound travels from the microphone to the speaker repeatedly, growing louder with each pass. Central banks have responded to these deflationary events through actions that have set up the conditions for the opposite - an inflationary positive feedback loop. But to understand that, we have to discuss recent history.
In the 2008 housing crisis, Federal Reserve Chairman Ben Bernanke tried to avoid this deflationary cycle by replacing the lost demand through monetary policy. He lowered interest rates as the government deficit spent to increase demand (i.e. to buy goods and services paid for with debt). In order to lower interest rates, he printed money to buy treasuries, lowering their yields. Called "quantitative easing" (a purposefully foggy and abstracted term for debt monetization), this program was framed at the time as a temporary, emergency measure that would be reversed in a recovery. However, it instead become the go-to playbook, and the attempts to reverse it's effects would fail (more on that later).
Federal Reserve Balance Sheet - Chart
https://libredd.it/r/Wallstreetsilver/comment...urce=share
To further explain quantitative easing, let's discuss how bonds work. Bond yields go down (and thus increase in price) as the demand for bonds rises. Think of an auction where bonds are being sold; if the bidders outnumber the items on sale, they'll compete to accept lower and lower yields. If the bonds outnumber the bidders, the seller has to offer a higher yield to finally get a buyer. But when the Federal Reserve prints money to buy bonds, they can force the yields down by bidding with printed money until the yields fall to the desired rate. This forces everyone else to buy bonds at these lower prices. Because other types of debt compete with interest rates, other debt instruments can lower their yields. This makes accumulating debt more affordable, both for the private sector and the government.
This is what people refer to when they mean yields are "artificially low." The price doesn't reflect actual supply and demand from lenders and borrowers who produced something of value, but instead reflects the enormous purchasing power of whoever controls the printing press.
These bond purchases and consequent low interest rates have several negative effects. The elderly, who invested in their earlier years with higher yields in mind, must now buy stocks to get higher returns. Pensions must do the same. The Federal Reserve knows this and is intentionally pushing people farther out on the "risk curve" to cause stocks to rise, theoretically creating a "wealth effect" where people spend more because they feel richer. The buyers who were "outbid" by the Federal Reserve in the bond market are "pushed" into buying something else - usually stocks.
Effect of QE on Stocks - Chart
https://libredd.it/r/Wallstreetsilver/comment...urce=share
This harms the elderly because they now have incredible downside risk if their now oversized positions in now overvalued stocks fall. Pensions are in the same situation. Younger people are punished as well, as they must "buy in" at higher prices, decreasing their future returns on investment. The wealth gap grows larger, as the wealthy own more stocks than the poor by far. Meanwhile, the broader economy gorges itself in debt.
Notice who wealth is being transferred from and to when the Federal Reserve prints dollars to push down yields. Savers lose income because interest rates are down, so their loss is the debtors gain. The poor and young lose opportunities to enrich the rich and old in the short term. The elderly and pensions are shoved into taking risks that, given their investment outlook, are not stable enough for their needs (in this case, preserving and not merely gaining wealth).
The Federal Reserve is effectively suppressing volatility by preventing large drawdowns. But this volatility suppression is paid for by printing money and further indebting the economy with each averted drawdown. This leverages the economy with debt that, at higher interest, would induce widespread bankruptcies (which is to say, a large-scale credit collapse).
Perversely, the cost of borrowing is so low that companies can now borrow money to avoid the consequences of borrowing too much money. This creates "zombie companies" which are unproductive and inefficient, and merely pay the interest on their existing debts without generating value for shareholders, reinvesting into their business, or paying down the principle on their debts. If interest rates rose, they would quickly collapse as their existing debt loads "roll over" into interest rates that they cannot afford to pay. They're neck-deep despite being at the shallow end of the pool; any deeper and they're completely underwater. They also present enormous risk to the economy, much like too much dead underbrush in a forest, ready to make the inevitable inferno that much bigger.
