Deflation – Dennis Tubbergen

Forecast on Target

Last week, I gave you an update on the housing market. It’s my strong opinion that real estate is now at the beginning of a decline that will rival the plunge in prices experienced at the time of the Great Financial Crisis.

This development fits in with my long-held belief that our economy will experience inflation followed by deflation. In the interest of full disclosure, this is not an original economic theory, one of the founding fathers, Thomas Jefferson warned us of this inevitable outcome if we allowed private bankers to control the issue of our currency.

I don’t need to convince anyone reading this that we are now experiencing the inflation part of this cycle. However, beginning in 2022, we are now seeing the beginning of the deflationary part of the cycle.

As I’ve commented in the past in this publication, the time frames separating inflationary periods from deflationary periods are not perfectly defined; there is evidence of both phenomena emerging at the same time.

It’s becoming increasingly probable from my viewpoint that we are headed for a stagflationary time – the prices of consumer essentials rise while the value of some financial assets fall.

Some of you are likely taking issue with that forecast given what Federal Reserve Chair, Jerome Powell had to say last week after the Jackson Hole Fed meeting.

In case you missed Mr. Powell’s statement, here is a bit from an article published on “Yahoo Finance” (Source: https://news.yahoo.com/jerome-powell-us-stock-markets-235847493.html) (Emphasis added):

Stock markets in the US ended the week sharply down following tough comments by the head of the country’s central bank, the Federal Reserve.

The bank’s chairman, Jerome Powell, said the bank must continue to raise interest rates to stop inflation from becoming a permanent aspect of the US economy.

His words sent US stocks into a tailspin, with markets tumbling 3%.

It comes as Americans are having to pay more for basic goods.

Inflation in the world’s largest economy is at a four-decade high.

During a highly anticipated speech at a conference in Wyoming on Friday, Mr. Powell said the Federal Reserve would probably impose further interest rate hikes in the coming months and could keep them high “for some time”.

“Reducing inflation is likely to require a sustained period of below-trend growth,” he said at the meeting in Jackson Hole.

Investors are concerned that if economic growth falters, higher interest rates will increase the likelihood of a recession.

Mr. Powell conceded that getting inflation under control would come at a cost to American households and businesses but he argued it was a price worth paying.

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said.

“These are unfortunate costs of reducing inflation but a failure to restore price stability would mean far greater pain.”

Mr. Powell wants to avoid inflation becoming entrenched. Simply put, that means if people believe inflation will be high, they will alter their behavior accordingly, making it a self-fulfilling prophecy. For example, someone who thinks prices will go up 3% next year is more likely to seek a 3% rise in wages.

The last time this happened, Mr. Powell’s predecessor, Paul Volcker, had to slam on the brakes, raising interest rates dramatically and sending the economy into recession.

In March, the Federal Reserve’s key interest rate was almost zero; it has since been raised to a range of 2.25% to 2.5% in an effort to tackle inflation.

Interesting that the author of the article referenced Paul Volcker, comparing the actions of Volcker as Fed Chair to the policy decisions of the current Fed Chair, Powell.

THEY ARE VASTLY DIFFERENT.

Volcker increased interest rates to nearly 20% to tame inflation; that’s a far cry from the current 2.5%!

As I have previously stated, from my research, inflation will not be subdued without real positive interest rates. Interest rates need to be higher than the inflation rate.

I will also go out on a limb here and put forth my prediction that the Fed will reverse course as deflation takes hold. As noted above, deflation signs are becoming more obvious. Last week, I provided a housing update; this week, let’s look a bit more closely at corporate layoffs which are becoming more prevalent. This from Michael Snyder (Source: http://theeconomiccollapseblog.com/the-layoff-tsunami-has-begun-50-of-u-s-companies-plan-to-eliminate-jobs-within-the-next-12-months/):

Unfortunately, a brand new survey that was just released has discovered that 50 percent of all U.S. companies plan to eliminate jobs within the next 12 months. The following comes from CNBC…

Meanwhile, 50% of firms are anticipating a reduction in overall headcount, while 52% foresee instituting a hiring freeze and 44% rescinding job offers, according to a PwC survey of 722 U.S. executives fielded in early August.

