Dennis Tubbergen – Dennis Tubbergen

Inflation and Debt Realities

Ever since the updated “New Retirement Rules” book was published in 2016, I have been warning that debt excesses would lead to a severe deflationary environment.

While such an economic climate has not yet fully emerged, there are signs that we are entering such a period. Stocks have fallen 20% from their peak, real estate markets are running out of steam, and the Federal Reserve is raising interest rates to attempt to tame inflation. Ironically, Federal Reserve easy money policies have led to the inflation we have been experiencing, and now the Fed is attempting to solve a problem that it had a big role in creating.

Meanwhile, as Americans are trying to deal with the inflationary environment, credit card debt has been rising – now topping $1 trillion for the first time in history. This¹ from “ABC News”:

U.S. consumers’ total credit card debt exceeded $1 trillion for the first time, according to a new study by the personal finance website WalletHub.

Consumers took on an additional $92.2 billion in debt last year, the highest single-year amount since 2007. The average U.S. household owes $8,600 on credit cards, WalletHub found.

The accumulation of debt reflected Americans’ confidence in the economy, according to Jill Gonzalez, a senior analyst at WalletHub.

“We haven’t seen anything like this,” she told ABC News. “Consumer confidence is at its highest point. Since the recession, people have been saving up for houses, cars … new furniture and appliances, which often get charged on credit cards.”

I find it interesting that Ms. Gonzalez interprets such high credit card debt as somehow being good for the economy.

In my view, Ms. Gonzales’ rationale for such a conclusion is completely nonsensical. If consumers have indeed been “saving up” for major purchases like cars, furniture, and appliances, it seems that credit card debt would not be higher; instead, it would be lower.

If I were saving up for a major purchase and elected to put the purchase on a credit card, I would be paying off the credit card balance on the due date to avoid interest charges.

This is NOT what is happening.

Instead, consumers are carrying balances on their credit cards.

And a quick review of the retail sales numbers confirms that this record-high level of credit card debt is not due to retail purchases. This² from “Market Watch”:
The numbers: Sales at retailers fell 0.4% in February and declined for the third time in four months, pointing to a slowdown in consumer spending as higher interest rates take a bite out of the U.S. economic growth.

Retail sales are a big part of consumer spending and offer clues about the strength of the economy. Sales had been forecast to fall 0.4%, based on a Wall Street Journal poll of economists.

Setting aside car dealers and gas stations, U.S. retail sales were still fairly tepid. Receipts fell at department stores, home centers and outlets that sell home furnishings, clothing and sporting goods.

Seems that these numbers invalidate the opinion of Ms. Gonzales.

It seems more likely that the reason credit card balances topped $1 trillion is that consumers are feeling the pinch of inflation and dealing with it by taking on debt.

Of course, this will only exacerbate the debt problem and make the eventual deflationary environment worse.

Another headwind for the economy and the government is the ever-increasing cost of servicing the US Government’s debt.

This⁴ from “Global Macro Monitor”:

Interest payments on the national debt during the current fiscal year (October to February) are up 29 percent y/y, one of the fastest-growing expenditure components of the Federal budget (see table).

Revenues are down, especially individual income taxes, which may reflect the slowing economy. Theory dictates (ceteris paribus) that government tax revenues should be rising with inflation, however. Hmmm.

The fact income tax receipts are lower but self-employment tax revenues (1099 employees) are higher, coupled with what is happening with the employment data, can we hypothesize that high income earners are leaving the workforce (or getting fired) and starting their own businesses, such as consultants, for example? Or could it be just a timing issue?

The overall deficit is exploding, btw, up 50 percent.

If the current situation normalizes and Treasury securities lose their flight-to-quality bid, interest rates are going to spike faster than one of Elon’s rockets.

Interest costs to service the debt are higher, and tax revenues are lower (can you say recession?).

Worse yet, can you say financial crisis ahead? Whether it is around the corner or a few years off, the current spending trajectory is not sustainable.

As the economy slows, expect tax revenues to decline and deficits to widen even further.

The overriding theme of the current world economy is excessive debt. Debt excesses exist in the private sector and on the balance sheet of nearly every world government.

Applying a little common sense (which has almost gone the way of the dinosaur) to the current worldwide debt situation has one concluding that there is no way for the debt to be paid.

The only question is how long it will be before the full reset arrives.

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The Problem with Fractional Reserve Banking and an Interesting Irony

Last week, I discussed the failure of Silicon Valley Bank and the harsh realities of the fractional reserve banking system.

Since I wrote that piece last week, there have been more bank failures and bank rescue packages.

Signature Bank followed Silicon Valley Bank. Credit Suisse was propped up with a $54 billion loan from the central bank of Switzerland. First Republic Bank is being bailed out by bigger banks.

As I have been stating here for a VERY long time, when there is too much debt to be paid, it won’t be paid. And, since banks have debt as assets, when debt goes unpaid, banks fail.

In the case of Signature Bank, there is an interesting ancillary story.

First, the facts around the Signature Bank failure. While I am no longer a fan of the editorial content of “Forbes”, the magazine did report on the Signature Bank failure (Source: https://www.forbes.com/sites/brianbushard/2023/03/13/what-happened-to-signature-bank-the-latest-bank-failure-marks-third-largest-in-history/?sh=b4456b890ff6):

Signature Bank, a New York-based regional bank that became a leader in cryptocurrency lending, shuttered suddenly on Sunday, marking the third-biggest bank failure in U.S. history just two days after the country’s second biggest failure, Silicon Valley Bank, rocked the stock market and reignited fears of “challenging and turbulent” economic times.

New York’s Department of Financial Services announced Sunday it had taken possession of the bank, which had more than $110 billion in assets and more than $88 billion in deposits as of the end of last year.

Signature Bank became the third regional bank to collapse in a matter of weeks, following the high-profile collapse of California-based crypto-friendly banks Silvergate Bank and Silicon Valley Bank, whose failure spooked investors wary of widespread financial vulnerability.

Interestingly, one of the Signature Bank board members is former US Congressman and co-sponsor of the Dodd-Frank Act, Mr. Barney Frank.

If you’re not familiar with the Dodd-Frank Act, it was passed in 2010 in response to the banking failures at the time of the Great Financial Crisis. Dodd-Frank (among other things) created the Financial Stability Oversight Council. According to the Dodd-Frank Act, the FSOC has three primary purposes (Source: https://www.investopedia.com/terms/f/financial-stability-oversight-council.asp):

“To identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace.
To promote market discipline by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the U.S. government will shield them from losses in the event of failure.
To respond to emerging threats to the stability of the U.S. financial system.”

I find number 2 above especially interesting. Reading it, one would logically conclude that bailouts would be a thing of the past. But, as we all know, bailouts are once again being used to make depositors, even uninsured depositors, whole. This from “CBS News” (Source: https://www.cbsnews.com/news/silicon-valley-bank-signature-bank-collapse-joe-biden-cbs-news-explains/)

The startling collapse of Silicon Valley Bank and Signature Bank continued to ripple across the American economy even as the U.S. raced to stabilize the banking system.

