Currency Devaluation or Market Crash

          This week, I want to share excerpts from and some of my comments on an insightful article penned by past RLA Radio guest, Mr. Alasdair Macleod.  Undoubtedly, many of you recognize Alasdair as the head of research at Gold Money. 

          Mr. Macleod’s article is titled “Waypoints on the road to currency destruction – and how to avoid it”.  (Source:  https://www.goldmoney.com/research/goldmoney-insights/waypoints-on-the-road-to-currency-destruction-and-how-to-avoid-it)

          I discuss this article in detail and offer additional proof of Mr. Macleod’s theory on the most recent “Headline Roundup” webinar that is presented live each Monday at Noon Eastern Time.  To get an invite to the webinar, just give the office a call and we’ll be glad to get you an e-mail with all the “Headline Roundup” login information.

          You can also visit www.RetirementLifestyleAdvocates.com and view the “Headline Roundup” webinar replay.

          This, from Mr. Macleod’s piece:

-Monetary policy will be challenged by rising prices and stalling economies. Central banks will almost certainly err towards accelerating inflationism in a bid to support economic growth.

-The inevitability of rising bond yields and falling equity markets that follows can only be alleviated by increasing QE, not tapering it. Look for official support for financial markets by increased QE.

-Central banks will then have to choose between crashing their economies and protecting their currencies or letting their currencies slide. The currency is likely to be deemed less important, until it is too late.

-Realizing that it is currency going down rather than prices rising, the public rejects the currency entirely and it rapidly becomes valueless. Once the process starts there is no hope for the currency.

          In essence, Alasdair is observing that central banks are painted into a corner and have two choices; one, protect their currencies and let their economies crash and burn or two, attempt to prop up their economies and markets via additional currency creation at the expense of their currencies.

          Mr. Macleod also notes in his piece that currency destruction and further devaluation can be avoided (emphasis added):

The few economists who recognize classical human subjectivity see the dangers of a looming currency collapse. It can easily be avoided by halting currency expansion and cutting government spending so that their budgets balance. No democratic government nor any of its agencies have the required mandate or conviction to act, so fiat currencies face ruin.

          The solution to currency devaluation is simply to balance government budgets so that currency creation becomes unnecessary.  In today’s world, this is much easier to say than to do.

          Despite the rhetoric from the Washington politicians that the nation’s fiscal woes can be corrected by taxing the billionaires, simple, basic math proves this doesn’t come close to solving the problem.

          A wealth tax far more draconian than the one being presently discussed does little to fix the deficit spending problem.  The truth is that the politicians could confiscate 100% of the wealth of all the country’s billionaires and the deficit spending would begin again within a few, short months.

          No matter how you slice it and no matter how many additional taxes you levy, the deficit problem cannot be solved by raising taxes.  Current levels of spending are just too far out of control.  And that’s the case before any new spending occurs which seems like an inevitability at this juncture.

          Mr. Macleod, in my view, correctly observes that ‘no democratic government nor any of its agencies have the required mandate or conviction to act, so fiat currencies face ruin.’

          The question that every “Portfolio Watch” reader should be asking is what does this ‘ruin’ look like and what steps can be taken presently to potentially protect one’s self?

          Mr. Macleod gives us some idea as to what this ruin may look like based on what has happened historically. 

If we consider the evidence from Austria before the First World War, we see that the economic prophets who truly understood economics became thoroughly despondent long before the First World War and the currency collapse of the early 1920s. Carl Menger, the father of subjectivity in marginal price theory became depressed by what he foresaw. As von Mises in his Memoirs wrote of Menger’s discouragement and premature silence, “His keen intellect had recognized in which direction Austria, Europe, and the world were pointed; he saw this greatest and highest of all civilizations rushing toward the abyss”. Mises then recorded a conversation his great-uncle had had with Menger’s brother, which referred to comments made by Menger at about the turn of the century when he reportedly said,

“The policies being pursued by the European powers will lead to a terrible war ending with gruesome revolutions, the extinction of European culture, and destruction of prosperity for people of all nations. In anticipation of these inevitable events, all that can be recommended are investments in gold hoards and the securities of the two Scandinavian countries” [presumably being on the periphery of European events].

          The events of the 1920’s led to the depression of the 1930’s.  An article, written by Richard Timberlake for the Foundation for Economic Education in 1999 (Source: https://fee.org/articles/money-in-the-1920s-and-1930s/) explains (emphasis added):

 Other observers, for example, many Austrian economists, believe that all the trouble started with a central bank “inflation” in the 1920s. This “inflation” had to be invented because it is a necessary element in the Austrian theory of the business cycle, which seems to describe most Austrian economic disequilibria. Austrian “inflation” is not limited to price level increases, no matter how “prices” are estimated. Rather, it is an unnatural increase in the stock of money “not consisting in, i.e., not covered by, an increase in gold.”

Once the Austrian “inflation” is going, it provokes over-investment and maladjustment in various sectors of the economy. To correct the inflation-generated disequilibrium requires a wringing-out of the miscalculated investments. This purging became the enduring business calamity of the 1930s.

The late Murray Rothbard was the chief proponent of this argument. Rothbard’s problem is manifest in his book America’s Great Depression. After endowing the useful word “inflation” with a new and unacceptable meaning, Rothbard “discovered” that the Federal Reserve had indeed provoked inflation in the 1921–1929 period. The money supply he examined for the period included not only hand-to-hand currency and all deposits in commercial banks adjusted for inter-bank holdings—the conventional M2 money stock—but also savings and loan share capital and life insurance net policy reserves. Consequently, where the M2 money stock increased 46 percent over the period, or at an annual rate of about 4 percent, the Rothbard-expanded “money stock” increased by 62 percent, or about 7 percent per year.

          Money stock increasing at 7% per year resulted in inflation in the 1920’s followed by a painful deflationary period in the 1930’s.

          Here is why that is interesting.

          The chart above illustrates the Fed’s assets.  It’s important to remember that the Fed creates currency to buy these assets.  As you can see from the chart, the Fed has more than doubled the money it’s created in less than 2 years.

          By comparison, the 7% increase in the money supply from 1921 to 1929 is very mild yet the painful deflationary period of the 1930’s followed.

          What lies ahead given the current level of debt and currency creation?

          Mr. Macleod gives us an idea.

          My question for you is this:  have you adopted the Revenue Sourcing approach to managing your assets?

          Do you have assets that may perform well in a deflationary environment like the 1930’s as well as the inflationary environment that is likely to precede it?

          If not, time may be running short.

If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there

Stocks and the Fed

As I was doing the research this week that I do every week, it struck me as to how tightly correlated the performance of stocks is to the balance sheet of the Federal Reserve.

          The chart on this page is a chart of an exchange-traded fund that tracks the performance of the Russell 3000, a very broad stock market index.

          The most recent low on the chart is the market bottom of March of 2009.  Since that time, as you can see from the chart, stocks have moved up significantly; the chart pattern is nearly vertical.

          Each bar on the chart represents one month of price action.  The green bars on the chart are the months during which the Russell 3000 moved higher and the red bars on the chart represent the months during which stocks moved lower.

          Since March of 2020, stocks have moved lower only 4 months with the balance of the months seeing stocks move higher; significantly higher in many months.  Since the market low of March of 2009, stocks have moved higher by 213%.

          The second chart is a chart from the Federal Reserve representing total Federal Reserve bank assets.

          Notice the correlation between currency creation by the Federal Reserve and the parabolic rise in the price of stocks.

          On my radio program, I’ve gone on record stating that it is my belief that the Fed’s taper talk is just talk.

          In the September issue of the “You May Not Know Report”, I reference an article published by Ryan McMaken about the political realities of the current fiscal situation.  I’d encourage you to check out the piece in the “You May Not Know Report”.

          In short, McMaken points out that the Fed’s “dual mandate” of keeping prices stable and maintaining full employment is really not the point any longer.

          Here is a bit from his piece (Source: https://mises.org/wire/how-fed-enabling-congresss-trillion-dollar-deficits) (emphasis added):

If all this spending were just a matter of redistributing funds collected through taxation, that would be one thing. But the reality is more complicated than that. In 2020, the federal government spent $3.3 trillion more than it collected in taxes. That’s nearly double the $1.7 trillion deficit incurred at the height of the Great Recession bailouts. In 2020, the deficit is expected to top $3 trillion again.