These are executives’ expectations for the next six months to a year, and therefore may evolve, according to Bhushan Sethi, co-head of PwC’s global people and organization group.

Can those numbers be accurate?

I knew that things were bad because I write about this stuff on a daily basis.

But I didn’t think that half of the firms in the entire nation were already looking to cut workers.

Wow.

At this moment, I am at a loss for words.

It’s going to get bad out there. If you have a good job right now, try to do whatever you can to hold on to it.

Sadly, some of the biggest names in the corporate world have already started to lay off workers. For example, Ford Motor just announced that it will be laying off “roughly 3,000 white-collar and contract employees”…

Wayfair has also decided that now is the time for mass layoffs…

I thought that Wayfair was doing quite well.

I guess not.

In a desperate attempt to stay afloat, Peloton has also chosen to lay off “hundreds of workers”…

And even Groupon is getting in on the act. 500 of their workers will now be updating their resumes…

Other big names that have announced layoffs in recent weeks include Best Buy, HBO Max, Shopify, Re/Max, and Walmart.

Unfortunately, this is just the tip of the iceberg.

As this new economic downturn deepens, countless more Americans will lose their jobs.

And as that happens, all of a sudden there will be vast numbers of people that can’t pay their mortgages or make their rent payments, and that will make our new housing crash even worse.

We are now very clearly past the peak of the housing bubble, and the ride down is going to be really painful.

Last year at this time, the housing market in California was extremely hot, but now the numbers are definitely heading in the other direction…

Snyder goes on to quote statistics on the California real estate market. He notes that the sales volume of single-family houses in California fell 14% in July from June and by 31% from one year ago. Sales of single-family homes in California have fallen for 13 consecutive months. Price declines are now starting to follow sales declines as one might expect. Prices were down 3.5% in July from June. While that may seem like a relatively small decline, it’s significant should it continue month-after-month.

The forecast of inflation followed by deflation that I put out there in my “New Retirement Rules” book is now playing out.

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.

Is the Fed About to Lose?

One of the points of my “New Retirement Rules Book”, last updated in 2016, was that an economy that had accumulated far more debt than was sustainable would eventually experience a deflationary climate as debt was purged from the system.

Prior to that deflationary environment emerging, I suggested that depending on the policies pursued by the Federal Reserve, we could see inflation prior to deflation.

Since that book was published, the Federal Reserve, the central bank of the United States, has created trillions in new currency. The result of that reckless policy is now evident – accelerating inflation in all areas of the economy but perhaps now most evident at the gas station and the grocery store.

The Federal Reserve is now trying to engineer a soft economic landing. That simply means the central bank wants to get inflation under control while avoiding a recession.

In my view a snowman has a better chance of surviving from now until the 4^th of July.

In my conversations with many radio show listeners and New Retirement Rules class attendees, I find that there is confusion around the terms ‘inflation’ and ‘deflation’.

Inflation is technically defined as an increase in the currency supply and deflation is defined as a decline or contraction in the currency supply.

Increases in consumer prices are a symptom of inflation.

In a deflationary environment, currency disappears from the financial system as debts go unpaid and stock values and real estate values plummet.

It’s somewhat ironic that inflation can set off deflation. But history teaches us that it happens time and time again.

In Weimar, Germany, after the infamous hyperinflation destroyed the currency, deflation set in and an economic environment emerged that allowed a fringe political leader like Adolph Hitler to rise to power.

Due to the monetary policies of the Federal Reserve, we are now experiencing inflation but we will not avoid a painful deflationary environment.

As I’ve discussed in the past, this is due to one major reason – the currency system that we are presently using and have been utilizing since 1971.

Prior to 1971, the US Dollar was backed by gold.

In 1944, after World War II and the deflationary period of the 1930s, an international agreement made the US Dollar the world’s reserve currency. At that time, the United States had more than 20,000 tons of gold reserves making the rest of the world comfortable that the US would be able to make good on her promise to redeem US Dollars for gold at a rate of $35 per ounce.

