It’s All a Gigantic Monopoly Game

Monopoly came about back in 1935.

The board game, based on an earlier game called The Landlord’s Game, aims to teach basic economics and show the dangers of concentrating land in the hands of a few.

Players move around the board, buying up areas which they can then develop with homes and hotels. They can also buy up utilities and infrastructure and then ask for ‘rent’ from anyone who lands on their property.

The goal is to own as much as possible so as to become the richest player…and to bankrupt all other players. A player becomes bankrupt when they owe more than what they own.

It’s probably no coincidence then that the game came about in the aftermath of the roaring twenties and the Great Depression, a time of excesses that resulted in a huge crisis.

If you have ever played the game, you have probably noticed two things.

The first is that the game can be really long.

In fact, I don’t remember ever finishing a game. We usually get tired and declare whoever has the most money and properties the winner.

Bankrupting all the players can take a long time…which brings me to my second point.

The banker — who pretty much controls the game — can never run out of money.

According to the rules (emphasis mine):

THE BANK…Besides the Bank’s money, the Bank holds the Title Deed cards and houses and hotels prior to purchase and use by the players. The Bank pays salaries and bonuses. It sells and auctions properties and hands out their proper Title Deed cards; it sells houses and hotels to the players and loans money when required on mortgages.

‘The Bank collects all taxes, fines, loans and interest, and the price of all properties which it sells and auctions. The Bank never “goes broke.” If the Bank runs out of money, the Banker may issue as much more as may be needed by writing on any ordinary paper.

In a way, this makes Monopoly an endless game…and quite similar to our current economic system.

Paper money is an ‘I owe you’ backed by nothing except confidence on the banker. The banker can print as much of it as it wants, and the more money the banker issues the more power money loses.

But, if we were in a game of Monopoly now, I would say we are reaching a critical point in the game.

The US Federal Reserve started meetings yesterday to decide if they issue another rate hike.

They need to get to 3% to stave off any potential crisis…and to counteract the stimulus from the tax breaks issued by the government earlier this year.

But, there is a lot of debt in the system, much more than during the 2007 debt crisis. And higher interest rates will make all that debt more expensive.

Markets are watching closely. After years of record performance, they are fretting. Higher debt will cut on earnings.

Will the Fed raise this week…and keep to their plan of at least three increases in the new year?

US President Donald J Trump isn’t happy about it….and he took to Twitter to show it:

Donald Trump tweet
Source: Twitter

Higher interest rates make debt more expensive, but they also make for a stronger dollar. This makes exports more expensive which increases the trade deficit, something Trump is looking to reduce.

But, higher interest rates are only a part of this story.

Since 2008, bankers decreased rates but also flooded the economy with liquidity. That is, they issued as much paper money as they needed to stimulate the economy with something called quantitative easing (QE), increasing their balance sheet.

But now, central banks are not only making debt more expensive but taking all that liquidity away with quantitative tightening (QT)

In other words, the banker is refusing to create more money on ordinary blank pieces of paper.

Trump isn’t the only one asking the Fed to take a break.

In a recent opinion piece for The Wall Street Journal, ex-Fed governor Kevin Warsh and Stanley Druckenmiller, the CEO for Duquesne Family Office LLC, make a case for the Fed to pause their program:

Around Oct. 1, global central-bank liquidity reversed and stocks began their descent from peak prices. That is no coincidence. The Federal Reserve should take an important signal from recent developments at its meeting this week. [..]

The Fed’s balance sheet is where the money is. Yet it has provided little additional clarity on its balance-sheet plans since Chair Janet Yellen’s tenure. At a time of global quantitative tightening and uncertain economic prospects, the Fed’s silence on its asset holdings is contributing to the tumult. We were assured by policy makers that QE provided large benefits to the real economy. If so, won’t its reversal in the form of QT come with a cost? It can’t all be rainbows and unicorns.

The Fed is taking liquidity out of the system and increasing interest rates.

Volatility is picking up…calls for an early recession are mounting.

Could we be getting close to ending the game?

Best,

Selva Freigedo

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