In a bid to contain the risk of contagion, financial regulators announced Sunday that they will guarantee all deposits at the banks, while President Biden said Monday that “Americans can have confidence that the banking system is safe.”

In the case of the Signature Bank failure, there is an interesting, ironic side story. Seems that the co-sponsor of the Dodd-Frank Act, former congressman Barney Frank, is on the Board of Directors of Signature Bank. This from “The Wall Street Journal” (Source: https://www.wsj.com/articles/barney-frank-signature-bank-failure-silicon-valley-bank-dodd-frank-congress-elizabeth-warren-d1588178?mod=djemalertNEWS):

Life is full of irony, but it’s hard to think of a richer one than Barney Frank sitting on the board of the failed Signature Bank. The former Congressman who was the scourge of Wall Street, the co-author of the Dodd-Frank Act that was supposed to keep the banking system safe, wasn’t able to prevent his bank from becoming one of the first casualties of the latest bank panic.

It’s amusing to think of Mr. Frank cashing a check as a bank director, but then even left-wing former Congressmen have to make a living. And in Mr. Frank’s case, it has been a nice one, with cash compensation of $121,750 and stock awards of $180,182 in 2022 alone. He’s been on the board since 2015. Perhaps out of office and late in life, Mr. Frank developed a strange new respect for capitalism.

Mr. Frank once famously said he wanted to “roll the dice” to ramp up lending on Fannie Mae and Freddie Mac before they failed. Signature seems to have done the same as it dove into crypto during the Federal Reserve-fueled financial mania.

In recent interviews, Mr. Frank is blaming crypto for the bank’s demise in the wake of the Silicon Valley Bank (SVB) closure on Friday. He told Politico that Signature was in good shape as recently as Friday, but was then hit by “the nervousness and beyond nervousness from SVB and crypto.” He said the bank is the “unfortunate victim of the panic that really goes back to FTX,” the failed crypto exchange.

Mr. Frank seems to blame regulators for taking a needlessly hard line against Signature because of crypto. “I think that if we’d been allowed to open tomorrow, that we could’ve continued,” Mr. Frank told Bloomberg. “We have a solid loan book, we’re the biggest lender in New York City under the low-income housing tax credit.”

We sympathize with Mr. Frank because the Biden Administration really does want to purge the U.S. banking system of any dealings with crypto companies. It may be that the regulators decided to roll up Signature Bank because of its crypto association. It wouldn’t be the first time regulators saw an opening in a crisis to achieve a political goal by other means.

If Mr. Frank is right, he now knows how hundreds of thousands of other people in business feel when regulators panic for political reasons and look for businesses to shut or blame.

As for the failure of Dodd-Frank’s regulatory machinery to prevent the latest bank failures, Mr. Frank is taking no blame. He says the reforms made the system sturdier, and he also dismisses claims by Sen. Elizabeth Warren that some modest Trump-era changes in bank rules for mid-sized banks made a difference.

“I don’t think that had any effect,” Mr. Frank told Bloomberg. “I don’t think there was any laxity on the part of regulators in regulating the banks in that category, from $50 billion to $250 billion.” He ought to know from where he sat on the Signature board.

Mr. Frank is getting a painful education in the difficulty of running a company when politicians don’t like the business you’re in.

The reality is, as I noted last week, that under the fractional reserve banking system, even banks that would be considered healthy by current standards can be taken out by a bank run by depositors. This is a reality that was reiterated in a recent MSNBC interview by former FDIC Chair Sheila Bair. (Source: https://www.msn.com/en-us/money/companies/banking-system-on-the-verge-of-a-bear-stearns-moment-former-fdic-chair/ar-AA18LP2A)

Bair added that the “immediate problem” posed by the situation in the banking system is “if people start to panic and take deposits out of a perfectly healthy bank, they’re going to force that bank to close.”

“It’s the classic Jimmy Stewart problem,” she told host Neil Cavuto. “We deposit money into a bank, they lend it out, they invest it in securities, it’s not all sitting in a vault. If you try to get all the money out at once, you’re going to force the bank to unnecessarily fail.”

According to Bair, actions taken by the government have created “mass confusion” that could cause efforts to support the banking system to backfire. Acknowledging there are some banks with problems, she also emphasized that only a small percentage of the overall banking system has issues.

“[The government is] trying to imply that all uninsured are protected, which they don’t have legal authority to do, frankly, and this is putting pressure on community banks,” she said. “It’s really troubling.”

“First Bank Failure of Many?”

As I discuss in my New Retirement Rules Class, ever since 1971, the US Dollar has been debt rather than an asset.

On August 15, 1971, President Richard Nixon eliminated the link between the US Dollar and gold, making the US Dollar a fiat currency.

Since that date, US Dollars have been loaned into existence. The lower a bank’s reserve requirement and the more borrowing that occurs, the more US Dollars are created. Of course, as longer-term readers of this weekly publication know, after the financial crisis, when interest rates were reduced to zero, lending did not accelerate. It was at that point that the Federal Reserve began a ‘temporary’ program of quantitative easing or currency creation.

Since that time, worldwide debt has increased from about $100 trillion to about $300 trillion.

Since banks have debt as assets, I have been talking about the strong likelihood of banks failing as excessive debt goes unpaid.

This pattern of bank failures as asset price bubbles caused by currency creation has existed for much of history.

It happened during the financial crisis.

Many of you probably remember Henry Paulsen, the Treasury Secretary at the time, getting on television and stating that unless he got $700 billion from congress immediately, the financial system as we knew it would fail.

Congress complied and the banks got their bail out.

From a historical perspective, a bailout is not normal or typical. For most of history, when banks fail, there is a ‘bail-in.’ Banks are bailed out by the bank’s depositors, who lose some or all of the money they have in the bank.

A bail-in was the solution for failed banks in 1933 when President Roosevelt declared a bank holiday, relieving banks of any responsibility to repay depositors.

While it is too early to tell, the most recent bank failure involving Silicon Valley Bank will likely see many depositors lose their deposits. Looks like at least a partial bail-in might be happening.

In case you haven’t yet heard, Silicon Valley Bank, the 18^th largest in the country, failed last week. This from “Zero Hedge”. (Source: https://www.zerohedge.com/markets/record-bank-run-drained-quarter-or-42-billion-svbs-deposits-hours-leaving-it-negative-1bn):

For those who slept through yesterday, here is what you missed and why the US banking system is suffering its worst crisis since 2020. Silicon Valley Bank, aka SIVB, the 18th largest bank in the US with $212 billion in assets of which $120 billion are securities (of which most or $57.7BN are Held to Maturity (HTM) Mortgage Backed Securities and another $10.5BN are CMO, while $26BN are Available for Sale, more on that later )…

… funded by over $173 billion in deposits (of which $151.5 billion are uninsured), has long been viewed as the bank at the heart of the US startup industry due to its singular focus on venture-capital firms. In many ways it echoes the issues we saw at Silvergate, which banked crypto firms almost exclusively.

The big question, of course, is what happened in the past 24 hours to not only snuff the bank’s proposed equity offering, but to push the bank into insolvency.