It took about 25 years for the US to back out of this agreement. In 1971, the US’ gold reserves were reduced to 8000 tons and President Nixon eliminated the link between the US Dollar and gold. Since that time, US Dollars have been loaned into existence.

Many of you reading this know that back story extremely well.

Since all world currencies are debt today, when debt levels reach unsustainable heights and debt goes unpaid, the currency supply contracts and deflation sets in.

Note from the chart on this page from Gold Switzerland (Source: https://www.gold-eagle.com/sites/default/files/images2020/evg081821-5.jpg) that worldwide debt levels now stand at $300 trillion.

Based on the current spending trajectory, within 4 to 9 years, global debt could reach $2 quadrillion!

That is an increase of more than 600%!

At some point, debt levels collapse under their own weight, and deflation sets in.

The Federal Reserve and other world central banks are trying to avoid this deflationary outcome by creating currency.

The chart shows the expansion of the currency supply.

Notice the currency created by the Federal Reserve has been literally off the charts in an attempt to avoid this deflationary outcome which is inevitable in my view.

History tells us this policy will not work.

There cannot be an economic ‘soft landing’ in my view.

And, it seems the economic data is starting to bear this out.

Michael Snyder, wrote a piece last week in which he cited much of this data. (Source: http://theeconomiccollapseblog.com/here-are-11-statistics-that-show-how-u-s-consumers-are-faring-in-this-rapidly-deteriorating-economy/)

–According to a Harvard CAPS/Harris Poll that was recently conducted, 56 percent of Americans say that their financial situations are getting worse, and only 20 percent of Americans say that their financial situations are improving.

–Another new survey has just discovered that 66 percent of Americans “have avoided social events because they’ve felt embarrassed or uncomfortable” about their financial situations.

–The housing bubble appears to be bursting. At this point, sales of new single family homes are falling at a very frightening pace…

Sales of new single-family houses in April plunged by 16.6% from March and by 26.9% from a year ago, to a seasonally adjusted annual rate of 591,000 houses, the lowest since lockdown April 2020, according to the Census Bureau today. Sales of new houses are registered when contracts are signed, not when deals close, and can serve as an early indicator of the overall housing market.

(Editor’s note: I’ve been warning of an inevitable correction in real estate prices)

-After breaking the all-time national record in March, the average price of a gallon of gasoline in the United States has gone 42 cents above the old record and is now sitting at $4.59.

–The average age of a car on U.S. roads has reached an all-time record high of 12.2 years. Many Americans continue to delay replacing their current vehicles because new vehicles have become so unaffordable.

–Millions of American families are struggling with rapidly rising food prices…

The index for food away from home increased 7.2% over the last year, the Labor Department reported earlier this month. Food prices were up 9.4% in April from the same time last year — the biggest jump since April 1981, the Bureau of Labor Statistics recently reported. And grocery store prices increased 10.8% for the year ended in April.

–U.S. natural gas futures just crossed the nine dollar threshold – the highest level that we have seen since the financial crisis of 2008. That means that much higher energy costs are on the way for U.S. consumers.

–Multiple Fed surveys are showing that manufacturing activity in the U.S. is really slowing down…

The slowdown in manufacturing activity on display in reports from the Federal Reserve banks of New York and Philadelphia was confirmed by a survey from the Richmond Fed indicating that factory activity contracted in the mid-Atlantic region in May. The Fifth District Survey of Manufacturing Activity index dropped 23 points from a positive reading of 14 in April to a minus nine, the lowest reading since May 2020, when much of the economy was still reeling from the onset of the pandemic and lockdowns.

-Zero Hedge is reporting extremely depressing news about U.S. macro data: “Other than April 2020 – when the entire economy was closed – May’s serial disappointment in US Macro data is the worst since Lehman”

-Thanks to plunging stock prices, approximately 20 trillion dollars in household net worth has been “wiped out” so far this year.

-A new CBS News/YouGov survey has found that 74 percent of Americans believe that things are going badly in this country and that 51 percent of Americans actually believe that Joe Biden is “incompetent”.

In my view, we are likely seeing the beginning of the transition from inflation to deflation.