Zombie Companies - Chart
https://libredd.it/r/Wallstreetsilver/comment...urce=share
In fostering the growth of zombie companies, low interest rate policy and deficit spending risk ironically thwarting the intended purpose of Keynesian economics (i.e. to obtain economic recovery). Keynesian economics proposes that deficit spending can be paid for through taxation and rate hikes once the economy recovers. But zombie companies cannot service their debts at higher rates of interest and taxation, which means the recovery cannot be paid for as intended because without enough profitable companies on the other end of the tunnel, there is no recovery.
This dilemma of debt accumulation without securing sufficient future growth affects Keynesian economics in general. If you spend $3 for every $1 of growth, you're in serious trouble when the next crisis comes along and you haven't finished paying down the recovery from the last one.
Now it should be noted that the Federal Reserve did attempt to "undo" their 2008 intervention. They steadily sold the bonds they purchased back into the market (the printed money then disappeared into the nothingness from whence it came). Interest rates steadily rose. Everything looked like it was returning to normal.
Then December 2018 happened.
As the Federal Reserve announced that quantitative tightening and interest rates hikes would continue on "autopilot." The stock market sold off, and the Federal Reserve blinked. The current chair, Powell, appeared with former chairs Bernanke and Yellen to announce that the rate hikes would end and quantitative tightening would be ended in the near future. The stock market rallied.
Federal Funds Rate - Chart
https://libredd.it/r/Wallstreetsilver/comment...urce=share
At that moment, it was over. The recovery could not be paid for. Interest rates could not be determined by supply and demand. The prospect of a deflationary feedback loop was too frightening, the magnitude of which would only be amplified by the debt accrued by corporations and the government.
The stage had been set for an inflationary positive feedback loop.
Aka, the hyperinflation infinite loop.
https://libredd.it/r/Wallstreetsilver/comment...urce=share
Because inflation has appeared in the economy, bond holders want to be compensated with higher interest. This causes yields to rise, which would cause a deflationary knock-on effect as debts are rolled over into unserviceable interest rates. To avoid deflation, the Federal Reserve prints money to lower the yield of treasuries, which rescues the borrowers. Repeat this process until...
The currency is worthless.
https://libredd.it/r/Wallstreetsilver/comment...urce=share
Now, understand that this is the larger cycle; there will be disinflationary gyrations within this cycle, but ultimately it will end in a deflationary or inflationary "default" on excess credit, which has greatly outpaced economic growth.
Debt Outpacing Real GDP Growth - Chart
https://libredd.it/r/Wallstreetsilver/comment...urce=share
This concludes my review of this subject.
I intend to write another piece concerning inflation and whether or not we can expect it to be transitory, because that remains an unsettled question for many. There are a lot of variables at play, including human psychology, monetary policy, interest rates, velocity of money, loss of production due to unemployment programs, game-theoretic dilemmas and more. It's a fascinating topic that I want to do a deep dive on.
Not investment advice. Do your own research and come to your own conclusions.
Buy physical Silver.
.
https://libredd.it/r/Wallstreetsilver/comment...explained/
I am writing this piece to lay out my case for silver and explain the incredible macroeconomic fundamentals that encouraged me to invest in this space years ago.
To my understanding, there are three primary reasons to buy silver at this time:
The Federal Reserve is caught in an inflationary loop as they attempt to thwart the credit cycle.
The squeeze, which has historical precedent and potentially extreme upside.
How these two combined will create incredible demand for this undervalued asset (buy when undervalued, sell when overvalued).
I want to focus on reason 1. in this piece.
In my view, we are in an inflationary positive feedback loop.
To understand this, we have to first establish how Keynesian economics responds to inflation and deflation. Second, we will describe how this policy approach has shaped the current macroeconomic environment. Lastly, we will discuss how stagflation presents an especially difficult problem for monetary policy, and how this is leading is toward the aforementioned inflationary positive feedback loop.
Keynesian economics proposes that when the economy enters a recession, policy makers should respond by deficit spending to create demand in the economy.
US Debt to GDP - Chart
https://libredd.it/r/Wallstreetsilver/comment...urce=share
But why suggest this response? Because recessions can be viewed as shortages of demand. As people lose income from a large-scale event (such as a famine or pandemic), they stop buying goods and services. Everything else being equal, net demand in the economy falls.
