NEMETHY: Prepare for monetary climate change

NEMETHY: Prepare for monetary climate change
NEMETHY: Prepare for monetary climate change / wiki
By Les Nemethy CEO and founder of Euro-Phoenix Financial Advisors April 20, 2022

Monetary climate change (to borrow a phrase from author and columnist Ron Stoeferle) is happening far faster than environmental climate change. The following chart highlights some of these monetary climate changes:


Past decade(s)

Coming decade(s)

Unipolar world/globalisation

Multipolar world/ regional blocs

Deflationary bias

Inflationary bias

Positive real interest rates

Negative real interest rates

Rising debt levels spur growth

Real debt stops increasing or declines, providing a headwind to growth


Value shifts to “real” things and commodities

The Fed “put” encouraged “risk on” investments

Central banks lose effectiveness and become a source of uncertainty

In the past decades we’ve had an enormously positive economic tailwind from globalisation. There was a seemingly infinite low labour cost manufacturing base in China, which became the “world’s factory”, creating a global deflationary bias. This process is now reversing, providing a tailwind to global inflation.  

In the post-World War II era, the US percentage of global GDP, imports, exports, etc, has been steadily declining, whereas similar indicators for China have been steadily increasing, overtaking the US on some measures. The world is no longer unipolar; Pax Americana can no longer be taken for granted.

Globalisation seems to have reversed gear as the world moves towards trade blocs. To name a few recent events:

dozens of multinationals recently withdrew from Russia;

trade between Russia and China is becoming closer;

threats of sanctions are leading Chinese companies (most recently Sinopec) to divest assets in the West;

chipmakers are now investing heavily in US production;

everyone is seeking food and energy security.

Supply chain security and duplication of supply chains are inflationary. This re-organisation accentuates hoarding, supply bottlenecks, etc. While I don’t believe we will see hyperinflation (defined as prices rising by 50% per month), I do believe we will see superinflation (price rising at 10% per annum).  

Since Paul Volcker squeezed inflation out of the US economy with 16% interest rates in the early 1980s, nominal interest rates have steadily declined over the past 40 years. They reached the “zero bound” in most developed countries a sizeable portion of global sovereign debt had zero percent or lower nominal interest rates.  

This is a trend that has reversed over the past months, with nominal interest rates moving marginally higher, but there is a limit to how high rates can increase (given the $360 trillion of global debt). Inflation is likely to remain far higher than interest rates. In my opinion year treasuries at 4-5% could already trigger a recession. Official inflation could well remain over 7% in the EU and US, perpetuating negative interest rates for most of the coming decade.

Negative real interest rates are a form of hidden taxation, and represent the only politically viable way most countries can reduce real indebtedness by inflating it away. That’s a disaster for anyone who is a saver, bondholder, retiree, etc. The US had a similar period of negative real interest rates in the decade following World War II.

There has been a trend over the past decades towards financialisation (e.g. much more rapid growth of the financial economy than the real economy). For example: there is over $100 trillion of “paper” gold (future contracts, ETF’s, etc.) and only some $7 trillion of real gold. Bullion banks and others have made fortunes via fractional reserve trading of paper gold, but if there were a run on gold, there would not be enough real gold to back all the paper gold.  

Whereas today global equities are estimated at about $115 trillion, the pendulum may swing back towards the 1980 crisis situation, where equities and gold were at comparable levels (each capitalised at about $2.5 trillion). Historically, the commodities to equities ratio is at an all-time low:

Holders of fiat currencies may lose confidence due to money printing (40% of US dollars were “printed” over the last two years); there are early indications of a trend whereby central banks and investors alike seek refuge in real stores of value (e.g. gold and other commodities).  

In summary, we are entering a new monetary era characterised by inflation, negative real interest rates and the re-emergence of “real” assets, likely a long-term commodity cycle.

Sadly, there is an increasingly common view that central banks are becoming part of the problem rather than part of the solution. Economist Russell Napier believes central banks are irrelevant, because the primary method of monetary expansion is through government guarantees of bank lending.  

Financial markets expert Mohammed El Erian believes the Fed, after a number of mistakes, has lost control of the inflation agenda: delayed action against inflation means that the Fed will have to slam on the monetary brakes, causing a major recession, or allow inflation to accelerate out of control. The proverbial “soft landing” is becoming increasingly elusive.


This article is intended for educational and (hopefully) entertainment purposes, not investment advice. Conduct your own due diligence prior to any investment decision.

Les Nemethy is the CEO and founder of Euro-Phoenix Financial Advisors Ltd. and a former World Banker