Possible Economic Outcomes

From where I sit, it seems that stagflation is the most likely economic outcome near term.

Stagflation is defined as inflation combined with economic contraction.

The official inflation rate is 8.5%, but any long-term reader of “Portfolio Watch” knows this official number is highly manipulated. The actual inflation rate, absent favorable adjustments to make the reported number appear more palatable, is higher, likely mid-teens, depending on whose data you want to believe.

No matter, inflation is rampant. The Fed is ever-so-incrementally increasing interest rates to ostensibly fight inflation. The reality is that the level of increase so far will probably not subdue inflation.

The economy is still growing officially, but from my perspective, once the ultimate revisions are made, we are probably in a recession presently.

On my weekly “Headline Roundup” webinar, I discussed the opinion of Mr. Peter Grandich, founder of Peter Grandich and Company, relating to inflation. Grandich is of the opinion that the Fed is well behind the curve when addressing the inflation problem. Long-time readers of “Portfolio Watch” know that I agree completely.

Grandich says that inflation today is a completely different animal than it was in the 1970s which was the last stagflationary environment experienced by the country. Grandich says “the situation is beyond what the Fed can do now”.

“Social and political disharmony is at the highest level since the onset of the Civil War in the U.S.,” Grandich said, “and with the world suffering economic challenges, it does not paint a good picture for the future.”

Grandich added, that he is investing only in the gold market presently.

As far as the topic of economic contraction is concerned, Deutsche Bank recently became one of the world’s first major banks to forecast a recession.

This from “CNN Business”:

“Deutsche Bank raised eyebrows earlier this month by becoming the first major bank to forecast a US recession, albeit a mild one.

Now, it’s warning of a deeper downturn caused by the Federal Reserve’s quest to knock down stubbornly high inflation.

‘We will get a major recession,’ Deutsche Bank economists wrote in a report to clients on Tuesday.

The problem, according to the bank, is that while inflation may be peaking, it will take a long time before it gets back down to the Fed’s goal of 2%. That suggests the central bank will raise interest rates so aggressively that it hurts the economy.”

As I have often stated, the Fed is between the proverbial rock and a hard place, all of their own making. If the bank increases interest rates in a meaningful manner, recession will have to be the ultimate outcome.

On the other hand, if the economy officially enters a recession and the Fed reacts by easing once again, the inflation monster will be further fueled.

There are already signs that the economy, addicted to the artificial stimulus of the Fed is reacting negatively to the very modest tightening to date.

Stocks are declining in 2022.

The chart is a weekly chart of the Standard and Poor’s 500. Each bar on the price chart represents one week of price action in this market. The green bars represent weeks the market finished up, and the red bars represent weeks that the market finished lower.

Note the uptrend line drawn on the chart from the most recent market bottom in 2020 to the end of 2021.

That trend was broken as we entered 2022. And, since the trend was broken, we are now seeing the market ‘stair-step’ lower with a series of lower highs and lower lows.

In this report, shortly after the first of the year, I suggested that the top in stocks might be in. At this point, that seems to be the case, and I expect the series of lower highs and lower lows to continue.

At this juncture, the Fed is continuing with its modest program of tightening. The question will be how they react if stocks fall harder and go much lower.

As noted above, more easing will mean more inflation.

There are three economic outcomes here, in my view:

One, the Fed stays the course, raising interest rates modestly and intermittently. This course of action means that inflation may accelerate more slowly, but we also have a recession. This is the stagflation outcome I discussed above.

Two, the Fed, fearing recession, reverses course and begins currency creation once again while reducing interest rates. This could mean more inflation, even hyperinflation, which will ultimately transition to a severely deflationary environment, perhaps after a currency event of some type.

Three, the Fed, to get inflation in hand, increases interest rates so we have net positive interest rates after factoring in inflation. This course of action likely leads almost immediately to the deflationary outcome. In order to pursue this option, the federal budget would also have to be balanced or be a lot closer to balanced.

Near term, I expect option one or a stagflation outcome.

However, it would not be surprising to see the Fed revert to option two when the economy worsens.

And that seems to be what is occurring.

