NQA#6: Three Black Swans
Dmitry Orlov
Three Black Swans.mp3
0:00
10:20
Continuing with my series "No Questions Asked", here is a new episode: Three Black Swans
In response to viewer demand, I am providing more coverage of my cat
He may not ask any questions (since he already knows all the answers)
But he is willing to grace this channel with his presence
And so... let's talk about some black swans — three of them
BLING!
One of the countries that's currently breeding black swans is Japan
There's a good chance that Japan will play an important role in crashing the world economy
It seems likely to trigger a new episode within the cycle of global financial crises
Japan is the country with the highest debt to GDP ratio: 230%
Conventional economic thinking is that anything over 100% is the kiss of death
But death is sometimes slow in coming, taxing our patience
The solvency of the Japanese government depends on the low interest rate set by Japan's central bank
It keeps the interest payments on Japanese debt from swallowing up the government's entire budget
Japan has bucked the global trends of increasing and decreasing interest rates for a long time now
This made Japan the home of the carry trade
Speculators borrow cheaply in Japan and then invest at a higher interest rate elsewhere
Because of some magical-mystical phenomenon, global inflation has hardly touched Japan
But in spite of low inflation the yen has been substantially devalued
This weird state of affairs, called Abe-nomics, has kept Japan afloat
Abe-nomics is just good old quantitative easing, Federal Reserve-style
With the financial stimulation being provided using the left hand rather than the right hand
However, all bad things must come to an end eventually
And in 2025 inflation in Japan reached 3%
This would be considered insignificant in most countries
In Turkey, for instance, inflation is at around 30%, down from 80%
But even 3% a big number for Japan
The interest rate set by the Japanese Central bank is just 0.5%
Central banks like to keep their interest rates above inflation in order to control it
But here we have inflation six times higher than the interest rate
This is enough to make most central bankers run around with their hair on fire
Even in Japan, where next week Japan's central bank will raise its interest rate
It will raise it all the way up to 0.75%, perhaps even higher
The backdrop of this move does not seem auspicious for interest rate increases
Japan's GDP is falling
The Japanese economy is definitely not overheating
The higher interest rate will most likely cause the yen to strengthen
This is definitely not what Japan needs, since a stronger yen will hurt Japan's exports
It may not seem like such a big deal
But what is important is the context
Japan's engine of growth and capital formation has stalled
At the same time, financial markets are growing out of control
Huge bubbles have formed in crypto, AI and other speculative garbage
It is this combination of ingredients that has fed the black swan
Nobody can tell when exactly it will take flight, but it is getting ready
The interest rate increase by Japan's central bank will wreck the carry trade
Money will drain out of the financial markets
Some of it will flood into Japan, driving up inflation some more
Giving rise to a vicious cycle
BLING!
Meanwhile, black swan number two is starting to flap its wings in Europe
The US Federal Reserve has stopped supporting the European Central bank using currency swaps
As a result, a liquidity crisis is forming in Europe
The draining of liquidity will trigger a new debt crisis in certain well-known countries
The European Commission is doing what it can to make this crisis worse
It has decided to permanently block Russian assets held at Euroclear in Belgium
The plan is to abscond with these assets and to feed them into the Ukrainian black hole
This would allow the EU to perpetuate the fiction that NATO hasn't yet lost the war to Russia
But this plan is causing the Belgian prime minister and the head of Euroclear to break out in cold sweat
The problem is that these Russian assets cannot even be stolen because they don't actually exist
These assets consists of Europe's debt to Russia
The Europeans have already spent the money which Russia had paid them
Also, this debt is subject to various conditions
Its mishandling is sure to affect European ratings
It is also bound to trigger a series of lawsuits
The first of these has already been filed with a court in Moscow
There is no shortage of European assets in Russia for this court to confiscate
The attempt to take this debt out of Euroclear and to exchange it for money will zero out its value
Meanwhile, the ratings of European bonds will fall and interest rates on them will go up
The only possible buyer for these stolen goods is the European Central Bank
The ECB would have to emit a corresponding quantity of euros
But the ECB head Christine Lagard already said "no" to the Eurocommissars
She has an ironclad reason for her answer
There is no longer an automatic dollar-euro currency swap in effect
And unsupported euro emission would simply dilute the value of the euro
BLING!
As if two black swans weren't enough, there is also black swan number three ready to take flight
Over in the US, Trump's MAGA initiative hasn't gone anywhere and time is running out
I don't much like the acronym MAGA
I prefer the acronym MASALL
It stands for "Make America Suck a Little Less"
It seems much more realistic
In any case, the only way to kick-start MAGA now would be to cause the financial markets to tank
This could, in theory, cause money to pour into the real economy of goods and services
Meanwhile, the US dollar's share of global currency reserves is about to drop below 50%
The US dollar is no longer the reserve currency of choice
The share of the US dollar in international oil futures is already less than half
The petrodollar, which supported the ability of the US to print money, is gone
Consequently, the US dollar is finding less and less use as a medium of exchange in international trade
It is splitting into an internal currency and an external currency
The internal currency is going to inflate and the external currency is going to crash
The US will find itself unable to participate in world trade to the usual extent
And will be forced into economic isolation and autarky
Meanwhile, lots of fools are still hyping AI and talking up NVidia stock
But there is lots of hard data showing that investments in AI are simply not effective
Worse than that, AI is rapidly turning lots of people into idiots
People who use AI soon find themselves unable to function without AI
At the same time, AI systems cannot be prevented from making mistakes
Recent studies indicate that AI systems can have error rates ranging from 45% to over 70%
Meanwhile, the costs of AI technology and the electricity it is soaking up are increasing
But these costs are not supported by any payback
AI is a disaster in the making
The AI bubble seems ready to pop at any time
Three black swans are ready to take flight in Japan, in Europe and in the US
But that's not all
There are also some black swan eggs that seem ready to hatch
The US shale oil is on a plateau and production will inevitably head down
The US will be forced to once again ramp up its oil imports
But there isn't enough spare capacity in the world to make up for any large drop in US shale oil
The US will be forced to strike a balance between a shortage of energy and a shortage of money
It is desperately trying to steal Venezuela's oil, even to the point of hijacking oil tankers
The attempt at regime change in Venezuela could turn into a massive embarrassment for the US military
And the US military-industrial complex is yet to process the fact that it has lost the arms race to Russia
You may not know what to do with all of this information
But luckily, my cat does
He is going to sleep on it
And then he will go to the kitchen and eat some cat food
And then go to the bathroom and scratch around in the litter box
By then it will be time for his next nap...
Его канал на Ютубе называется The New Atlas
https://m.youtube.com/@TheNewAtlas