We got the answer just a few moments after that tweet, when the California Department of Financial Protection and Innovation reported that shortly after the Bank announced a loss of approximately $1.8 billion from a sale of investments and was conducting a capital raise (which we now know failed), and despite the bank being in sound financial condition prior to March 9, 2023, “investors and depositors reacted by initiating withdrawals of $42 billion in deposits from the Bank on March 9, 2023, causing a run on the Bank.“

As a result of this furious drain, as of the close of business on Thursday, March 9, “the bank had a negative cash balance of approximately $958 million.”

At this point, despite attempts from the Bank, with the assistance of regulators, “to transfer collateral from various sources, the Bank did not meet its cash letter with the Federal Reserve. The precipitous deposit withdrawal has caused the Bank to be incapable of paying its obligations as they come due, and the bank is now insolvent.”

Some context: as a reminder, SIVB had $173 billion in deposits as of Dec 31., which means that in just a few hours a historic bank run drained a quarter of the bank’s funding!

But not everyone got out in time obviously, there is a long line of depositors who are over the $250,000 FDIC insured limit (in fact only somewhere between 3 and 7% of total deposits are insured).

The article goes on, listing MANY companies and organizations that had uninsured deposits in the bank.

Here’s the reality of the fractionalized banking system. Banks are required to maintain minimum reserves that are a percentage of deposits. That minimum reserve requirement currently stands at 10%.

As the article excerpt above points out, the run on Silicon Valley Bank had depositors demanding withdrawals of $42 billion on total approximate assets (as of December 31, 2022) of $173 billion.

That’s a little more than 24% of deposits.

This bank had a relatively high amount of liquidity given the minimum required level of reserves. Yet, despite that relatively high level of liquidity, the bank run consumed all the liquidity and then some, making the bank insolvent.

“Business Insider” tells of the predicament of a winery owner who is dealing with the bank failure. (Source: https://www.businessinsider.com/silicon-valley-bank-collapse-wine-industry-napa-valley-cade-surprise-2023-3?utm_campaign=tech-sf&utm_medium=social&utm_source=facebook):

Conover said CADE has a “large loan” and mortgage with SVB on four wineries and five vineyards. And as of Saturday, the company’s checking account “is locked up.”

“I’ve never been through this before,” Conover said. The only similar crisis he could recall was during the 2008 recession.

Here is a business owner with debt outstanding to the bank with a checking account that is locked up and not accessible.

While it will take some time to see how this is sorted out, for the time being, this business owner has a problem – outstanding loans requiring payments and a once liquid checking account that is now illiquid.

There are a few lessons here.

One, as noted at the beginning of this piece, if there is too much debt to be paid, it won’t be paid. Since banks have debt as assets, when debt goes unpaid, banks become insolvent.

Two, under the fractionalized banking system, because reserves are only a portion of deposits, nearly any bank that experiences a bank run of large enough magnitude can become insolvent.

Three, it’s probably prudent to know the safety ratings of your bank, keep deposits under the $250,000 insurance threshold (if possible), and diversify holdings among multiple banks.

Stagflation Imminent?

Last week, I discussed the inevitable outcome of government overspending and central bank overprinting.

This outcome will be as ugly as it will be predictable in my view.

Eventually, inflation will give way to an ugly deflationary environment. In the meantime, we will probably see stagflation – rising consumer prices and falling asset prices. Professor Noriel Roubini has a similar take. This from “Markets Insider” (Source: https://markets.businessinsider.com/news/stocks/nouriel-roubini-economy-recession-inflation-debt-market-crash-dr-doom-2023-3):

A “perfect storm” is brewing, and markets this year are going to get hit with a recession, a debt crisis, and out-of-control inflation, the economist Nouriel “Dr. Doom” Roubini said.

Roubini, one of the first economists to call the 2008 recession, has been warning for months of a stagflationary debt crisis, which would combine the worst aspects of ’70s-style stagflation and the ’08 debt crisis.

“I do believe that a stagflationary crisis is going to emerge this year,” Roubini said Thursday in an interview with Australia’s ABC.

With consumer inflation still sticky at 6.4%, Roubini said he estimated that the Federal Reserve would need to lift benchmark rates “well above” 6% for inflation to fall back to its 2% target.

That could spark a severe recession, a stock-market crash, and an explosion in debt defaults, leaving the Fed with no choice but to back off its inflation fight and let prices spiral out of control, he added. The result would be a steep recession, anyway, followed by more debt and inflation problems.

“Now we’re facing the perfect storm: inflation, stagflation, recession, and a potential debt crisis,” Roubini said.

He has remained ultrabearish on the economy, despite the market’s growing hope that the US could skirt a recession this year.

Though more bullish commentators are making the case for a healthy rebound in the S&P 500, which fell 20% last year, Roubini has previously said the benchmark stock index could slide another 30% as investors battled extreme macro conditions.

“They will continue to go down,” he said of stocks, pointing to the recent sell-off as investors priced in higher interest rates from the Fed. “The market is already correcting.”

He urged investors to protect themselves by choosing inflation hedges, such as gold, inflation-indexed bonds, and short-term bonds. Those picks are likely to beat stocks and bonds, he said, which could suffer.

I believe Roubini is correct on a couple counts.

Stocks will likely decline further in my view. One only needs to look at the Buffet Indicator to quickly conclude that despite last year’s decline in stock values, stocks remain heavily overvalued.

And, in order to tame inflation, as I have stated previously, real interest rates need to be positive – interest rates need to be higher than the inflation rate.

There are already signs of stagflation emerging. The real estate market is a good example. Wolf Richter, had this to say on real estate (Source: https://wolfstreet.com/2023/03/04/housing-bust-2-has-begun/):

The housing market in the United States has turned down, and in some big markets very dramatically so. Other markets lag a little behind.

That’s how it went during the last Housing Bust, that I now call Housing Bust #1. During Housing Bust #1, Miami, Phoenix, San Diego, Las Vegas, etc. were a little ahead; other places, like San Francisco were a little behind. In 2007, people in San Francisco thought they would be spared the housing bust they saw unfolding across the country. And then it came to San Francisco with a vengeance.

This time around, San Francisco and Silicon Valley, and the entire San Francisco Bay Area, are at the forefront, along with Boise, Seattle, and some others. In the San Francisco Bay Area, during the first 10 months of this housing bust, Housing Bust #2, the median house price has plunged faster than it did during the first 10 months of Housing Bust #1. That’s what we’re looking at. I’ll get into the details in a moment.

Across the US, home sales have plunged month after month ever since mortgage rates started to rise a year ago. In January, across the US, total home sales plunged by 37% from January last year. Sales plunged in all regions, but they plunged worst in the West, by 42% year-over-year, and the least worst, if I may, in the Midwest, by 33%. This is happening everywhere.

The median price of all types of homes across the US in January fell for the seventh month in a row, down over 13% from the peak in June. Some of the decline is seasonal, and some is not.

This drop whittled down the year-over-year gain to just 1.3%. At this pace, we will see a year-over-year price decline in February or March, which would be the first year-over-year price decline across the US since Housing Bust 1.

Active listings were up by nearly 70% from a year ago, though by historical standards they’re still low. Lots of sellers are sitting on their vacant properties and are holding them off the market, and are putting them on the rental market or are trying to make a go of it as vacation rentals. And they’re all hoping that “this too shall pass.”