Credit card debt that Americans are carrying increased almost unbelievably last month. This from “Zero Hedge” (Source: https://www.zerohedge.com/economics/shocking-consumer-credit-numbers-everyone-maxing-out-their-credit-card-ahead-recession):

While it is traditionally viewed as a B-grade indicator, the March consumer credit report from the Federal Reserve was an absolute shock and confirmed what we have been saying for months: any excess savings accumulated by the US middle class are long gone, and in their place, Americans have unleashed a credit-card fueled spending spree.

Here are the shocking numbers: in March, one month after the February print already came in more than double the $18 billion expected, consumer credit exploded to an absolute blowout of $52.435 billion, again more than double the expected $25 billion print, and the highest on record!

And while non-revolving credit (student and car loans) rose by a relatively pedestrian 21.1 billion (which was still the 6th highest on record)… … the real stunner was revolving, or credit card debt, which more than doubled from the already elevated February print of $14.2 billion to a stunning $31.4 billion, the highest print on record… just in time for those credit card APR to start moving higher, first slowly and then very fast.

Yes, you read that correctly; credit card debt doubled and then some from February to March.

The best explanation, in my view, is that consumers are forced to borrow money or use credit to meet their household living expenses.

That is a trend that is also unsustainable.

There are many unsustainable trends; consumer debt levels, government debt levels, government spending, overvalued markets, and currency creation, to name a few.

A reversal of these unsustainable trends is inevitable.

Are Currency Changes Imminent? – Part 2

The big news in financial markets last week was the big decline in US Treasuries. Not surprising given the news I discussed last week; Russia has now loosely tied its currency, the Ruble, to gold and required any country that Russia deems to be unfriendly to use Rubles or gold when trading with Russia.

As I noted last week, this move will likely be bullish for gold and negative for the US Dollar. Many readers could be looking at the performance numbers in the databox above and noting that the US Dollar moved significantly higher last week. It’s important to understand that the US Dollar Index is a relative measure of the purchasing power of the US Dollar, not an absolute measure. The US Dollar Index measures the US Dollars purchasing power relative to the purchasing power of the Japanese Yen, the Euro, the Swedish Krona, the British Pound Sterling, the Swiss Franc, and the Canadian Dollar.

All one needs to do is visit a grocery store or purchase any consumer item to quickly realize that the US Dollar is losing absolute purchasing power. The other fiat currencies used in the US Dollar Index are simply performing more poorly than the US Dollar on a collective basis.

This move by Russia, I believe, is the biggest economic news of our time. As big as when Nixon eliminated the convertibility of the US Dollar for gold.

Interestingly, at the time Nixon made that move, the ultimate implications of the action were not widely understood by the populace. I think one could reasonably state that the same could be said about this move by Russia that could be the catalyst for big currency changes globally moving ahead.

From my perspective, currency changes typically occur slowly. It’s taken more than 50 years for the US Dollar to lose 98% of its purchasing power. The US Dollar has been the preferred currency for international trade since the Breton Woods agreement of 1944. After Nixon eliminated the US Dollar redemptions for gold in 1971, an agreement was struck with Saudi Arabia to sell its oil exports in US Dollars in exchange for military favors.

Now though, as has happened many times throughout history, currencies are beginning to evolve more rapidly. Many years from now, looking back, I believe this move by Russia will be viewed as the catalyst for major currency changes that are yet to come.

Past RLA Radio Guest, Peter Schiff, recently commented (Source: https://schiffgold.com/key-gold-news/russia-is-quietly-making-the-case-for-owning-gold/):

The head of the Russian Parliament, Pavel Zavalny, made comments recently addressing the subject of economic and financial sanctions. It’s clear that gold is playing a large role in protecting Russian wealth. That role may get bigger and it could create a paradigm shift in how the world does business.

Russia has a lot of natural gas and oil. And it sells a lot of natural gas and oil to the world. Zavalny made it clear that Russia is happy to sell — in hard currency. And what is hard currency? Not dollars.