In other words, the federal government needs to borrow a whole lot of money at unprecedented levels to fill that gap between tax revenue and what the Treasury actually spends.

Sure, Congress could just raise taxes and avoid deficits, but politicians don’t like to do that. Raising taxes is sure to meet political opposition, and when government spending is closely tied to taxation, the taxpayers can more clearly see the true cost of government spending programs.

Deficit spending, on the other hand, is often more politically feasible for policymakers, because the true costs are moved into the future, or they are—as we will see below—hidden behind a veil of inflation.

That’s where the Federal Reserve comes in. Washington politicians need the Fed’s help to facilitate ever-greater amounts of deficit spending through the Fed’s purchases of government debt.

When Congress wants to engage in $3 trillion dollars of deficit spending, it must first issue $3 trillion dollars of government bonds.

That sounds easy enough, especially when interest rates are very low. After all, interest rates on government bonds are presently at incredibly low levels. Through most of 2020, for instancethe interest rate for the ten-year bond was under 1 percent, and the ten-year rate has been under 3 percent nearly all the time for the past decade.

But here’s the rub: larger and larger amounts put upward pressure on the interest rate—all else being equal. This is because if the US Treasury needs more and more people to buy up more and more debt, it’s going to have to raise the amount of money it pays out to investors.

Think of it this way: there are lots of places investors can put their money, but they’ll be willing to buy more government debt the more it pays out in yield (i.e., the interest rate). For example, if government debt were paying 10 percent interest, that would be a very good deal and people would flock to buy these bonds. The federal government would have no problem at all finding people to buy up US debt at such rates.

But politicians absolutely do not want to pay high interest rates on government debt, because that would require devoting an ever-larger share of federal revenues just to paying interest on the debt.

For example, even at the rock-bottom interest rates during the last year, the Treasury was still having to pay out $345 billion dollars in net interest. That’s more than the combined budgets of the Department of Transportation, the Department of the Interior and the Department of Veterans Affairs combined. It’s a big chunk of the full federal budget.

Now, imagine if the interest rate doubled from today’s rates to around 2.5 percent—still a historically low rate. That would mean the federal government would have to pay out a lot more in interest. It might mean that instead of paying $345 billion per year, it would have to pay around $700 billion or maybe $800 billion. That would be equal to the entire defense budget or a very large portion of the Social Security budget.

            McMaken makes a great point.  Politically speaking, it would be a major problem for the Fed to taper and/or raise interest rates.

            So, the Fed will likely continue on their current unsustainable course until things blow up.

            Going back to the ‘dual mandate’ of stable prices and maximum employment, it’s now obvious that the first objective of stable prices is out the window.  The inflation genie is now fully out of the bottle.

            Prices are rising across the board in nearly every category of spending.  Looking past the heavily manipulated inflation reporting metric most often used to report the headline inflation rate – the Consumer Price Index – one finds the actual, real-world inflation rate is 12% or 13% per annum.

            With the Fed staying the course as far as easy money is concerned, look for the real inflation rate to continue to accelerate and look for the Fed to continue to say that inflation is transitory or come up with some other narrative to explain away the rising inflation rate as attributable to something other than reckless Fed policy.

            The Fed may have gotten some cover this past week for staying the course.  The jobs report was a huge disappointment to the downside.  This from “Zero Hedge” (Source:  https://www.zerohedge.com/markets/goodbye-taper-huge-jobs-miss-us-adds-just-243k-jobs-august):

Moments ago the BLS reported that in August just a paltry 235K jobs were added, far below the 725K expected below even the most pessimistic forecast; the number was not only a huge drop to last month’s upward revised 1.053MM but was the weakest print since January.

While we expect that the pundits will quickly blame the resurgence of covid in August, manifesting itself in zero jobs added in leisure and hospitality, with Bloomberg already busy spinning by saying that “the deceleration in hiring likely reflects both growing fears about the rapidly spreading delta variant of Covid-19 and difficulties filling vacant positions” the reality is that the US economy is rapidly slowing even as inflation continues to soar, positioning the US squarely for a stagflationary crash and putting the Fed’s tapering plans squarely in doubt.      

          The economy is slowing. 

            Even mainstream forecasters are revising economic growth estimates downward.  In the “Zero Hedge” article referenced above, it was noted that Morgan Stanley cut its 3rd quarter GDP growth estimate to 2%.

If you or someone you know could benefit from our educational materials, please have them visit our website at www.RetirementLifestyleAdvocates.com.  Our webinars, podcasts, and newsletters can be found there.

Higher Education and Hyperinflation

In this week’s update, I’ll look at a couple of topics that I’ve examined in previously.

          I’ll begin with my forecast from earlier this year that at least 1/3rd of colleges and universities would close within five years.  While COVID has impacted enrollment at institutions of higher learning, problems existed in the higher education world prior to the lockdowns imposed in response to COVID.

          For several years I have been forecasting big changes in higher education.  The primary reason for this forecast was the huge amount of student loan debt that existed and continued to build.  Once one understands the anatomy of a price bubble, they become easy to recognize.  Tuition rates at colleges and universities have been rising at rates much faster than prices for just about every other category of spending. 

          This rapid rise in tuition rates has been fueled by access to easy credit in the form of student loans for virtually any student who wants one.  Easy credit is rocket fuel for price bubbles.

          While price bubbles are easy to recognize, the timing of when these bubbles burst is much more difficult to predict.  Bubbles can often build for a much longer time frame and to much higher levels than one would ever think is possible.

As I have stated, COVID simply exposed where weakness already existed, not just in higher education, but in many areas.

          As far as higher education is concerned, there is evidence that the bubble may be about to unwind.

          A recent “Zero Hedge” piece (Source:  https://www.zerohedge.com/personal-finance/fall-enrollment-slides-coronavirus-threatens-higher-education-bubble) explained:

Take, for example, the 2020 fall semester, the number of first-year undergraduate students are in freefall across the country, down 16%, when compared to 2019 fall semester, according to a new report by the National Student Clearinghouse Research Center (NSCRC). Overall undergraduate enrollment slid 4%  from this time last year, mostly because of the 13.7% drop in international students.

Naked Capitalism’s Yves Smith points out that virus-related enrollment declines are happening at a time when colleges and universities’ revenues were already slumping, potentially creating a perfect storm of campus closures. 

“Empty seats are inflicting financial damage on colleges already reeling from the pandemic. Earlier this year, when the virus began spreading, many schools cleared their campuses of students and refunded housing costs. With enrollment warning, revenue from tuition, dormitories and dining halls is being hurt at a time when some institutions are posting low endowment returns,” Bloomberg said. 

Jack Maguire, the founder of the enrollment-consulting firm Maguire Associates and former dean of admissions at Boston College, warned that “colleges are losing billions of dollars” as the virus continues to rage across the country. 

 “It may not be the end of it if this new wave hits and students are sent home again,” Maguire said. 

NSCRC showed enrollment slumps were the most drastic at community colleges, down 9.4% overall, and 22.7% for first-year students. Undergraduate enrollment at four-year public colleges and universities fell 1.4% overall, and down 13.7% for first-year students. As for private nonprofit colleges, overall enrollment was down 2%, and -11.8% for first-year students.

Despite undergraduate enrollment down across all types of institutions, private for-profit colleges recorded a 3% increase. 

          Rapidly declining enrollment numbers will make it difficult for many colleges to survive.

          In past posts, I have also been taking an in-depth look at the ultimate end result of the massive money creation now taking place.  If you’ve been a longer-term reader of this site, you know that I have forecast a future reset which will be reactive as occurred in Zimbabwe and Weimar, Germany or proactive like the worldwide currency reset in 1944 as a result of the Bretton Woods agreement.

          This week, I wanted to draw your attention to an article penned by past radio guest, Alasdair Macleod.  In the article (Source:  https://www.goldmoney.com/research/goldmoney-insights/hyperinflation-is-here), Mr. Macleod states that hyperinflation is already here.

          Here is a bit from his piece (emphasis added):

The progression of annualized monetary inflation from under 6% before the Lehman crisis, to 9.6% subsequently until March this year, and 65% in the thirty weeks since is clear from the chart. If the monetary authorities have the knowledge, the mandate, the authority, the ability, and the desire to stop inflating the currency, we would not describe it as hyperinflation, instead deeming it to be no more than a brief period of exceptional inflation before a return to sound money policies.