Money that one person spends is another person's income. That means as each income stream disappears, there is a knock-on effect of lost income somewhere else in the economy. If this happens at a large enough scale, a recession results.
US Unemployment Rate - Chart
https://libredd.it/r/Wallstreetsilver/comment...urce=share
This is where credit comes in and makes everything worse.
Most of the currency circulating in an economy is actually credit lent by banks. That is to say, a lot of the currency was created through lending and borrowing. If I deposit dollars into a bank, the bank can lend those dollars to someone else. This process creates more demand in the economy because credit allows the dollars to be in two places at once - both in my account, and lent to someone else who will spend them in the economy (such as buying a boat). The more money that is deposited, the more credit is issued, creating a credit expansion where there is more money in the economy.
If the credit supply collapses due to a series of bankruptcies, demand starts to collapse with it because much of that demand was credit. When demand evaporates, someone's future income is lost. As income disappears, more debtors cannot service their debts, which leads to more collapsing credit and lost demand.
Credit collapses are effectively deflationary positive feedback loops. A positive feedback loop is when a cause and effect feed into each other, reinforcing and magnifying each other in a cycle. To steal an example I read elsewhere, imagine holding up a microphone to a speaker and tapping it. The sound travels from the microphone to the speaker repeatedly, growing louder with each pass. Central banks have responded to these deflationary events through actions that have set up the conditions for the opposite - an inflationary positive feedback loop. But to understand that, we have to discuss recent history.
In the 2008 housing crisis, Federal Reserve Chairman Ben Bernanke tried to avoid this deflationary cycle by replacing the lost demand through monetary policy. He lowered interest rates as the government deficit spent to increase demand (i.e. to buy goods and services paid for with debt). In order to lower interest rates, he printed money to buy treasuries, lowering their yields. Called "quantitative easing" (a purposefully foggy and abstracted term for debt monetization), this program was framed at the time as a temporary, emergency measure that would be reversed in a recovery. However, it instead become the go-to playbook, and the attempts to reverse it's effects would fail (more on that later).
Federal Reserve Balance Sheet - Chart
https://libredd.it/r/Wallstreetsilver/comment...urce=share
To further explain quantitative easing, let's discuss how bonds work. Bond yields go down (and thus increase in price) as the demand for bonds rises. Think of an auction where bonds are being sold; if the bidders outnumber the items on sale, they'll compete to accept lower and lower yields. If the bonds outnumber the bidders, the seller has to offer a higher yield to finally get a buyer. But when the Federal Reserve prints money to buy bonds, they can force the yields down by bidding with printed money until the yields fall to the desired rate. This forces everyone else to buy bonds at these lower prices. Because other types of debt compete with interest rates, other debt instruments can lower their yields. This makes accumulating debt more affordable, both for the private sector and the government.
This is what people refer to when they mean yields are "artificially low." The price doesn't reflect actual supply and demand from lenders and borrowers who produced something of value, but instead reflects the enormous purchasing power of whoever controls the printing press.
These bond purchases and consequent low interest rates have several negative effects. The elderly, who invested in their earlier years with higher yields in mind, must now buy stocks to get higher returns. Pensions must do the same. The Federal Reserve knows this and is intentionally pushing people farther out on the "risk curve" to cause stocks to rise, theoretically creating a "wealth effect" where people spend more because they feel richer. The buyers who were "outbid" by the Federal Reserve in the bond market are "pushed" into buying something else - usually stocks.
Effect of QE on Stocks - Chart
https://libredd.it/r/Wallstreetsilver/comment...urce=share
This harms the elderly because they now have incredible downside risk if their now oversized positions in now overvalued stocks fall. Pensions are in the same situation. Younger people are punished as well, as they must "buy in" at higher prices, decreasing their future returns on investment. The wealth gap grows larger, as the wealthy own more stocks than the poor by far. Meanwhile, the broader economy gorges itself in debt.