“This too shall pass” – that’s the mortgage rates. The average 30-year fixed mortgage rate went over 7% late last year, then in January, it dropped, went as low as 6%, and the entire industry was breathing a sigh of relief. This was based on fervent hopes that inflation would just vanish, and that the Federal Reserve would cut interest rates soon, and be done with this whole nightmare.

But in early February came the realization that inflation wasn’t just going away. Friday’s inflation data confirmed that inflation is reaccelerating, that it already started the process of reacceleration in December. Some goods prices are down, but inflation in services spiked to a four-decade high. Services is nearly two-thirds of what consumers spend their money on. Inflation is very difficult to dislodge from services. The Federal Reserve is going to have its hands full dealing with this – meaning higher rates for longer.

And mortgage rates jumped again and on Friday were back to about 6.9%, according to the daily measure by Mortgage News Daily. Just a hair below the magic 7%.

And potential sellers are still sitting on their vacant properties, thinking: and this too shall pass.

So how many vacant homes are there? The Census Bureau tracks this. In the fourth quarter last year, there were nearly 15 million vacant housing units – so single-family houses, condos, and rental apartments. That’s over 10% of the total housing stock.

In 2022, the number of total housing units increased by over 1.3 million. If each housing unit is occupied on average by 2.5 people, that’s housing for 3.3 million more people than in the prior year. The US population hasn’t grown nearly that fast in 2022.

Ok, so now here are nearly 15 million vacant housing units. Of them, 11 million were vacant year-round. Some of the 11 million were being remodeled to be rented out, and others were for sale, and that’s the inventory we actually see, and there are other reasons why homes were vacant.

But 6.6 million homes were held off the market, for a variety of reasons, such as that the owners don’t want to sell the property at the moment.

If just 10% of these 6.6 million homes that are held off the market show up on the market, it would double the total number of active listings. If 20% of these homes show up on the market, it would trigger an enormous glut.

This is the shadow inventory. It can emerge at any time. And during Housing Bust 1, this shadow inventory that suddenly emerged created the biggest housing glut ever.

As I noted last week, history teaches us that excessive debt levels lead to deflation.

This time will ultimately be no different.

Deflation will at some point, become the prevalent economic force. In the meantime, expect stagflation.

That will be more bad news for stocks and real estate as well as consumer prices.

The best advice that I can offer is to have some of your assets that will be protected from a prolonged decline in stocks and real estate and other assets that will perform well in an inflationary environment.

An Artificial Economy

The March “You May Not Know Report” discusses how the current economy (since the time of the Great Financial Crisis) is artificial- the result of easy money policies by the Federal Reserve and government stimulus.

History teaches us that when governments overspend and central banks over print, eventually, reality sets in. One of the founding fathers, Thomas Jefferson, told us that we could expect inflation followed by deflation and that is exactly the track on which we now find ourselves.

Inflation has not subsided; the most recent data shows that inflation is accelerating exactly as Jefferson suggested it would. And Americans are suffering as a result. There are now also signs of deflation setting in as well. This from Michael Maharrey writing for Schiff Gold (Source: https://schiffgold.com/commentaries/this-strong-economy-is-a-facade-built-out-of-debt/):

Retail sales surged in January, creating the impression that the economy is humming along nicely. After all, there can’t be a problem if consumers are out there consuming, right?

But a lot of people are ignoring a key question: how are people paying for this shopping spree?

As it turns out, they’re putting a lot of this spending on credit cards.

Even with a big 1.8% decline in retail sales in December, revolving credit, primarily reflecting credit card debt, grew by another $7.2 billion that month, a 7.3% increase.

To put the numbers into perspective, the annual increase in 2019, prior to the pandemic, was 3.6%. It’s pretty clear that Americans are still heavily relying on credit cards to make ends meet.

Meanwhile, household debt rose by $394 billion in the fourth quarter of 2022. It was the largest quarter-on-quarter increase in household debt in two decades.

Debt balances have risen $2.7 trillion higher than they were at the beginning of the pandemic.

Clearly, this isn’t a sign of a healthy economy. Americans are spending more on everything thanks to rampant price inflation that doesn’t appear to be waning, and they’re relying on credit cards to do it. Saving has plunged. This isn’t a sound economic foundation, and it isn’t even sustainable. Credit cards have a nasty thing called a limit. And with credit card interest rates at record-high levels, people will reach those limits pretty quickly.

I ran across something the other day that provides an even more striking example of just how reliant the US economy is on debt.

A company called the Wisconsin Cheeseman sells gift packs of cheese, candies and other treats. And you can buy the gifts on their in-house credit plan.

Let this sink in for a moment. A primary pitch from a gift company is that you can buy on credit.

The annual percentage rate will run you a modest 5.75% to a hefty 25.99% depending on the state. (Most states are currently above 20%. But don’t worry. Your payments can be as low as $10 a month.) Just don’t think about the fact that you’ll probably be paying for this cheese for years to come.

There are other companies facilitating borrowing this doesn’t even show up in the official debt figures.

The use of BNLP services such as Affirm, Afterpay and Klarna has exploded in the last couple of years. These services allow consumers to pay off purchases through installment payments, often interest-free. In a December 2021 report, Cardify CEO Derrick Fung said buy now, pay later has rapidly become more mainstream.

“The consumer over the last 12 months has become more compulsive and BNPL products are the result of us being locked up for too long and wanting more instant gratification,” he said.

Buy now, pay later is a convenient way to spread out spending, but there is a dark side. It encourages consumers to spend more. Nearly 46% of those polled said they would spend less if BNPL wasn’t an option.

The rise of buy now pay later (BNPL) is another sign of a deeply dysfunctional economy. Americans are piling up millions of dollars of additional debt using BNPL on top of their credit cards.

So, while the mainstream pundits tell you the economy is strong, they are looking at a facade. It’s a house of cards. And eventually, it will collapse.

American consumers continue to “support the economy” by spending money today despite rising prices. But they’re borrowing to do it. Tomorrow is fast approaching. And with it depleted savings, higher interest rates, and looming credit card limits. This is simply not a sustainable trajectory, no matter how the mainstream press tries to spin it.

Consumers are struggling. That means that the deflation part of the cycle that Jefferson warned us about may be about to emerge in earnest.

As I have stated in the past (and there are many analysts who would disagree with me), I expect that the Federal Reserve will reverse course and begin pursuing easy money policies once again.

Should I be right about this, we will have to wait and see if the Fed can be effective. I have my doubts. Consumers are accumulating too much debt.

The chart below breaks down debt accumulation by age. Alarmingly, those age 60 plus are accumulating more debt on a percentage basis than other age groups. That should serve as a huge red flag and warning sign.

This time will be no different.

Deflation will, at some point, become the prevalent economic force.

That will be more bad news for stocks and real estate.

Stocks are already feeling it, and real estate is now beginning to dramatically unwind in many parts of the country.

Debt Truths

A seldom-discussed topic that has a significant economic impact is private sector debt levels.

Ever since 1971, when the US Dollar became a fiat currency, and new currency has been created by loaning it into existence.