But sound money was emphatically discarded in 1971, when the post-war Bretton Woods agreement was finally abandoned — not that the monetary regime at that time was in any way sounder than Adam’s fig leaf was an item of clothing. For the fact of the matter is that sound money in America was arguably abandoned long ago, with the founding of the Fed at Jekyll Island before the First World War.

As a means of funding government deficits, inflation is capable of being stopped by cutting government spending and/or raising taxes. But now, a one-off increase of 65% of narrow money is to be followed by another massive expansion already in the wings. The hope is that that will be enough, just as the original 65% increase in M1 was hoped to be enough to ensure a V-shaped recession would be followed by a return to normality.     

          The chart above is telling.  The trajectory of money creation from 1980 to 2008 was rather tame.  From 2008 to earlier this year the trajectory of money creation, when charted, was about a 45-degree slope.  Earlier this year, the trajectory went parabolic.

          You don’t need to be an economist to forecast this outcome, you only need to view a few price charts that went parabolic to quickly conclude that parabolic price charts always reverse because parabolic price charts reflect bubbles.

          Mr. Macleod notes in his article that senior Fed economist, Michael T. Kiley concluded in August that quantitative easing (money printing) in an amount equal to 30% of US Gross Domestic Product (GDP) would be needed to deal with the Coronavirus.  In rough terms, the Fed has already created about $3 trillion in new money this year; that means there could be another $3.5 trillion coming to fund additional stimulus.

          In his article, Alasdair points out that the US Government’s annual operating deficit when calculated since March of 2020 is about $4.4 trillion.  That’s a number that is significantly more than tax receipts.

          Mr. Macleod notes in his piece that these already scary numbers are likely to get worse (emphasis added):

If these conditions persist in the new fiscal year — which seems increasingly certain, Kiley’s calculation of the further $3.5 trillion stimulus underestimates the problem. According to an op-ed by Allister Heath in today’s Daily Telegraph, Larry Summers, the US economist and arch-inflationist, believes that the cost of covid-19 will reach 90% of US GDP, substantially more than Kiley’s estimate of 30%. Over-dramatic perhaps; but can we envisage that the forthcoming stimulus package, and then undoubtedly the one to follow that, will restore normality and set the budget deficit firmly in the direction towards a balance? If the answer is no, then we already have hyperinflation. 

          Alasdair notes that people hold a certain level of personal liquidity or cash.  When money is stable, this level of personal liquidity doesn’t vary much.  But, when people sense that the price of items will fall, the level of cash they hold rises and when they expect the price of items they wish to buy to fall, they exchange their cash for tangible items.

          He also notes that hyperinflations tend to end quickly (emphasis added):

The effect of changes in the general level of personal liquidity is potentially a more important influence on the level of prices than the quantity of money itself. It should be evident that if the increased quantity of money in circulation is simply hoarded, there will be no effect on the general level of prices. Alternatively, if the public decides to abandon a state-issued currency, irrespective of the quantity in circulation it will lose all of its purchasing power.

The abandonment of a state-issued currency by the public terminates all hyperinflations and once the process is underway it tends to be rapid. In Weimar Germany, it was said this flight into goods and out of money began in May 1923 and lasted to mid-November. In the other European nations, which suffered collapses of their currencies in the early 1920s, the final process was equally swift.

Is Your Currency Going to Change?

Every day that passes we are seeing changes as far as currencies are concerned globally.  Given the rest of the news and the tendency of the mainstream media to report with bias, many of these changes have gone largely unreported and consequently unnoticed.

          For a long time, recognizing that the current financial system is highly stressed, and the current level of money printing and debt accumulation is unsustainable, I have been forecasting a future ‘reset’ of some kind.

          In the October “You May Not Know Report” newsletter distributed to my clients, I noted that there are two ways for this reset to occur – either reactively or proactively.  I offered the example of Zimbabwe as a reactive reset and the example of the Bretton Woods agreement as a proactive reset.

          If you’re not a reader of the “You May Not Know Report”, I’ll briefly summarize here.  In the case of Zimbabwe, due to overspending and massive money printing by Robert Mugabe, a reactive reset took place.  Once the citizens of Zimbabwe woke up to the fact that holding currency versus tangible assets didn’t make sense, the rush to own tangible assets created massive price inflation.  In this reset, the government simply opted to allow the citizens to use stronger currencies like the US Dollar.

          The Bretton Woods agreement created a new monetary system in the 1940’s.  This system was anchored by the US Dollar which was redeemable for gold at a rate of $35 per ounce.  This was a proactive reset of the monetary system.  This system remained in place until 1971 when the link between the US Dollar and gold was broken.

          Shortly after the link between the US Dollar and gold was eliminated, a deal was struck with Saudi Arabia to sell oil only in US Dollars and the Petro-Dollar was born.  Now, due to profligate spending and reckless money printing by the Fed, the writing is on the wall.  This trend will have to end.

          You don’t need to be an economist to recognize this.  More than $3 trillion was created out of thin air this year alone.  This week’s RLA radio guest, Rob Kirby contends that there is more money being created than is admitted by the Fed.  He provides compelling evidence to back up his claim.

          During the interview, Rob borrows an analogy he borrows from past RLA Radio guest, Chris Martenson.  The analogy:  imagine that you begin by putting one drop of water in Yankee Stadium and then every minute you double it.  One minute after placing the one drop of water in the stadium, you place two drops.  After another minute passes, you place four drops.  And so on.

          At the end of 45 minutes, the water level in the stadium is just covering the bases, but after 50 minutes, the stadium is completely full of water.  The point is simply that all the action happens in the last five minutes.       

          Past RLA Radio guest, Alasdair Macleod, made this point as well.  Mr. Macleod has suggested that hyperinflations occur quickly, over a period of months rather than years.

          So, the bottom line is that money creation is occurring at a level that is not sustainable, and the trillion-dollar question is what will the reset look like?  Will it be reactive, or will it be proactive and how will you be affected?

          There is growing evidence that there is activity occurring presently that may lead to a proactive reset although, at the present time, there is nothing concrete.  Trying to figure out what this reset might look like based on the information that is available is a lot like putting a puzzle together.

          As I have reported previously, the idea of a “Digital Dollar” has been floated twice already this year.  Although the idea is still an idea at this point in the United States, other countries around the world are testing digital currencies.  The Bahamas, Ukraine, Uruguay, and parts of China are testing digital currencies presently.

          At the end of September, the European Central Bank applied to trademark the term “Digital Euro” which can be abbreviated to DE.  Perhaps a move to get the Germans more comfortable with the idea?

          Now, just about 2 weeks after the European Central Bank applied for the “Digital Euro” trademark, the Bank of Japan is getting in on the act.  This from Zero Hedge (Source:  https://www.zerohedge.com/markets/circle-complete-boj-joins-fed-and-ecb-preparing-rollout-digital-currency) (emphasis added)(official excerpt from the BOJ’s statement in larger font):

On Friday, the Bank of Japan joined the Fed and ECB when it said it would begin experimenting on how to operate its own digital currency, rather than confining itself to conceptual research as it has to date.

Digitalization has advanced in various areas at home and abroad on the back of rapid development of information communication technology. There is a possibility of a surge in public demand for central bank digital currency (CBDC) going forward, considering the rapid development of technological innovation. While the Bank of Japan currently has no plan to issue CBDC, from the viewpoint of ensuring the stability and efficiency of the overall payment and settlement systems, the Bank considers it important to prepare thoroughly to respond to changes in circumstances in an appropriate manner.

The bank explained that it might provide general-purpose CBDC if cash in circulation drops “significantly” and private digital money is not sufficient to substitute the functions of cash while promising to supply physical cash as long as there is public demand for it.

            Interesting that the Bank of Japan states, “while the Bank of Japan currently has no plan to issue CBDC”.  From my experience, whenever a politician or a central banker floats an idea with such a disclaimer, that is exactly what they are planning.

          “Reuters” also reported on the development (Source:  https://www.reuters.com/article/japan-economy-boj-digital/boj-to-start-central-bank-digital-currency-tests-next-fiscal-year-idUSKBN26U0RA) (emphasis added):

The Bank of Japan said on Friday it would begin experimenting next year on how to operate its own digital currency, joining efforts by other central banks to catch up to rapid private-sector innovation.

The move came in tandem with an announcement by a group of seven major central banks, including the BOJ, on what they see as core features of a central bank digital currency (CBDC) such as resilience and a clear legal framework.

