From a Business Modeling perspective, your company lies at the apex of a fragile ecosystem, owing to the fact that jewelry is a highly discretionary consumer product that lies well outside of life’s essentials. In good times, plentiful amounts of “nutrients” move up the ecosystem and into your revenue stream. Indeed, you don’t generally even notice the fragility unless something pretty bad happens. And fortunately, the past forty years have been characterized by pretty good geopolitical times, with the notable exceptions of the Gulf War that ruined the Christmas season of 1990, the dreadful Great Recession of 2008 (that lingered on into 2010), and the initial, very scary onset of the Pandemic.
Viewed from a broad historical perspective, the last forty years have been unusually free of global catastrophes, especially when compared with other periods of similar duration like the one between 1914 and 1954, which saw two World Wars, a Depression, the Korean conflict, and the initial stages of what would ultimately become a prolonged cold war. But during the past decade, through negligence and recklessness, we have wrecked the economic architecture of the world, in ways that will make the next forty years very different from the past forty. To understand how this occurred, let’s review the set of unfortunate events leading up to the present day, with a mind towards helping you to start building a defensive perimeter around your business if life gets hard.
The financial architecture of the world starts with the Dollar, and then moves to the currencies and economies of the rest of the first world nations, and then to the emerging markets. The Fed’s balance sheet (an accounting of assets it buys with money created out of thin air) going into 2008 had less than a trillion dollars on it, but then from 2008 to 2018 grew from 990 billion to four and a half trillion. And just as we started to try to wean ourselves off that level, from four and a half down to four trillion, the emergence of the Pandemic caused those in charge to throw monetary caution to the wind, as the Fed then took its balance sheet from four trillion to nine trillion in just eighteen months. In a massive overreaction, they increased the money supply in the US by forty percent. No one knew what the mortality rate of Covid would be, but our leaders panicked. And that expansion in the money supply has now produced a similar forty percent rise in the global cost of goods.
Recognize that all of the world’s goods and services are ultimately valued in Dollars. Most of the world’s poor live in horribly mismanaged economies, but they survive because they find ways to remain fed, clothed, and housed in spite of it all. When global GDP is running at around three and half percent, and inflation is running at around one and a half percent, they can get by. But think about what happens in countries around the world like Argentina, or Lebanon, or Gaza, when you suddenly shock the world financial system with 40 percent inflation. The poor already lacked disposable income before the dollar inflated, so inflation now breaks them. Even worse, their economies then hyperinflate, producing a negative convexity to the emerging world when the US shocks the global system.
Consider what happens in countries like Turkey as hyperinflation kicks in, where a population exceeding 85 million lacks our fidelity to Western Civilization’s values. Egypt is now experiencing annual inflation at a rate exceeding 35 percent. Pakistan is well on its way there. And all of this results directly from the egregious moves made by our policymakers, forcing dollar inflation on an already grim world economy.
But you can’t blame just the Fed and Treasury for the disaster. Congress’ inability to control spending also plays a significant role. In fiscal 2023, the federal government took in 4.4 trillion in receipts, but spent 6.1 trillion. Folks trying to minimize the profound nature of this deficit spending will tell you that it only represents seven percent of GDP. Unfortunately, what’s really happening is that we are spending 40 percent more than we are taking in, with no end in sight.
The high rate of inflation that we’re creating in Dollar terms will now simply continue to expand into the rest of the world, breaking the global financial system with profound consequences. And while the sixteen idiots running the Fed keep indulging in self-congratulatory acts, and Treasury Secretary Janet Yellin (whose actual qualifications are as a Labor Economist, so we can’t blame her for the fact that she’s clueless about what really counts) famously asserts that the inflation we’re causing is “Transitory”, the hots spots that are most likely to ignite are now moving to the edge of war. It is not an accident that a hot war is now occurring in Europe, and that Iran and its proxies are now attacking Israel.
Worst of all, with growing social tensions now providing the tinder for ignition of wars throughout the globe, our current level of defense spending rests at a pathetic three and a half percent of GDP. By contrast, defense spending peaked at forty-seven and a half percent of GDP in 1945, because we were then fighting a war we had to win. But now, with global social unrest and emboldened enemies (keep an especially close eye on what happens as China increasingly asserts its rights over the Philippines in an area called the Second Thomas Shoal), America will have no choice but to dramatically ramp up military expenditures, and this will inevitably require additional deficit spending, pouring gasoline onto an already red-hot inflation fire.
In sum, with the Fed’s balance sheet currently standing at 7 trillion and headed higher as they attempt to reduce interest rates (in part to keep a weakened bank sector drowning in bad Commercial Real Estate loans afloat), and deficit spending at forty percent and moving higher, the stage is set for significant changes that will suddenly highlight the fragility of your company’s position in the economic ecosystem. The global social unrest that our macroeconomic mismanagement is now producing will inevitably serve as a catalyst for geopolitical instability, in turn creating a hinge in history. It’s unclear where this scenario will take us, but I’m betting that this does not turn out well.
In next month’s column, I’ll review strategies that may help to safeguard your company and your assets as we move into this new, potentially challenging economic era. I know this analysis seems a bit dark, but keep in mind the fact that the Chinese pictogram for “Crisis” requires drawing the forms for two words: “Danger” and “Opportunity”. Yes, there will be Danger, but if you can properly anticipate what’s coming and build the right plan, the Opportunity, though daunting, may yet produce a desirable outcome.
Class dismissed!