If banks have a 10% reserve requirement, a $100,000 deposit into a bank can be transformed into $1,000,000 if the velocity of money is high enough.

For example, say you deposit $100,000 into your bank. Your banker reserves 10% or $10,000 and loans out the other $90,000. Say the borrower of the $90,000 buys an expensive car and borrows the $90,000 now available from your bank to do so. The car dealer deposits the $90,000 into her bank. That banker reserves 10% or $9,000 and loans out the other $81,000. That process continues up to a maximum of new currency created of $1,000,000.

Historically, when the Federal Reserve wanted to jump-start the economy by increasing the currency supply, the central bank would reduce interest rates to increase the velocity of money, thereby creating more currency.

That worked until the time of the financial crisis when interest rates were reduced to zero, but lending did not follow due to the fact that, collectively speaking, the American public was already deeply in debt.

It was at that point the Federal Reserve made the decision to ‘temporarily’ pursue a program of quantitative easing or currency creation. As we all now know, the program continued long past the time that a reasonable person would say it was temporary.

As I have often stated, it is my belief that this program will once again be revived in earnest, although it will likely be called something other than quantitative easing.

Since the time of the financial crisis, this policy of currency creation has caused debt levels to increase immensely. At the time of the financial crisis, worldwide debt was about $100 trillion. It now stands at $300 trillion – a truly remarkable number.

Presently, debt levels are continuing to increase. The data shows that consumers are increasingly taking on new debt to cope with rising living costs. This from “Zero Hedge” (Source: https://www.zerohedge.com/markets/consumer-debt-soars-394bn-most-20-years-record-169-trillion-young-borrowers-struggle-repay):

While it won’t tell us anything we don’t know – since it is two months delayed and we already get monthly updates from the Fed via the G.19 statement – this morning, the NY Fed published its quarterly Household Debt and Credit report, which showed that total household debt in the fourth quarter of 2022 rose by 2.4% or $394 billion, the largest nominal quarterly increase in twenty years, to a record $16.90 trillion. Balances now stand $2.75 trillion higher than at the end of 2019, before the pandemic recession.

And the same chart broken down by age:

Every type of consumer credit increased in Q4, and here is a detailed breakdown:

Mortgage balances rose by $254 billion in the fourth quarter of 2022 and stood at $11.92 trillion at the end of December, marking a nearly $1 trillion increase in mortgage balances in 2022.
Home equity lines of credit rose by $14 billion to $340 billion.
Student loan balances now stand at $1.60 trillion, up by $21 billion from the previous quarter. In total, non-housing balances grew by $126 billion.
Auto loan balances increased by $28 billion in the fourth quarter, consistent with the upward trajectory seen since 2011.
Credit card balances increased $61 billion in the fourth quarter to $986 billion, surpassing the pre-pandemic high of $927 billion.

There is an eternal truth about excessive debt accumulation – if there is too much debt to be paid, it won’t be paid.

This is true regarding private sector debt and it is true as far as government debt and liabilities are concerned as well.

It is my view, based on simple math, that debt levels are now past the point of no return and are now too high to ever be paid.

The result, at some future point, will be a massive deflationary environment that will, in my view, resemble the 1930’s; or, possibly, worse.

Looking at the first chart above, one can see the combined debt total of mortgage debt, home equity loan debt, auto debt, student loan debt, and credit card debt is now about 1/3^rd higher than at the time of the financial crisis.

Alarmingly, debt levels have grown the most among those over age 60. That, at least in my view, indicates that consumers are increasingly relying on debt to make ends meet in what is a very difficult economy.

And, to add insult to injury, the most recent inflation numbers indicate that inflation is not under control. This was not at all surprising to me. As I have been stating, the Fed isn’t doing enough to get inflation under control.

Inflation will not be controlled until we have real, positive interest rates – something we are a long way away from.

In the meantime, the US economy (and the world economy) is heading for a time of painful stagflation.

What is the Real Story?

For many years I have written about how economic data is often ‘massaged” (or manipulated?) to make the reported numbers look more favorable.

This is true of the reported inflation rate, the reported unemployment rate, and the money supply.

Now, it seems that there is extreme manipulation as far as the jobs report is concerned. This from Michael Snyder (Source: http://theeconomiccollapseblog.com/dont-be-stupid-the-u-s-economy-actually-lost-2-5-million-jobs-last-month/):

I can’t take it anymore. Fake numbers that are released by the government get turned into fake news by the corporate media, and many Americans don’t even realize that they are being conned. Major news outlets all over the country are breathlessly trumpeting the “blockbuster jobs report” as if it is a sign from heaven that good economic times are ahead. We are being told that the U.S. economy added 517,000 jobs last month, but that isn’t true. Sadly, the truth is that the U.S. economy actually lost 2.5 million jobs in January. Yes, you read that correctly. So how in the world does a loss of 2.5 million jobs become a “gain” of 517,000 jobs? Every month, government bureaucrats apply “adjustments” to the numbers that they believe are appropriate, and at this point, their “adjustments” have become so absurd that they have turned the monthly employment report into a total farce.

As I have been documenting on my website for weeks, there has been a tremendous wave of layoffs over the last several months.

Google, Microsoft, Amazon, Apple, Facebook, Lyft, Twitter, Walmart, McDonald’s, FedEx, and countless other large corporations have decided to conduct mass layoffs.

But now the government expects us to believe that the U.S. economy is actually adding jobs at a very brisk pace?

That doesn’t make any sense at all.

Unfortunately, the corporate media is totally buying it. For example, CNBC just posted an article that described the jobs report as “stunningly strong”…

The employment picture started off 2023 on a stunningly strong note, with nonfarm payrolls posting their biggest gain since July 2022.

Nonfarm payrolls increased by 517,000 for January, above the Dow Jones estimate of 187,000 and December’s gain of 260,000, according to a Labor Department report Friday.

And a CNN article has quoted one expert as saying that “the labor market is more like a bullet train”…

“With 517,000 new jobs added in January 2023 and the unemployment rate at 3.4%, this is a blockbuster report demonstrating that the labor market is more like a bullet train,” Becky Frankiewicz, president and chief commercial officer of ManpowerGroup, said Friday.

Really?

After all of the layoffs that we have witnessed in recent months, does she really believe that?

Not to be outdone, Moody’s Chief Economist Mark Zandi boldly declared that any concerns about a coming recession “should be completely dashed by these numbers”…

The January jobs report should “dash” concerns of recession, Moody’s chief economist said Friday, but warned that the numbers may overstate job growth.

“Any concern the economy is in recession or close to a recession should be completely dashed by these numbers,” Moody’s Chief Economist Mark Zandi told CNN’s Matt Egan on Friday, adding that it would take “an awful lot” to send the US economy into a downturn.

The U.S. economy did not add 517,000 jobs last month.

That is the “adjusted” number.

The “unadjusted” number actually shows that the U.S. economy lost 2.5 million jobs last month. The following comes from Bloomberg…

For the establishment survey, the government’s updated seasonal factors may have impacted the headline payrolls figure. On an unadjusted basis, payrolls actually fell by 2.5 million last month.

That is actually what was measured.

But if you brazenly add more than 3 million jobs to the report that simply do not exist, it makes it look like the U.S. economy is doing just great.