            When digital dollars were proposed previously, it was suggested that the Federal Reserve would maintain a digital wallet for each American.  The reason given for the development of a digital dollar wallet was that it would be easier and more efficient for citizens to receive their stimulus payments, a.k.a. “helicopter money”.

          And, while the Bank of Japan stated there would be physical cash available if there was public demand for it, my cynical side questions this statement.

          While physical cash would likely be available for a period, one can’t help but wonder for how long.  Once a population gets comfortable with digital currency and largely quits using cash, it’s easy for a central bank to justify pulling the cash and using only the digital currency.

          Once the cash get pulled, it then becomes far easier to impose negative interest rates across the board.

          I remain hopeful that we will ultimately see a proactive reset with a digital currency that is linked to gold or silver.  History suggests that when fiat currencies fail, the population typically demands a return to some form of gold or silver-based currency.

          No matter when or how a reset might occur, holding gold and silver in a portfolio makes sense for many investors.

          Many traditional money managers are now jumping on the gold and silver bandwagon.  While this doesn’t guarantee anything as far as the price of gold and silver are concerned, it’s interesting at the very least.

          Kelvin Tay of UBS Global Wealth Management had this to say, “We like gold because we think that gold is likely to actually hit about $2,000 per ounce by the end of the year.  In the event of uncertainty over the US election and the COVID-19 pandemic, gold is a very, very good hedge.”

          Wells Fargo’s head of real asset strategy John LaForge had this to say about gold, “The fundamental backdrop looks good.  Interest rates remain low, money supplies excessive and we are doubtful that the US Dollar’s September rally has long legs.  We view gold at these prices as a good buying opportunity and, as evidenced by our 2021 year-end targets, expect higher gold prices.

          I will revisit this topic as information warrants.

Precious Metals Price Manipulation and Looming Inflation

In my October client newsletter, I discussed the recent payment by JP Morgan Chase to settle criminal and civil charges that the company manipulated the precious metals markets.  This is a preview from the October “You May Not Know Report” newsletter that will be mailed next week.

JP Morgan Chase agreed to pay $920 million to settle civil and criminal charges after Federal agencies alleged the firm made fake trades in the precious metals markets6.  This from an article published in “The Daily Mail” (emphasis added):

JPMorgan Chase will pay a record $920million to settle US civil and criminal charges over fake trades in precious metals and Treasury futures designed to manipulate the market, US agencies announced Tuesday.

The settlement comes as the US banking giant reached a deferred prosecution agreement with the Justice Department to resolve criminal fraud charges over the long-running schemes.

In one of the schemes, JPMorgan traders in New York, London and Singapore between 2008 and 2016 commissioned tens of thousands of orders for gold, silver, platinum and palladium futures that were placed in order to be canceled to deceive other market participants, the Department of Justice (DOJ), one of three agencies involved in the case, said in a press release.

As a recent “Zero Hedge” article pointed out, it wasn’t that long ago that if anyone even mentioned the possibility of a market being manipulated, they would quickly be branded a conspiracy theorist.  This from the piece (emphasis again added):   

There was a time when the merest mention of gold manipulation in “reputable” media was enough to have one branded a perpetual conspiracy theorist with a tinfoil farm out back. That was roughly coincident with a time when Libor, FX, mortgage, and bond market manipulation was also considered unthinkable when High-Frequency Traders were believed to “provide liquidity” when the stock market was said to not be manipulated by the Fed, and when the ever-confused media, always eager to take “complicated” financial concepts at the face value set by a self-serving establishment, never dared to question anything.

All that changed in November 2018 when a former JPMorgan precious-metals trader admitted he engaged in a six-year spoofing scheme that defrauded investors in gold, silver, platinum, and palladium futures contracts. John Edmonds, then 36, pled guilty under seal in the District of Connecticut to commodities fraud, conspiracy to commit wire fraud, commodities price manipulation, and spoofing, a trading technique whereby traders flood the market with “fake” bids or asks to push the price of a given futures contract up or down toward a more advantageous price, and to confuse other traders or HFTs which respond to trader intentions by launching momentum in the other direction. As FBI Assistant Director in Text Box:  Charge Sweeney explained at the time, “with his guilty plea, Edmonds admitted he intended to introduce materially false and misleading information into the commodities markets.”

A little more than a year later, former Deutsche Bank precious metals trader David Liew sat in a federal courtroom telling a jury about how he learned to ‘spoof’ markets from his colleagues, and that he considered the behavior to be “OK” because it was “so commonplace.” Unfortunately for him, federal authorities didn’t see it that way, and have aggressively prosecuted the big dealer banks for market manipulation across a variety of markets. His testimony led to convictions for two of his former coworkers. A few days later, JP Morgan agreed to settle similar allegations with a record $1 billion fine, netting another major victory for the government in the nearly decade-long campaign to root out manipulation from the precious metal markets.

I have discussed my belief that there has been manipulation in markets for several years.  Given the easy money policies in which central banks have been engaging, it’s logical that outside sources have at the very least influenced precious metals’ prices.

The fundamentals for precious metals are strong.  Radical easy money policies dictate that some of a prudent investor’s portfolio be allocated to metals.

Past RLA Radio show guest, Alasdair Macleod published an article this past week in which he updated his views on the ultimate outcome of these policies.  This from his piece (emphasis added):

The purpose of monetary inflation is always stated by central banks as being to support the economy consistent with maximum employment and a price inflation target of two percent. The real purpose is to fund government deficits, which are rising partly due to higher future welfare liabilities becoming current and partly due to the political class finding new reasons to spend money. Underlying this profligacy has been unsustainable tax burdens on underperforming economies. And finally, the coup de grace has been administered by the covid-19 shutdowns.

The effect of monetary inflation, even at two percent increases, is to transfer wealth from savers, salary-earners, pensioners, and welfare beneficiaries to the government. In no way, other than perhaps from temporary distortions
does this benefit the people as a whole. It also transfers wealth from savers to borrowers by diminishing the value of capital over time.

Mr. Macleod published a chart in his piece that shows how the money creation trajectory has gone “almost off the chart”…..literally.

One can study any chart pattern with such a vertical or parabolic pattern and quickly ascertain that such patterns always reverse.  While the timing of such a reversal is impossible to determine, we can say with a high degree of confidence that such a chart pattern is not sustainable for any longer period of time.

Mr. Macleod comments (emphasis added):

It can be seen that the rate of FMQ’s growth was fairly constant over a long period of time — 5.86% annualized compounded monthly to be exact — until the Lehman crisis when the rate of growth then took off. Since Leman failed in 2008 FMQ’s total has grown by nearly 300%.

Since last March growth in the FMQ has been unprecedented, becoming almost vertical on the chart, triggered by the Fed’s response to the coronavirus. And now a second wave of it has hit Europe and the early stages of a resurgence appears to be hitting the land of the dollar as well. With lingering hopes of a V-shaped recovery being banished, a further substantial increase in FMQ is all but certain.

Already, FMQ exceeds GDP. If we take the last time things were normal, say, in 2005 when the US economy had recovered from the dot-com crash and before bank credit expansion and mortgage lending become overblown, we see that in a functioning relationship FMQ should be between 35%—40% of GDP. But with the US economy now crashing and FMQ accelerating, FMQ is likely to be in excess of 125% of GDP in the coming months.

What is the source of all that extra money? It is raised through quantitative easing by the central bank in a system that bends rules that are intended to stop the Fed from just printing money and handing it to the government.

FMQ, or fiat money quantity, if things were normal, should be 35% to 45% of the nation’s economic output.  By Mr. Macleod’s calculations, FMQ is now between 300% and 400% of that level.

This action by the Fed will, we believe, be bullish for tangible assets like gold and silver.  In a prior issue of “Portfolio Watch”, we noted that China has begun to reduce her US Dollar holdings and exchange these dollars for tangible assets.  Mr. Macleod again comments (emphasis added):

China has already declared a policy of reducing her dollar investments in US Treasury bonds and is selling her dollars to buy commodities. Few realize it, but China is doing what ordinary people do when they begin to abandon a currency — dumping it for tangible goods which will cost more in the future due to the dollar’s declining purchasing power. And as the dollar’s purchasing power declines measured in commodities more nations are likely to follow China’s lead. 

Credit and Currency Realities

As longer-term readers of this blog know, I have long advocated for a “Two-Bucket Approach to managing assets.  Over the past few years, as I have been forecasting the events that are now occurring, other individuals and companies in our industry have begun to promote what they label a two-bucket approach to managing assets.

