Belarus just saw its central bank raise interest rates significantly. I think what has happened to the economy in Belarus over the past few months is an important indicator that serves as a precedent for what is to come in the major Western economies, particularly the United States.
- Like any nation-state with a fiat monetary policy controlled by a central bank, Belarus has a debt problem, and recently got its debt rating cut by S&P.
- As with any debt crisis, the problem really begins when the creditor is not getting their installment payments. If this happens -- or in some cases, if there is even the threat of this happening -- distribution chains can get disrupted. In the case of Belarus, it has already seen power outages related to debt payment concerns emerge.
- Currency devaluation is one of the most important steps, as fiat currencies tend to inflate their debt away. Crises always expose themselves to market panics -- no matter whether this panic is created by a regulatory authority or by grassroots market forces. Belarus used monetary policy to devalue its currency by 56% over the period of one night.
- Currency devaluation means imports become more expensive -- and thus, more scarce. Belarus ran out of meat.
- Interest rates begin to rise to strengthen the currency. Belarus has increased its interest rate by 16.5% thus far this year.
This sequence of events will manifest themselves in economies exposed to the global sovereign debt crisis. Indeed this destructive sequence may manifest in all economies, as a result of the instability inherent in monetary systems in which virtual all money is loaned into existence with no restriction as to the maximum money supply. And so, I think a similar sequence of events could occur -- and in fact, is probably already under way -- even in large economies like the United States.
The trading opportunity here is gold. Once interest rates rise, there will be a collapse in demand for goods/services purchased primarily with credit, such as real estate -- and so opportunities to take profits in gold and put them in real estate after interest rates go up may emerge.
Disruption of distribution networks stemming from the ongoing global sovereign debt crisis also set the stage for new distribution systems to emerge -- particularly for energy. The new distribution system of the world will built atop information networks like Google (GOOG), Amazon (AMZN), Facebook, and other internet companies skilled in building and coordinating communities.
But, the foundation must be set before the real winners can be built, and the current foundation is anything but stable. So, the companies in Bubble 2.0 were pursuing largely the right idea, but due to the financing imbalances borne out of an inherently instable monetary system, the opportunities will not be realized by the Internet sector -- yet, that is.