As we near the end of February, there have been even more layoffs announced. (Source: https://www.zerohedge.com/personal-finance/after-worst-january-job-cuts-great-recession-here-are-12-major-layoffs-have)

#1 Disney has decided to tell approximately 7,000 employees to hit the bricks…

“We will be reducing our workforce by approximately 7,000 jobs,” CEO Bob Iger said during the company’s first quarter earnings call. “While this is necessary to address the challenges we’re facing today, I do not make this decision lightly. I have enormous respect and appreciation for the talent and dedication of our employees worldwide, and I’m mindful of the personal impact of these changes.”

#2 Yahoo has announced that it will be laying off “more than 20% of its workforce”…

Yahoo will lay off more than 20% of its workforce by the end of 2023, eliminating 1,000 positions this week alone, the company said in a statement Thursday.

#3 Ebay was doing quite well, but now they have decided that 4 percent of their workers are no longer needed…

Ebay on Tuesday announced plans to cut 500 jobs, or about 4% of its workforce, according to a filing with the SEC.

#4 Affirm is yet another tech company that has recently made a decision to conduct mass layoffs…

Affirm announced it’s cutting 19% of its workforce Wednesday. The news came as it reported second quarter earnings that fell below analyst estimates on both the top and bottom lines.

#5 As the U.S. housing crash deepens, JPMorgan Chase has concluded that now is the time to “cut hundreds of mortgage employees”…

JPMorgan Chase & Co. cut hundreds of mortgage employees this week, adding to job losses across the industry as home-lending businesses continue to be hurt by elevated interest rates.

#6 GoDaddy just let their workers know that they plan to “reduce the size of our global team by about 8%”…

Today, we are announcing a plan to reduce the size of our global team by about 8%. This will come as difficult news for many valued and respected GoDaddy team members.

#7 Micron is one of the biggest private employers in Idaho, but now it intends to “reduce its global headcount by about 10% over the next year”…

Micron has begun laying off workers, a spokesperson for the company told the Idaho Statesman.

The news marks the beginning of the company’s plan to reduce its global headcount by about 10% over the next year. Micron CEO Sanjay Mehrotra announced during a quarterly conference call with investors in December that the company is taking significant steps to reduce costs and operating expenses as demand for its principal products wanes.

#8 GitHub has become yet another victim of the downsizing trend in the tech industry…

Microsoft-owned GitHub is laying off 10% of its staff, the company confirmed to Fortune.

#9 Nomad Health just laid off approximately 20 percent of their entire corporate workforce…

Nomad Health, a healthcare staffing startup, laid off around 20% of its corporate workforce this week, according to four terminated employees, as the surge in travel nurses and other temporary healthcare workers ignited by the pandemic cools down.

#10 Zoom is giving the axe to approximately 1,300 workers…

Zoom on Tuesday said it will lay off about 1,300 employees, or approximately 15% of its staff, becoming the latest tech company to announce significant job cuts as a pandemic-fueled surge in demand for digital services wanes.

#11 Boeing was supposedly going to be hiring more workers, but instead, the company just announced that thousands of positions in finance and human resources will be eliminated…

“We expect about 2,000 reductions this year primarily in Finance and HR through a combination of attrition and layoffs,” Boeing confirmed Monday.

#12 Do you remember when Dell computers were still popular? Unfortunately, the tide has turned, and now Dell has been forced to get rid of 6,650 workers…

Dell Technologies Inc. is eliminating about 6,650 roles as it faces plummeting demand for personal computers, becoming the latest technology company to announce thousands of job cuts.

Despite reports to the contrary, the labor market is not healthy.

Bubbles and a Stock Forecast

Ever since the time of the Great Financial Crisis, I have written about the topic of bubbles.

Whether the bubble is a price bubble in stocks, bonds, real estate or commodities, there are some ‘bubble characteristics’ that often hold true.

The first characteristic is that bubbles are often symmetrical, taking as long to unwind as they do to build.

The second bubble characteristic is that when a price bubble is graphed, the downside of the bubble is nearly a mirror image of the upside of the bubble.

Charles Hugh Smith wrote a piece on this topic last week that, in my view, does a nice job explaining these bubble characteristics. (Source: https://www.oftwominds.com/blogjan23/bubble-symmetry1-23.html) Here is an excerpt from his excellent piece: Should bubble symmetry play out in the S&P 500, we can anticipate a steep 45% drop to pre-bubble levels, followed by another leg down as the speculative frenzy is slowly extinguished.

Bubble symmetry is, well, interesting. The dot-com stock market bubble circa 1995-2003 offers a classic example of bubble symmetry, though there are many others as well. The key feature of bubble symmetry is the entire bubble retraces in roughly the same time frame as it took to soar to absurd heights.

Nobody could see bubble symmetry coming, of course. At the peak and for some time after, bubbles are viewed as the natural order of markets, and so they should continue expanding forever.

Alas, the natural order of markets is mean reversion and the collapse of whatever is unsustainable. This includes speculative manias, credit bubbles, asset bubbles, and projections of endless expansion of margins, profits, sales, consumption, tax revenues, and everything else under the sun.

There’s a well-worn psychological path in the collapse of bubbles. This path more or less tracks the Kubler-Ross phases of denial, anger, bargaining, depression, and acceptance, though the momentum of speculative frenzy demands extended displays of hubris and over-confidence, i.e., the first wobble “must be the bottom.”

There are also repeated spikes of false hope that “the bottom is in” and the bubble is starting to reflate.

This pattern repeats until the speculative fever finally breaks, and all those betting on a resumption of the bubble mania finally give up.

This process often takes about the same length of time that it took for the bubble mania to become ubiquitous. If it took about 2.5 years for the bubble to expand, it takes about 2.5 years for the bubble to pop and the market to return to its pre-bubble level.

Once again, we hear reasonable-sounding claims being used to support predictions of a never-ending rise in stock valuations.

What hasn’t changed is humans are still running Wetware 1.0, which has default settings for extremes of emotion, particularly manic euphoria, running with the herd (a.k.a. FOMO, fear of missing out), and panic / fear.

Despite all the assurances to the contrary, all bubbles pop because they are based in human emotions. We attempt to rationalize them by invoking the real world, but the reality is speculative manias are manifestations of human emotions and the feedback of running in a herd of social animals.

As I was reading Mr. Smith’s analysis, I thought I would graph stocks using a chart of an exchange-traded fund that tracks the price of the Standard and Poor’s 500:

Note that I have drawn 3 horizontal lines on the price chart.

Should stock prices fall to the most obvious strong area of support as noted by the top horizontal line, there would be a further decline in stock prices of about 40%.

Should prices fall to the second (or middle) horizontal line I’ve drawn on the chart, that would mark a decline of about 54% from these levels.

And, should stock prices fall to the levels noted by the third (or bottom) horizontal line on the chart, that would be about a 62% declines from these levels.

While the ‘buy the dip’ mentality seems to be dominating stock investors’ actions at this point, I expect a lot more downside in stocks before the bottom is finally in. I also believe that may mark a terrific opportunity to invest in stocks.