The best-selling book “Revenue Sourcing” clarifies my approach which is unique.  To a casual observer, the differences between other approaches to asset management and the one described in the “Revenue Sourcing” book, may seem trivial; however, they are not.

In this short piece, I will explain the premise of the two-bucket approach described in “Revenue Sourcing”.  From my experience, this premise goes unnoticed and unrecognized by most in the financial industry, advisors, and analysts alike.  Sadly, this means that their clients miss out on this particularly important principle as well.

The evidence points to the fact that we are nearing the end of a credit cycle and a currency cycle. 

Here is the point of this week’s post, once the currency cycle busts and resets, traditional asset management and planning strategies will fail those who use them.

A credit cycle ends when the system has reached its capacity to service debt.  Credit cycles peak and then subsequently bust much faster than currency cycles.  Digging deeper into credit cycles we find that private sector credit cycles boom and then bust more frequently than public sector credit cycles primarily because the private sector is comprised of individuals and businesses can only accumulate debt to the point that they have the income to service the debt.

The same thing was once true for the public sector or government credit cycles.  When governments operate under a balanced budget, debt can only accumulate to the point that there are tax revenues to service the debt.

Once the noble pursuit of fiscal responsibility is abandoned and the policymakers resort to money creation to paper over budget gaps, the currency cycle bust begins.  The currency cycle bust progresses slowly at first but then, over time, it feeds on itself accelerating dramatically into the final bust and reset.

There is additional evidence that we are moving closer to a reset.  While predicting the exact timing and character of a reset is impossible, there are now statements being published about monetary policy that were but speculation a few months ago.

Alasdair Macleod discusses some of these statements in his most recent article titled, “China is Killing the Dollar”.  Mr. Macleod reports that on September 3, 2020, the state-owned Chinese newspaper “Global Times” ran a front-page article featuring a quote from Xi Junyang, a professor and the Shanghai University of Finance and Economics.  The professor stated, “China will gradually increase its holdings of US debt to about $800 billion under normal circumstances.  But of course, China might sell all of its US bonds in an extreme case, like a military conflict.”

As Alasdair correctly states, the professor’s statement was obviously sanctioned as front-page news by the Chinese government.

Mr. Macleod comments, “While China has already taken the top off its US Treasury holdings, the announcement (for that is what it amounts to) that China is prepared to escalate the financial war against America is very serious. The message should be clear: China is prepared to collapse the US Treasury market. In the past, apologists for the US Government have said that China has no one to buy its entire holding. The most recent suggestion is that China’s Treasury holdings will be put in trust for covid victims — a suggestion, if enacted, would undermine foreign trust in the dollar and could bring its reserve role to a swift conclusion.  For the moment these are peacetime musings. At a time of financial war, if China put her entire holding on the market Treasury yields would be driven up dramatically, unless someone like the Fed steps in to buy the lot.”

Should China take this bold step, the country would have about $1 trillion in US Government bonds to sell.  And should China take this step, they would not be alone.  It would likely mean that just about every other country holding US Government bonds would follow suit.

The result of such action, now being openly discussed, would be either the Federal Reserve printing more money to buy the discarded bonds or a rapid and likely increase in interest rates on the bonds as new bond investors would be looking for a higher return on their investment in order to properly compensate them for the increased risk of holding US government debt.

The likely course of action would be the Fed printing more money which, at a certain future point would mean reaching a tipping point where confidence in the US Dollar is lost.

Mr. Macleod points out in his piece that we may be closer to reaching that tipping point.  China has been accumulating more tangible assets since March of this year when the Fed changed bank reserve requirements to 0% and openly stated that it would pursue easy money policies.  Subsequent to that announcement, the Fed has printed about $3.5 trillion out of thin air and more recently changed it’s inflation targeting policy to allow inflation to run above the 2% target for as many months as it runs below the target.

It’s important to note that the Fed is using an extremely flawed metric to measure the rate of inflation.  As I have discussed in past posts, neither food prices nor fuel prices are included in the official inflation measurement.  The officially reported inflation rate is also seriously understated using subjective adjustments like hedonic adjustments, substitution, and weightings.

The Fed allowing inflation to continue at a rate over 2% when the real-world inflation rate according to private, credible, third-party sources is between 8% and 10% likely translates to 1970’s style inflation or greater.

Since March, when the Fed made its initial announcement, China has been accumulating tangible assets.  This from Mr. Macleod’s article (Source:  https://www.goldmoney.com/research/goldmoney-insights/china-is-killing-the-dollar)  (Emphasis added):

China is now aggressively stockpiling commodities and other industrial materials, as well as food and other agricultural supplies. Simon Hunt, a highly respected copper analyst and China-watcher put it as follows:

“China’s leadership started preparing further contingency plans in March/April in case relations with America deteriorated to the point that America would try shutting down key sea lanes. These plans included holding excess stocks of widgets and components within the supply chains which meant importing larger tonnages of raw materials, commodities, foods stuffs and other agricultural products. It was also an opportunity to use up some of the dollars which they have been accumulating by running down their holdings of US government paper and their enlarged trade surpluses.

It is apparent that the Fed’s policies are accelerating a move away from the US Dollar which was already underway.  It’s a sign that we are moving ever closer to the end of the currency cycle while we arrive at the conclusion of the credit cycle simultaneously.

The two-bucket approach outlined in the “Revenue Sourcing” book attempts to account for this.  Once one understands the currency cycle, one also understands the ‘dual realities’ that exist.

This dual reality is that unless Federal Reserve policies are suddenly and dramatically changed, we will have inflation in US Dollar terms but deflation in terms of gold which has historically been money.

Here’s my take:  as prices in US Dollars continue to rise, prices in gold will continue to decline.

This has been abundantly evident over the past 50 years, 20 years and even 1 year.  I’ll examine housing as an example although similar conclusions could be reached using food, automobiles or most any other item.

Almost 50 years ago, in 1971, then President Richard Nixon eliminated the link between the US Dollar and gold, reneging on the promises the US made as part of the Bretton Woods agreement which guaranteed an exchange of the US Dollar for gold.  At that time, gold was $35 per ounce and the median home sale price was about $25,000.  That meant that it took about 714 ounces of gold to buy a home.

By calendar year 2000, the median home sale price was about $135,000 and the price of gold was about $250 per ounce.  At that time, it took 540 ounces of gold to buy a new home.  While it took 5.4 times more in US Dollars to buy a home, it took only 75% of the gold.

Fast forward to today.  The median price of a new home is $278,000 and gold is selling for about $1950 per ounce.  That means a new home can be purchased for about 142 ounces of gold.  Compared to 1971 when the US Dollar officially became a fiat currency, it now requires roughly 1,100% more US Dollars to buy a new home.  Priced in gold, a home can be purchased for only 20% of the gold that was required to make the same purchase in 1971.  The 685 ounces of gold that would have purchased one home in 1971 purchases nearly five new homes today.

The two-bucket approach recognizes this trend and adapts a plan accordingly.  This is especially important as we near the end of the currency cycle while at the same time reaching the end of the credit cycle. 

Get your copy of the #1 best-seller “Revenue Sourcing” at Amazon.com.

Gold, Stocks and the Economy

Metals continued their breakout last week.  Gold advanced another 3.85% while silver jumped more than 7.5% on price.  As I stated last week, we expect that this trend will continue over the long term as the Federal Reserve will likely continue its easy money policies.

Given the big run up in price in the metals, it would not be surprising to see a pause in the rally or even a fairly significant pullback.  However, I would suggest that many investors consider using pullbacks as a purchase opportunity.

Since the economy just officially experienced the worst quarterly decline in US history, I expect that there will be more stimulus coming from Washington.  It’s already being discussed.  As we all know, there is no money to fund another stimulus package so it will be funded the same way as the last economic rescue bill was funded – more money will be created from thin air.

That will continue to be bullish for metals and be bearish for the US Dollar.

The US Dollar Index, which measures the purchasing power of the US Dollar against other fiat currencies has declined notably as the Fed has been engaging in money printing.  On March 20, the US Dollar Index stood at nearly 103.  Presently, it stands at 93.46; that’s a decline of more than 9% in 4 months.  Huge when looking at currency valuation from an historical perspective. 

It’s important to remember that the currencies against which the US Dollar is being measured are also fiat currencies that are also being devalued.  The US Dollar is just presently winning the “race to the bottom”.

