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As the banking crisis continues to play out, doomsday predictions are coming in thick and fast.
Amid all the negativity, economist Raoul Pal has a positive take on the developments. A “2008 redux,” he says, can’t happen despite many on FinTwit calling for it.
In 2008, asset prices fell so hard that it resulted in a collateral spiral. Following quantitative easing (QE), it took six months for collateral prices to stabilize for debts to become manageable, the economist noted.
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With QE, the currency is debased and inflationary pressure rises before collateral is called at a systemic level, he added. Debasement is lowering the value of the currency.
Pal noted that this is what is happening currently, with the Fed’s balance sheet rising quickly in a financial crisis, the collateral prices begin to rise. Equities, bonds, crypto and gold are rising commensurately, he said.
QE, according to the economist, is debasement and does not drive liquidity into assets but it is an adjustment in prices to account for the weaker purchasing power versus scarce assets.
Pal noted that with QE, wages and earnings don’t rise but P/Es rise and people can afford less per dollar of investment in all assets from housing to equity to gold to crypto.
Fed Has Its Task Cut Out: The Fed needs to print and collateral prices will rise. If the collateral is worth more, then the debt is not called at a system-wide level unlike in 2008, Pal said.
QE is not inflationary whereas fiscal policy is, and it is short-lived, the economist said, pointing to Japan, which has been through this many times.
The trend rate of inflation is driven by demographics along with debt load, the economist said. it’s not money going into equities from too much liquidity seeping into the system allowing people to buy but it is debasement that does this, he added.
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Image and article originally from www.benzinga.com. Read the original article here.