I am often asked for my ultimate stock forecast. While it’s impossible to predict the future actions of the Federal Reserve, I think that we will see additional downside in stocks of 40% to 60%.

Until we reach that point, I am of the opinion that many investors would be well-served to take a cautious and deliberate approach to managing assets.

Consequences of Debt Excesses and Irresponsible Currency Creation

Debt has consequences. As does currency creation to temporarily mask the economic effects of excessive debt.

While an entire book could be written on how the consequences of debt and high levels of currency creation will manifest in the months and years ahead, in this issue of “Portfolio Watch,” I will examine two of these outcomes.

First, let’s discuss debt, in particular, student loan debt.

While there are many with student loan debt who were hopefully anticipating that their loans would be forgiven, it now seems that is not likely. That said, if you have defaulted on student loan debt, don’t think you are off the hook; that unpaid debt will follow you into retirement. This is from “Insurance News Net”:

While the promise of student loan debt relief seems to slip further out of reach, the prospects of the debt coming back to bite people in their retirement grows.

That is because student loan debt delinquencies can be deducted from Social Security benefits to the tune of thousands of dollars per year. The number of debtors is rising, along with delinquencies, according to a recent study by Boston College’s Center for Retirement Research. In fact, student loan delinquency rates have surpassed all other types of consumer debt delinquencies between 2012 and early 2020.

That trend is accelerating, meaning more Americans will see their Social Security benefits shrink. The withholding amount is the lessor of 15% of the Social Security monthly benefit or the amount by which the benefit exceeds $750 per month. The deduction is an average of $2,500 annually, a 4% to 6% decrease in benefits, according to the study.

“While these amounts are relatively small, for households that are just making ends meet, even a small decline in income can have significant consequences,” according to the study. “Putting these numbers into context, the amount of withheld benefits could roughly pay off the average per capita credit card balance. Since delinquency rates are higher among younger borrowers, student loans may pose a bigger risk for this group’s future retirement security.”

While this may not be a huge economic headwind now, as time passes, it will become more of a problem, pulling discretionary income out of the consumer spending dependent US economy.

Currency creation causes the wealth gap to widen. History teaches us this unequivocally. This time around is no exception. This is from CNBC:

Over the last two years, the richest 1% of people have accumulated close to two-thirds of all new wealth created around the world, a new report from Oxfam says.

A total of $42 trillion in new wealth has been created since 2020, with $26 trillion, or 63%, of that being amassed by the top 1% of the ultra-rich, according to the report. The remaining 99% of the global population collected just $16 trillion of new wealth, the global poverty charity says.

“A billionaire gained roughly $1.7 million for every $1 of new global wealth earned by a person in the bottom 90 percent,” the report, released as the World Economic Forum kicks off in Davos, Switzerland, reads.

It suggests that the pace at which wealth is being created has sped up, as the world’s richest 1% amassed around half of all new wealth over the past 10 years.

Oxfam’s report analyzed data on global wealth creation from Credit Suisse, as well figures from the Forbes Billionaire’s List and the Forbes Real-Time Billionaire’s list to assess changes to the wealth of the ultra-rich.

While the Federal Reserve is ostensibly holding the line on more currency creation, as I have often stated in this publication, it will be impossible for the Fed to totally cease currency creation until the Washington politicians balance the Federal budget.

The prospect of this seems highly improbable. Instead, I fully expect that there will be more currency creation in the future. Perhaps this currency creation will not take the form of quantitative easing as it has in the past, but I am forecasting that there will be some scheme put forth by the politicians and central bankers to subsidize the bad fiscal behavior of the collective group of Washington politicians.

One such scheme that has been discussed is the minting of a trillion-dollar coin.

Michael Maharrey, writing for Schiff Gold, recently commented on the scheme.

Policy wonks and government people come up with some really dumb ideas. And a lot of those dumb ideas just won’t go away.

Now that we’re in the early stages of the fake debt ceiling fight, a really dumb idea has been resurrected from the dead – the trillion-dollar coin.

Last week, the federal government ran up against the debt ceiling. That means it either has to come to some kind of agreement to raise the borrowing limit or it will default.

Now, we all know how this will end. After months of political theater and hand-wringing, Congress will raise the debt limit. But that just kicks the can down the road. Because before long, the government will run up against the debt ceiling again, and we’ll have to watch another awful sequel to this awful movie.

The debt ceiling drama completely ignores the real issue — the US government has a spending problem. The current administration is blowing through about half a trillion dollars every single month and running massive budget deficits. The solution is simple. The federal government could stop spending so much money. Or it could raise taxes. Or, why not both?

But these are politically non-viable solutions. Nobody in Washington DC is willing to seriously contemplate spending cuts. Sure, Republicans will talk about it, but that’s nothing but hot air. And nobody in Washington DC is willing to seriously contemplate raising taxes. Sure, Democrats will happily tax “the rich,” but tax increases would have to go much deeper into the poor and middle class to actually address the spending problem. So, Democrats are full of hot air too.

But there are some people out there who think they have a simple, politically viable solution — a panacea if you will. It wouldn’t require raising the debt ceiling. It wouldn’t require spending cuts. And it wouldn’t require raising taxes. (Except that it would — I’ll get to that in a minute.)

All the US Treasury needs to do is mint a $ 1 trillion dollar coin.

Viola! Problem solved!

The government could mint the coin, deposit it at the Federal Reserve, and then it could write checks against that asset.

Now, that may sound a little bit like the government is just creating money out of thin air. And that’s because it is. But hey, it’s legal, they argue. So, why not!

You do realize this is dumb, right?

This is a monetary disaster waiting to happen. It would put inflation on hyperdrive.

We just saw what happens when the Fed prints trillions of dollars out of thin air and injects it into the economy. The price of everything goes up. We’re paying for pandemic stimulus every time we go to the grocery store.

I mentioned earlier that this scheme would raise taxes. This is how. It would jack up the inflation tax even higher. Minting a coin and pretending it is worth $1 trillion doesn’t change the dynamics. When you boil it all down, it would do nothing but increase the money supply. That is, by definition, inflation.

They can call it whatever they want, but currency creation is still currency creation, and inflation is still inflation.

I expect that although the acceleration of inflation has slowed, there is once again more intense inflation in the relatively near future unless the Washington politicians change their spending habits.

Fat chance of that.

That means that there will have to be some kind of currency creation in the future. Whether it is more quantitative easing, a trillion-dollar coin, or some other mechanism, the outcome will be the same.

An even heavier inflation tax and a further widening of the wealth gap.

Are the Saudis Ready to Ditch the Dollar?

For several years now, I have been writing about the ultimate consequences of the considerable devaluation of the US Dollar.

Over the past couple of years or so, every American has felt the effects of this dollar devaluation first-hand as consumer price inflation has driven the price of nearly every necessity higher.

But now, even more serious consequences may be on the horizon.

Ever since the 1970’s, when the US Dollar became a fiat currency, the dollar has retained its status as the world’s reserve currency due to the agreement put in place with Saudi Arabia in the early 1970’s. This agreement had the United States offering Saudi Arabia military protection in exchange for the kingdom pricing oil exports in US Dollars. It was this agreement that established the petro-dollar as any country around the world that wished to purchase oil from Saudi Arabia had to inventory US Dollars in order to do so.

