No one understands the Everything Bubble.
Meanwhile in Afghanistan …
The new Taliban government doesn’t have access to Afghanistan’s central bank reserves because they are held overseas by the IMF and U.S., and Taliban cannot print its own currency, the Afghani, because there’s no banknote printer within the borders of the country.
… the country is looking to buy a new printer but so far no one wants to sell, worried about the possible sanction implications.
The country is facing massive bank runs, food shortage and, really, risk of “a total breakdown”. Across Afghanistan, people are selling anything they can to buy food and basic goods.
We have explained here before that the U.S. has, like, this nice superpower that it can print its own debt seemingly forever. Its actually a pretty simple mechanism that I think everyone should understand, but maybe doesn’t, so let me just explain again very quickly here:
Because $ is the world’s reserve currency, most international trade and almost all transactions that take place internationally (not just the ones involving U.S.) are in U.S. Dollars. This means that importers, exporters, banks that are servicing them, central banks all around the world, and many, many other market participants need to hold U.S. Dollar or liquid $-denominated assets. Like anyone else, they like to keep their wealth safe, and so they buy U.S. Treasuries.
This is why there is unlimited demand for U.S. debt. The FED can print ad infinitum.
This means that, yes, in the simplistic-sort-of-way, the U.S. can print itself out of any crisis. Other countries (not just Afghanistan) cannot do this or they can only do this to a limited extent (Japan).
Basically, a country can keep printing its debt to fund its economy with the “imaginary” money as long as the investors buying its debt believe it to be sustainable and, like, you know, repayable.
But repayable is a strange concept these days, and certainly in the case of the U.S. it doesn’t seem to matter all that much because everyone needs and wants to keep buying its debt anyway as we’ve explained before.
There are other ways in which country can make up “imaginary money” to fuel its growth. China is swelling its economic growth with debt for years. And it can, thanks to the capital controls. Chinese cannot take their money out. If they could, this would lead to severe outflow of capital and devaluation of yuan. So it doesn’t matter that everyone knows that there is a lot of bad debt in the Chinese economy and that the real estate sector is in a bubble (Evergrande) because if you are Chinese, there is nowhere else to put money.
What China is doing forcefully, the U.S. has managed to achieve naturally because, again, everyone needs and wants to keep significant part of their assets in $.
How the magic works.
When the U.S. starts printing, those billions of $ seep through to markets in many ways. And please be patient with me here — FED buys billions of $ of corporate bonds; sellers of those bonds (companies issuing their own new bonds, investors owning old bonds, etc.) recycle those billions back to the financial markets by buying stocks, bonds and other financial products. Prices rise and rates on bonds fall. Pension funds and large institutional investors start buying real estate because they don’t earn enough on bonds. House prices go up, but then they go up even more because FED also buys billions of $ in U.S. treasuries off of large banks (they have accounts at FED, so this means literally adding many more zeros to their balances) and the banks are now happy to lend to people much more. People buy more houses; they also feel richer because the value of their houses (all houses, really) goes up, so they buy stocks, bonds and eventually even cryptocurrencies. Repeat the cycle and:
American households’ net worth hit another record high, buoyed by the biggest-ever gain in home values. Wealth increased by $5.8 trillion last quarter, according to new Fed data. Skyrocketing stock values accounted for the bulk of those gains ($3.5 trillion). Real estate appreciation was responsible for $1.2 trillion — a record quarterly jump.
At some point, this sort of thing leads to strange things happening. Like, people start buying records on blockchain (NFTs) that represent .jpegs, tweets or just short moments of something (Le Bron James slam dunk). But we have talked about this here before and also about NFTs as art. You could say that this doesn’t sound very constructive. “In the long run, people get rich by creating economic value. If [..] people are just trading nonsense among themselves, it is hard to see how they can all get rich.”
But that’s not what is happening. The world’s economic engine is restarting post-COVID and it is thanks to debt. The “imaginary money” has held us when the wheels stopped turning.
Debt leads to excesses, bad spending and dumb investing, but it is also essential for economic activity. And, like, I am oversimplifying here, but debt is our second nature. We need to be able to stretch our spending and investing, not wait until we’ve earned it.
Before WW-I, the world was running gold standard, and, certainly, countries could not print money to stimulate their economies. If they did, it would lead to an outflow of gold from their coffers in a vicious self-perpetuating circle because the firm peg of each currency to the value of gold meant that speculators would run in to the country’s central bank and exchange the weakened currency for gold.
And although (as I suspect gold bugs and BTC-maximalists would like to point out) this mechanism kept countries’ borrowing in check, it also slowed down the growth and economic activity because money was not available when it was needed (say, when an entrepreneur had a new idea or an opportunity to invest) but when it was earned.
We have mentioned elsewhere that debt turns repayment into a fluid concept because it can shift the repayment indefinitely into future, or put differently, there is no ‘eye for an eye’ in finance, and this makes us all more daring.
There is nothing new about a country inflating its currency to outspend its potential, going as far back as the Roman Empire. It tends to end up bad. The difference this time is that the U.S. has managed to take the whole world on a ride with it.