It seems clear to us that the current policy of money printing will now continue until confidence is ultimately lost in the currency.  Since the financial crisis, I have always taken the position that money printing to the point of currency failure was one possible economic outcome.  The other potential end result was a deflationary depression like the one experienced in the 1930’s.  The deflationary outcome would be the result of ceasing to print money and allowing the debt to be purged from the system.

While there are many analysts whose opinion I respect who still hold to the view that the deflationary outcome will be the most likely outcome, it seems to me that we may be past the point of no return when it comes to money creation.

In either scenario, a reset will have to occur.  Resets occur when unsustainable economic conditions exist.  Presently, debt levels in the private sector and on the balance sheets of every level of government are totally unmanageable.  At the federal level, debt and unfunded liabilities are well in excess of $100 trillion.  Third grade math concludes that this debt and these liabilities will never be paid.  And yet, the federal government continues to spend at levels never before seen.

Why?

Reversing the spending trajectory results in the deflationary, 1930’s style reset.

So, the politicians and the federal reserve are doubling down in an effort to avoid that outcome doing the only thing they know how to do.  Spend and print.

This course of action, should it continue, assures that the reset will be an inflationary, or hyperinflationary outcome.

Since 2014, I have been suggesting to many clients that they begin to add precious metals to their portfolio.  As time has passed, and the likelihood of an inflationary outcome increased, I have recommended that metals holdings increase.  For many investors, holding 20% of a portfolio in precious metals may be advisable.

So, what will the coming reset look like?

Every area of the economy will be affected in my view.

As I discuss in my August client newsletter, I expect to see anywhere from 1/3rd to nearly half of all colleges and universities cease to exist.  While top-tier universities with large endowment funds will be fine financially, many second-tier universities and colleges with limited endowments will fall by the wayside.  There are already entire campuses for sale at what would have been considered to be bargain basement prices just a year or two ago.

The American Alliance of Museums published the results of a survey that was conducted among 760 member museums.  One-third of the museum directors reported a high likelihood of the museum closing permanently within the next 16 months.  (Source:  https://www.zerohedge.com/markets/third-us-museums-not-confident-they-will-survive)

Many small businesses, devastated by lockdown orders, have closed.  Now, with lockdown orders again being imposed in many states, small businesses that weathered the initial round of lockdown orders, are now closing permanently.

As many as 1/3rd of New York City’s businesses will never reopen (Source:  https://nypost.com/2020/07/20/a-third-of-nycs-small-businesses-may-never-reopen-industry-report/).

Of the businesses listed on Yelp as being temporarily closed due to government imposed lockdowns, 55% now convey they are permanently closed (Source:  https://www.marketwatch.com/story/41-of-businesses-listed-on-yelp-have-closed-for-good-during-the-pandemic-2020-06-25).

These developments are all deflationary and will contribute to another collapse in the banking system which I believe is inevitable and is quickly approaching.  Ironically, as past RLA Radio guest Alasdair Macleod suggests (https://www.goldmoney.com/research/goldmoney-insights/the-path-to-monetary-collapse) it is this event that will lead to a loss of confidence in the currency which is always the ultimate cause of an inflationary currency failure.  This from Mr. Macleod’s piece “The Path to Monetary Collapse” (emphasis added):

Governments and central banks can be expected to cooperate with each other to stop their currencies collapsing, but ultimately it is a matter for the general public. While inflations have persisted for considerable periods, the final collapse, when the public realizes what is happening to money, in the past has typically taken between six months and a year. The German inflation 97 years ago started before the First World War, but its catastrophic phase can be identified as starting in May 1923 and ending the following November. John Law’s monetary collapse, the closest parallel to that of today, ran from approximately February 1720 to the following September.

In the run up to its collapse, Law’s Mississippi experiment depended increasingly on money-printing to support financial asset values. The same inflationary policies apply today. The end point of Law’s inflationary stimulation is lining up to be identical with our neo-Keynesian experiment, and on that basis alone is increasingly likely to come to a rapid conclusion.

It’s generally accepted that the Fed’s policies are propping up stocks as Mr. Macleod points out.  JP Morgan CEO, Jamie Dimon had this to say on the topic (Source:  https://needtoknow.news/2020/05/jp-morgans-dimon-admits-fed-liquidity-is-propping-up-stocks/) (emphasis added):

The Fed’s liquidity, bringing out the bazooka, is propping up stock prices as well as all other asset classes.”

I track the Dow to Gold ratio since it is, in my view, a better way to determine the true value of stocks.  Since the year began, stocks priced in gold have become more affordable.  Earlier in the year, the Dow to Gold ratio was around 19 and the ratio presently stands at about 13.  That’s a decline of more than 30% in the value of stocks when priced in gold.

New readers should be aware that the Dow to Gold ratio is simple to calculate.  One takes the value of the Dow Jones Industrial Average in US Dollars and divides by the value of an ounce of gold in US Dollars.

Since the value of US Dollars is rapidly changing but an ounce of gold is unchanged, pricing stocks in gold is a much more accurate way to determine the real value of stocks.

As long-term readers know, my forecast is for the Dow to Gold ratio to reach 2 or more likely 1.

A Dow to Gold ratio of this level is not historically unprecedented.  In the early 1980’s. gold was selling for $850 per ounce and the Dow was at 850.

A similar relationship (with different numbers) is a likely outcome this time around too.

Slouching Toward 1929?

Here on this blog each week, I like to present evidence as to where the financial markets and economy may be going in light of the extreme economic conditions that now exist.

We can learn much about where we are headed economically and financially by studying similar times in history.  That’s the focus of this week’s post.

I’ll briefly compare aspects of the 1929 economy with today’s economy.

While there are many similarities, there is one striking difference – the money.  Up until 1933, the US Dollar could be exchanged for gold at a rate of $20.67 per ounce.  Today, the US Dollar is unbacked; meaning there is no limit to the quantity of fiat currency that can be created.

In the early 1930’s prices tended to be more stable; today prices rise.

But, there are many similarities.  In 1928, President Herbert Hoover was elected as the economy was roaring.  However, in 1929, Congress passed the Smoot-Hawley Act in response to a contracting US economy, which imposed large tariffs on imported goods.  The idea was to protect US farmers and manufacturers from foreign competition.  The country’s mood was nationalist and government intervention in trade was welcomed.  Much like today.

For context, the boom of the 1920’s occurred because of Fed policies.  The Fed was formed in 1913.  Benjamin Strong, who was the Chair of the Federal Reserve in the 1920’s pursued easy money policies which created the bubble now referred to as the Roaring Twenties and the subsequent bust.  A pattern that always repeats itself when money is printed.

President Hoover attempted to reflate the economy.  He called a series of meetings with business leaders to attempt to keep consumer spending going but he neglected to also focus on production without which consumer spending has to be limited.  It was a fatal mistake.

Franklin Roosevelt won a landslide victory over Hoover in the election of 1932 as banks were failing, farmers were revolting and unemployment was soaring.  Not all that dissimilar to today’s economy.

Alasdair Mcleod, past guest on my radio program compares (emphasis added):

Roosevelt then delivered his inaugural address, which included the famous line, “So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself.” His speech was followed by the Hundred Days, the first time a president had set such a schedule.

In Britain, Rishi Sunak, the new Chancellor, is now pursuing his version of a Hundred Days announcing subsidies and new support as the occasion demands, financed by monetary inflation. Admittedly Sunak remains a free marketeer but has yet to prove his measures are temporary. Meanwhile, President Trump is destroying his administration’s finances in an attempt to contain the economic fallout from the coronavirus in his election year.

They say that repeating a failed action in search of a different outcome is a sign of madness. Hoover and Roosevelt were pioneers of today’s failed economic policies and it is their post-war successors who are arguably certifiable. But the problem is deeper than that, with the public voting for the same failed policies, so even an economically literate politician has to deliver solutions in that context. It is what makes history repetitious. Instead of economics, psychological factors drive politics, including the public desire for the state to provide easy solutions to economic and personal difficulties. But the lesson from the Hoover era is that we stand on the precipice of an economic collapse as a result of a combination of excessive credit creation in the years before and the introduction of trade tariffs. And that was before the coronavirus was added to this lethal mix.

The psychology suggests that this time the politicians and the monetary authorities will pursue much the same course as before, even more aggressively. So far, the evidence supports this thesis, and it allows us to anticipate mistakes yet to be made.