That agreement has served the US well for about 50 years. However, over the past few years, there are ever increasing signs that much of the rest of the world is seeking US Dollar alternatives.

This past week, another major move was made away from the US Dollar as Saudi Arabia publicly announced the kingdom was actively looking to price its oil exports in currencies other than US Dollars. This from “The Gateway Pundit” (Source: https://www.thegatewaypundit.com/2023/01/another-biden-catastrophe-saudi-arabia-announces-readiness-trade-currencies-us-dollar-another-blow-us-economy/):

Saudi officials announced this week they are ready to to trade in currencies other than the US dollar in a huge blow to the American economy.

Saudi Arabia announced the move following a December meeting with China’s President Xi Jinping. The kingdom is ready to trade in yuan instead of the dollar in trade exchanges.

Saudi Arabia has also announced its intention to join the BRICS alliance.

Russia Today reported:

Saudi Arabia is ready to discuss trading in currencies other than the US dollar, according to the Kingdom’s finance minister Mohammed Al-Jadaan, as cited by Bloomberg.

Al-Jadaan’s comments come a month after China’s President Xi Jinping said that Beijing is ready to make energy purchases in yuan instead of the US dollar in trade exchanges with members of the Gulf Cooperation Council (GCC). China’s leader highlighted the necessity of the shift while speaking at a Chinese-Arab summit hosted by Saudi Arabia earlier this week.

“There are no issues with discussing how we settle our trade arrangements, whether it is in US dollar, in euro or in Saudi riyal,” Al-Jadaan said on Tuesday during an interview with Bloomberg in Davos, Switzerland.

The oil-rich kingdom is seeking to deepen its ties with vital trade partners, including China. The readiness for talks on the issue expressed by Riyadh may signal that the world’s biggest oil exporter is open to diversifying away from the US dollar after decades of pricing crude exports in the US currency. The riyal, the Saudi national currency, has been pegged to the greenback, too.

This is simply HUGE news and provides yet another reason for Americans who aspire to a comfortable retirement to diversify out of US Dollars. (One of the best ways to do this, in my view, for many investors is to consider adding precious metals to one’s portfolio.)

While I don’t know the time frame (nor does anyone else in my opinion), I believe that ultimately the US Dollar will lose its status as the world’s reserve currency. Admittedly, this opinion is at odds with the opinions of some very bright guest experts that I interview on my radio program, but in my view, the US Dollar’s devaluation will continue, and the rest of the world will increasingly and urgently look for alternatives.

“Quoth the Raven” is an interesting opinion column. Here are some comments on this recent development involving Saudi Arabia from that column (Source: https://quoththeraven.substack.com/p/saudi-arabia-just-killed-the-petrodollar):

Put simply, I believe there is a historic divide in the making between the BRICS nations, led by Russia and China, and the West, led by the United States.

I was one of the few outlets last summer to even report on the fact that Russia and China openly announced a “new global reserve currency” (announced in July 2022, predicted by me in February 2022). And of course, Russia and China can’t do it on their own: they are working with nations like Saudi Arabia and India to help put their plans into practice.

Crucial to dethroning the U.S. dollar would be the removal of its use for buying and selling oil – a system that has been in place since the 1970s when the U.S. promised security for the Saudi Kingdom in exchange for the petrodollar system that underpins the dollar’s strength as global reserve currency. It’s a topic that I discussed at length back in September with Andy Schectman on this podcast.

Andy told me back in September 2022: “The dollar hegemony is right about ready to break when you realize that Saudi Arabia is about to join the BRIC nations. Do you think Biden is going to fly there to ask for more oil? He went there to beg them not to join BRIC.”

“The dollar was made reserve currency only because of our protection of the Saudi kingdom,” Andy continued. He then noted astutely that Saudi Arabia had signed new protection agreements with Russia. “All of the Eastern European countries that have repatriated their gold. They’re all part of the EU but they all trade their own currency. They’re all going to break away from the Western system,” he added.

And now it looks like Andy was right: it appears Saudi Arabia has just issued a death knell to the exclusivity of the petrodollar as we once knew it – the first of several dominoes that needs to fall before the U.S. is exposed financially as an emperor with no clothes.

As I have discussed here previously, the BRICS nations (I’ve added an ‘S’ to the BRIC reference to include the country of South Africa) are now developing their own currency, likely commodity-backed, to use in trade. This latest development involving Saudi Arabia may have the Saudi’s looking to use a different currency in oil trade, perhaps this BRICS currency that is being developed.

While this move away from the US Dollar was likely going to happen anyway at some point, recent US policy decisions have motivated the Saudi’s to move more quickly away from the US Dollar. This from “Times of India” (Source: https://timesofindia.indiatimes.com/readersblog/blogthoughts/saudi-arabia-the-foundation-of-brics-currency-47508/):

BRICS is an alliance of the world’s five major developing economies: Brazil, Russia, India, China and South Africa, most people underestimate it since it includes emerging economies as opposed to established economies in the G7. These five countries account for 41 percent of the world’s population and have a combined GDP of over 24.4 trillion U.S dollars. They also have a substantial military capability and an increasing political influence in the global sphere, and by teaming together, this group commands a voice for itself in the global sphere, for example, it helps them to have wiser worries about emerging economies whenever the West implements policies that are explicitly beneficial to itself, and a famous example of this is the carbon tax. The European Union routinely complains about the carbon emissions created by the Indian and Chinese steel industries. Because their industries are adopting to clean energy, they are now going to apply a carbon tax, so that when Indian and Chinese steel enter the global marketplace in 2030, Indian products will be taxed penalties precisely because of more carbon emission than these developed countries. However, developed nations have generated so much carbon during their development phase that they are primarily responsible for climate change, yet they ignore the past and now impose a tax on carbon emission, when developing countries needs economic fuel to thrive.

Saudi Arabia is one of the most powerful nations in the world, and it has always been the closest ally of the United States of America. However, Saudi Arabia is currently involved in a cold war with the same United States, because Saudi Arabia reduced oil output by 2 million barrels a day as a result the price of oil shot off from 91 dollars a barrel to 94 dollars a barrel, this action was tremendously profitable to OPEC, but it caused mayhem in the West. Further, President Biden warned Saudi Arabia with unclear repercussions and even offered passing the No Pick Bill to challenge Saudi Arabia’s security which begin violating the Petro dollar agreement between the U.S and Saudi. So, in exchange, Saudi Prince Mohammed bin Salman made a major step that sent shivers down the spines of Americans, and that was his proposal to join members of the BRICS. Previous years data states that Saudi has started making defence deals with both China and Russia firstly, they are not overly reliant on the U.S, secondly the Biden administration wants to relax economic sanctions on Iran, Saudi Arabia’s opponent in the Middle East, and the third reason is the oil consumption of BRICS. Resulting in Saudi Arabia, the world’s top oil producer allegedly proposing to join BRICS, by which they will have the backing of China, Brazil and India as the biggest consumers of oil in the world.

If you haven’t yet embraced “Revenue Sourcing” for your planning to help you protect yourself from currency risk, now is a good time to do so.