Notice who wealth is being transferred from and to when the Federal Reserve prints dollars to push down yields. Savers lose income because interest rates are down, so their loss is the debtors gain. The poor and young lose opportunities to enrich the rich and old in the short term. The elderly and pensions are shoved into taking risks that, given their investment outlook, are not stable enough for their needs (in this case, preserving and not merely gaining wealth).
The Federal Reserve is effectively suppressing volatility by preventing large drawdowns. But this volatility suppression is paid for by printing money and further indebting the economy with each averted drawdown. This leverages the economy with debt that, at higher interest, would induce widespread bankruptcies (which is to say, a large-scale credit collapse).
Perversely, the cost of borrowing is so low that companies can now borrow money to avoid the consequences of borrowing too much money. This creates "zombie companies" which are unproductive and inefficient, and merely pay the interest on their existing debts without generating value for shareholders, reinvesting into their business, or paying down the principle on their debts. If interest rates rose, they would quickly collapse as their existing debt loads "roll over" into interest rates that they cannot afford to pay. They're neck-deep despite being at the shallow end of the pool; any deeper and they're completely underwater. They also present enormous risk to the economy, much like too much dead underbrush in a forest, ready to make the inevitable inferno that much bigger.
Zombie Companies - Chart
https://libredd.it/r/Wallstreetsilver/comment...urce=share
In fostering the growth of zombie companies, low interest rate policy and deficit spending risk ironically thwarting the intended purpose of Keynesian economics (i.e. to obtain economic recovery). Keynesian economics proposes that deficit spending can be paid for through taxation and rate hikes once the economy recovers. But zombie companies cannot service their debts at higher rates of interest and taxation, which means the recovery cannot be paid for as intended because without enough profitable companies on the other end of the tunnel, there is no recovery.
This dilemma of debt accumulation without securing sufficient future growth affects Keynesian economics in general. If you spend $3 for every $1 of growth, you're in serious trouble when the next crisis comes along and you haven't finished paying down the recovery from the last one.
Now it should be noted that the Federal Reserve did attempt to "undo" their 2008 intervention. They steadily sold the bonds they purchased back into the market (the printed money then disappeared into the nothingness from whence it came). Interest rates steadily rose. Everything looked like it was returning to normal.
Then December 2018 happened.
As the Federal Reserve announced that quantitative tightening and interest rates hikes would continue on "autopilot." The stock market sold off, and the Federal Reserve blinked. The current chair, Powell, appeared with former chairs Bernanke and Yellen to announce that the rate hikes would end and quantitative tightening would be ended in the near future. The stock market rallied.
Federal Funds Rate - Chart
https://libredd.it/r/Wallstreetsilver/comment...urce=share
At that moment, it was over. The recovery could not be paid for. Interest rates could not be determined by supply and demand. The prospect of a deflationary feedback loop was too frightening, the magnitude of which would only be amplified by the debt accrued by corporations and the government.
The stage had been set for an inflationary positive feedback loop.
Aka, the hyperinflation infinite loop.
https://libredd.it/r/Wallstreetsilver/comment...urce=share
Because inflation has appeared in the economy, bond holders want to be compensated with higher interest. This causes yields to rise, which would cause a deflationary knock-on effect as debts are rolled over into unserviceable interest rates. To avoid deflation, the Federal Reserve prints money to lower the yield of treasuries, which rescues the borrowers. Repeat this process until...
The currency is worthless.
https://libredd.it/r/Wallstreetsilver/comment...urce=share
Now, understand that this is the larger cycle; there will be disinflationary gyrations within this cycle, but ultimately it will end in a deflationary or inflationary "default" on excess credit, which has greatly outpaced economic growth.
Debt Outpacing Real GDP Growth - Chart
https://libredd.it/r/Wallstreetsilver/comment...urce=share
This concludes my review of this subject.
I intend to write another piece concerning inflation and whether or not we can expect it to be transitory, because that remains an unsettled question for many. There are a lot of variables at play, including human psychology, monetary policy, interest rates, velocity of money, loss of production due to unemployment programs, game-theoretic dilemmas and more. It's a fascinating topic that I want to do a deep dive on.
Not investment advice. Do your own research and come to your own conclusions.
Buy physical Silver.
.