          History does repeat itself.  It appears that it is repeating itself this time too.

          At the onset of the Great Depression, bank failures were rampant.  Once again Mr. Mcleod relates (emphasis added):

But when the public began to withdraw cash in increasing amounts this false liquidity was exposed. The initial banking panic began in November 1930 in Tennessee when a correspondent network in Nashville collapsed after the Bank of Tennessee closed its doors, forcing over 100 institutions to suspend operations. And as the contraction in bank credit continued, additional correspondent systems imploded. That was only the start of it. The Bank of the United States in New York in December was followed by a new banking crisis in Chicago the following June, this time involving real estate. In 1932 over 2,000 banks closed, and in 1933 a further 4,000.

With a fundamentally weak global banking system, over-leveraged and virtually guaranteed to collapse as current financial and economic conditions deteriorate, a new banking failure could make the first wave of bank failures in 1930 Nashville look like a vicar’s tea-party. The failure of just one major bank anywhere in the world is likely to degenerate into a widespread panic because global regulation has ensured they all game the system similarly and they all share the same weaknesses to a greater or lesser degree.

In another potentially fatal error, following the Lehman crisis the G-20 agreed to new rules designed to ensure that the costs of future bank failures are to be carried by bondholders and large depositors as well as shareholders, and not governments. Fortunately, this bail-in route is intended to be optional, but there is a risk that in a widespread banking crisis one or more of the G-20 members will go down the bail-in route, probably for banks not on the G-SIB list but smaller and no less significant banks. With some bailing-out and some bailing-in, simple nationalization and preservation of all customer deposits becomes less likely, prompting a collapse not just in the banks bailed in, but panic in all bank bonds and major deposits which would otherwise be protected in a clean bail-out.

Putting the bail-in uncertainty to one side, instead of a series of bank failures between 1930-33 today’s global banking interdependence suggests one major crisis is more likely, which arguably has already started given the liquidity injections that have taken place since last September, commencing in the repo market.

          I have repeatedly warned of the weakness in the banking sector, first discussing the repo market being propped up in October issues and more recently with the reporting of banks operating under a zero percent reserve requirement since March of this year.  There are many similarities between the banking system of the early 1930’s and today.  However, due to the fact that the US Dollar is unbacked today, the problem will have to be worse today.

          If you’ve not yet checked the safety of your bank or come up with a cash diversification plan, we’d strongly advise you to do so.  My office can help you do this if we haven’t already.  Just give us a call at 1-866-921-3613.

          The bottom line is this.

          Governments are making the same mistakes as they made 90 years ago when putting forth policies to deal with the current environment.  Mr. Mcleod concludes (emphasis added):

As was the case between 1930—1933 we can be almost certain of a banking crisis. This time it will be global and almost certainly will require banks to be taken into public ownership. The cost will be immense, and it will be paid for by inflationary means.

The scale of it will mean an unprecedented destruction of wealth — hardly the basis for economic recovery. At the same time statist preservation of existing production for fear of unemployment will hamper, not help economic recovery; and, so long as fiat currencies retain any exchange value, there can be no economic revival.

Indeed, the most important difference from the 1930s is the money, which could well collapse entirely. Guided by the pre-Keynesian economic theory of the Austrian school, of the economic consequences we can be certain. The political consequences, in the long run, can only be guessed.

Banking Failures and Rising Prices?

As I note in this month’s “You May Not Know Report” which will be mailed to clients in about one week, there are two schools of thought as to where the economy and financial markets go from here given that debt levels are extreme and money creation is off the charts.

Those analysts who believe debt levels will dominate economic activity moving ahead are those who are in the deflation camp.  Excessive debt levels are deflationary.  Banks, which have debt as assets, can become insolvent when massive levels of debt go unpaid.

There are other analysts who are of the mind that excessive money creation will dominate in the future.  At a certain level of money creation, inflation is the only possible outcome.

Here’s the rub.  No one knows for certain what level of money creation tips the scales from deflation to inflation.  And, no analyst knows for certain what the inflation rate will be once the inflation tipping point is reached, assuming we get there.

On my radio program, we interview some very bright economists and financial commentators.  One thing is sure – there is not a common, widely accepted opinion.  That’s why in the book “Revenue Sourcing” I advocate using a revenue sourcing map to protect yourself from either outcome.

Given the extremes at which we find ourselves currently, I am confident that the outcome will also be extreme.  Once one fully understands the economic data, it’s absolutely impossible to imagine how investing the traditional way will produce the same outcome that it’s delivered historically.

The first and very real threat to your finances is the solvency of the banking system.  This was the issue during the financial crisis and looking at the data, it’s likely going to be an issue again, probably soon.

Egon von Greyerz, the founder of Matterhorn Capital Management in Zurich, recently noted in a piece he published that there is a very strong historic correlation between the unemployment rate and commercial loan defaults.  He published this chart to provide an illustration.

When reviewing the chart, one notes that the commercial bank loan delinquency rate has tracked the unemployment rate closely.  During the financial crisis, the official unemployment rate was just under 10% and the commercial bank loan delinquency rate was between 7% and 8%.

While there is some debate about the true current unemployment rate given the calculation methodologies used, by eyeballing the chart, one might easily conclude that the commercial bank delinquency rate could exceed 12%. 

Mortgage loan delinquency rates more than doubled from March to May and that’s with the extra $600 per week in federal unemployment benefits still being paid.  Those benefits are set to stop at the end of this month.

I expect delinquency rates to jump significantly as a result; my best estimate would be 20%, perhaps as high as 30%.

Most of the loans that are currently delinquent have not been reported by the banks.  But these bad loans will be reported over the next quarter or two.

Alasdair Macleod, an analyst who has been a past guest on my radio program had this to say about debt levels, the banking system and the response by the Federal Reserve (emphasis added):

But for now, monetary policy is to buy off all reality by printing money without limit and almost no one is thinking about the consequences.
Transmitting money into the real economy is proving difficult, with banks wanting to reduce their balance sheets, and very reluctant to expand credit. Furthermore, banks are weaker today than ahead of the last credit crisis, and payment failures on the June quarter-day just passed could trigger a systemic crisis before this month is out.
Sooner or later bank failures are inevitable and will be a wake-up call for markets.  Monetary inflation will then become an obvious issue as central banks and government treasury departments become desperate to prevent an economic slump by doing the only thing they know; inflate or die.
Foreigners, who are incredibly long of dollars and dollar assets will almost certainly start a chain of events leading to significant falls in the dollar’s purchasing power. And when ordinary Americans finally begin to discard their dollars in favor
of goods, the dollar will be finished along with all fiat currencies that are tied to it.

Since banks are experiencing loan delinquencies and soon loan defaults, they are not in a hurry to extend credit to customers.  Since the last several economic expansions were fueled by debt accumulation, when debt accumulation stops, the economy stops with it.

Mr. Macleod published this chart to demonstrate the banks’ balance sheets have begun to contract.

Alasdair also compares the current, looming crisis to the financial crisis of 2008 (emphasis added):

Following Lehman’s failure, a similar pattern to the one unfolding today of a rapid increase in bank assets through the newly invented QE was followed by a contraction of bank credit which lasted about fifteen months. But that crisis was about financial assets in the mortgage market, which had knock-on effects in the non-financials. Difficult though it was, its resolution was relatively predictable.
This crisis started in the non-financials and is, therefore, more damaging to the economy; its severity is likely to lead to a banking crisis far larger than the Lehman failure and possibly greater than anything seen since the 1930s depression.
Commercial bankers are now waking up to this possibility
. For them, the immediate danger is associated with this quarter-end just passed, when demand for credit to pay quarterly charges increases significantly. Already, businesses are in arrears as never before, with many shopping malls, office blocks, and factories unused and rents unpaid. It is this problem, shared by banks around the world, which due to the severity of current business conditions is likely to tip the banking system over the edge and into an immediate crisis. The extent of the problem is likely to be revealed any time in this month of July.

Bank failures are deflationary by nature as the money supply contracts as borrowers’ default on debt.

Mr. Macleod states that since this crisis is a far larger one than Lehman was, the bailout required will be far larger and there is only one way that such a bailout will be funded – more money printing.

This will lead to stagflation, a condition under which the economy sees low output but rising, likely rapidly rising prices.

Mr. von Greyerz, referenced above, noted that since COVID-19 hit, world governments and central banks have borrowed and printed a combined total of $18 trillion.  Mind-boggling.

To help put that number in perspective, if you counted quickly and never made a mistake, it would take you 32,000 years to count to a trillion.

If you’ve not already done so, I would suggest that you consider owning some precious metals.  If you’re unsure as to how to get started, give the office a call at 866-921-3613 and we’ll arrange a free, no-obligation, educational call to help you understand your options.

We’d also suggest checking out the safety rating of your banking institution.  Given the high probability of bank failures moving ahead, diversification with your cash assets is also advisable.

Only Two Possible Economic Outcomes

Last week, I stated that we are entering a time of significant financial transition. 

While that is clear, the ultimate direction of the transition is dependent on one, vitally important fundamental question.  Will the Federal Reserve continue money creation literally from thin air indefinitely until faith in the currency is eventually lost?  Or, will the Federal Reserve stop short of that, preserving the US Dollar but allowing markets and the economy to go through a deflationary financial reset?

That is not a new question.

In 2011, in my book “Economic Consequences”, I wrote about the slippery slope of money printing and the two inevitable outcomes.  The first, money creation continues until faith in the currency is lost.  Or, the second, money creation stops, and the forces of debt excesses thrust the economy into a deflationary recession or depression.

In the 2016 book “New Retirement Rules”, I revisited these two outcomes and confirmed that we would have to experience one or the other.

Presently, it appears the Federal Reserve has no intention of slowing down or stopping the money creation. 

While the corona-virus situation has muddied the water from a financial and economic analysis perspective, money creation began again in earnest in September of 2019, a full 6-months before the corona virus restraints were implemented.

In other words, money creation in the trillions of dollars began long before anyone heard of COVID 19.

After the Great Recession of 2007-2009, the Federal Reserve began ‘temporary’ and ‘emergency’ measures of quantitative easing to assist the economy’s transition from bust to recovery.  At that time the ‘extra-ordinary’ measures taken were to create billions of dollars per month through quantitative easing.

It seemed that it worked for a while.  But it never works long term.

As I have noted many times over the past decade in books and in this publication, as time passes, more money needs to be created to get diminished results.

Beginning last September, the Federal Reserve began injecting tens of billions of dollars into the repo market, which is the overnight, intrabank lending market.  On October 7, on this blog, I reported on this and warned it was a red flag of problems to come.  I talked about it again on October 21.  You can go check it out for yourself.

Presently, in response to COVID 19, money creation is off the charts.  The Fed is printing money for the US Treasury to backstop corporate debt and is printing still more money to directly purchase junk bonds.  From March 11 to April 13, the Fed’s balance sheet has expanded from $4.31 trillion to $6.13 trillion.  That’s an eye-popping 42% increase in only one month.  (Source:  https://www.strategic-culture.org/news/2020/04/21/real-new-deal-debt-jubilee-or-green-new-deal-global-dictatorship/)

While no one knows exactly how long the Federal Reserve can print without a loss of confidence in the US Dollar causing a currency collapse, we can all acknowledge it’s not forever.

Which brings us back to the question, will they stop or won’t they?

Over the past month, I have had many conversations with many very bright economists and financial experts.  I have concluded that no one knows for sure.

So, it’s best to prepare for either outcome understanding that by doing so, one strategy will ultimately be wrong, but you have a good chance to protect yourself and even prosper.

The first outcome has the Fed put the brakes on money creation.  That leads to a deflationary depression.  As bad as that sounds, that’s the better of the two outcomes here.

Under our money system, since 1971 when the link between the US Dollar and gold was eliminated, money has been loaned into existence.  If the Federal Reserve wanted to create more money, the central bank would reduce interest rates to encourage more borrowing.  The result was more money and the illusion of prosperity.  I intentionally use the word “illusion” here since debt-fueled consumption does not ultimately lead to prosperity, rather it leads to the exact opposite.

          After the Great Recession, when interest rates were reduced to 0%, no one borrowed.  The strategy that the Fed had used for the past 35 years suddenly quit working.  Why?

          The answer is simple.

          There was too much debt.  Speaking figuratively, citizens and businesses had collectively maxed out their credit cards and couldn’t take on more debt.

          The Fed was backed into a corner. 

They had two choices, endure the deflationary recession or depression, allowing irresponsible banks to fail or bail out the banks and resort to money printing.  The Fed chose the latter and the can was kicked down the road.

          In September of last year, as noted above, the Fed again faced a similar choice although it was not widely reported.  The Fed again chose money creation.

          Now, that money creation has reached levels that seem totally ludicrous and will undoubtedly be impossible to maintain for any extended period of time.  One of the two admittedly ugly outcomes will have to soon emerge – devastating deflation or massive inflation.

          Alasdair McLeod, past guest on the RLA Radio program and highly regarded economist, reasons that, as far as money creation is concerned, it may already be too late.  In his piece titled, “Anatomy of a Fiat Currency Collapse” (Source:  https://www.goldmoney.com/research/goldmoney-insights/anatomy-of-a-fiat-currency-collapse), he concludes that some or all fiat currencies could be gone by the end of the year.

          Mr. McLeod concludes (accurately) that government inflation statistics cannot be trusted.  That’s something that we’ve discussed extensively in this publication and on RLA Radio with guest experts like Dr. Chris Martinsen and Economist John Williams.  Government inflation reporting uses ‘adjustments’ to the reported inflation rate like hedonic (pleasure) adjustments as well as weighting adjustments and substitution to arrive at an inflation number that is lower than reality.  The Chapwood Index, a private inflation index, that tracks the prices of 500 consumer items has the actual annual inflation rate at about 10% which is very close to the alternative inflation number reported by John Williams of Shadow Stats.

          Mr. McLeod’s second point in the excellent piece is that the general populace lacks a general understanding and is generally ignorant of what inflation, or an expansion of the money supply actually does.  He states, “given proclamations by central bankers that they are about to hyperinflate, ignorance of monetary matters becomes an expensive condition. When trying to understand money, credit and how they flow, the vast majority of people find themselves in an Alice in Wonderland confusion where nothing makes sense. They are setting themselves up to lose everything they possess.”

          Mr. McLeod explains that inflation comes in two phases and the first phase is coming to an end.  Worldwide, all citizens expect that their currencies will buy less in the future without actually understanding exactly how much purchasing power has already been lost.  In the case of the US Dollar, McLeod found that when measured against gold, the US Dollar has retained only 2.2% of its 1969 purchasing power. 

          At the present time, Mr. McLeod speculates, we are entering the second phase of inflation which is currency destruction. 

McLeod writes: “With the general public and virtually all the financial establishment ignorant of or blind to the inflationary situation, central banks have chosen this moment to announce unlimited monetary expansion to buy off the consequences of the coronavirus. They have committed to the virtual nationalisation of their economies, to be paid for by debauching their currencies. The process depends on public ignorance of the consequences. In all the announcements of government support for their economies and of their central banks’ monetary role, there has been virtually nothing said or written about the consequences of the monetary inflation involved.”

          It is during phase two Mr. McLeod states that the general public will wake up and become aware of the fact that the currency is collapsing.

          This collapse in purchasing power will be exacerbated by the fact that many foreign entities holding US Dollar denominated assets will find themselves in a position of needing to liquidate them due to the rapidly deteriorating economy.  And, given the artificially low interest rates presently, there is not much that is attractive about owning US Dollar assets.

          McLeod says, “On both Wall Street and Main Street, Americans are bound to become increasingly aware of the inflationary consequences. The problem for the Fed is that there is no Plan B alternative to financing by means of inflation of money and credit, particularly in an election year.”

          After a persistent and unusually protracted period of monetary inflation over the last fifty years, it is increasingly likely the public will finally understand what is happening to prices. They will then begin to realise that it is excessive quantities of money in circulation that is the reason for rising prices, and that they must dispose of currency as quickly as possible for anything they want or can barter in future for something else. Empirical evidence is that this second and final phase of monetary debasement is likely to last only a matter of months.

Once this second phase starts, it is almost impossible to stop it, because the public will have lost faith not just in the currency, but in the government establishment’s monetary and economic policies as well. It ends when an unbacked fiat currency is no longer accepted as money by the public.”

          Whether the outcome of the present situation is deflation or inflation as Mr. McLeod has described, there is a lot at stake here.

          Educate yourself.  And do it soon.  I have free resources on my company website, www.RetirementLifestyleAdvocates.com.