“If they want to buy, let them pay either in hard currency, and this is gold for us, or pay as it is convenient for us, this is the national currency. As for friendly countries, China or Turkey, which are not involved in the sanctions pressure. We have been proposing to China for a long time to switch to settlements in national currencies for rubles and yuan. With Turkey, it will be lira and rubles. The set of currencies can be different and this is normal practice. You can also trade bitcoins.”

Zavalny said Russia has no interest in dollars, saying “this currency turns into candy wrappers for us.”

In an op-ed published by “MarketWatch”, Brett Arends said this might not mean anything. But it could mean a lot if other countries like China and India follow Russia’s lead. As Arends notes, a lot of countries aren’t thrilled with the United Sates’ ability to control the global financial system with a monopoly on the reserve currency.

Arends also says this adds to the argument for having gold in a long-term investment portfolio.

Not because it is guaranteed to rise, or maybe even likely to. But because it might — and might do so while everything else went nowhere, or went down. Like in a geopolitical or financial crisis where the non-western bloc decides to challenge America’s financial hegemony and ‘king dollar.’”

Arends calls himself “gold agnostic,” but he said there is no question “it has its uses.”

Gold is completely private. It is completely independent of the SWIFT or any other banking system. And despite the rise of cryptocurrencies, it remains the most widespread and viable global currency that is not controlled by any individual country.”

Moves made by Russia in recent weeks could represent a huge paradigm shift in global finance. Many countries have been building toward this for years as the US has weaponized the dollar.

In effect, Russia put the ruble on a gold standard that is now linked to natural gas.

Russia holds the fifth-largest gold reserves in the world. After pausing during the COVID-19 pandemic, the Central Bank of Russia resumed gold purchases in early March before suspending them again a couple of weeks later. The Russian central bank resumed buying gold from local banks on March 28 at a fixed price of 5,000 roubles ($52) per gram. Since Russia is insisting on payment of natural gas in rubles and they’ve linked the ruble to gold, natural gas is now indirectly linked to gold. The Russians can do the same to oil, as ZeroHedge explained.

If Russia begins to demand payment for oil exports with rubles, there will be an immediate indirect peg to gold (via the fixed price ruble – gold connection). Then Russia could begin accepting gold directly in payment for its oil exports. In fact, this can be applied to any commodities, not just oil and natural gas.”

So, what does this mean for the price of gold?

“By playing both sides of the equation, i.e. linking the ruble to gold and then linking energy payments to the ruble, the Bank of Russia and the Kremlin are fundamentally altering the entire working assumptions of the global trade system while accelerating change in the global monetary system. This wall of buyers in search of physical gold to pay for real commodities could certainly torpedo and blow up the paper gold markets of the LBMA and COMEX.”

“The fixed peg between the ruble and gold puts a floor on the RUB/USD rate but also a quasi-floor on the US dollar gold price. But beyond this, the linking of gold to energy payments is the main event. While increased demand for rubles should continue to strengthen the RUB/USD rate and show up as a higher gold price, due to the fixed ruble – gold linkage, if Russia begins to accept gold directly as a payment for oil, then this would be a new paradigm shift for the gold price as it would link the oil price directly to the gold price.”

We could be seeing a slow unwinding of the petrodollar. And the petrodollar is one of the foundations of the dollar’s position as the world currency. We’ve already heard rumblings of Saudi Arabia accepting yuan for oil.

The US and other western powers have tried to lock down Russia’s gold. But as Arends explains, that is virtually impossible in effect.

“Despite some laughable suggestions that the West might somehow sanction ‘Russian gold,’ there is no way of tracing the identity, nationality, or provenance of bullion. American Eagle coins or South African Krugerrands can be melted down into bars. Gold is gold. And someone will always take it. Carry a Krugerrand to any major city anywhere in the world and you will find people willing and eager to take it off your hands in return for any other currency you want.”

Back in 2011, when I wrote the book “Economic Consequences”, I noted that the Federal Reserve would ultimately determine whether the United States experienced deflation or inflation followed by deflation. I reasoned that the outcome would depend entirely on monetary policy.

It now seems that the latter outcome is inevitable and perhaps even imminent.

Are We on the Verge of a Crack-Up Boom?

Stocks rallied and gold fell last week. At this point, I don’t view these developments as trend-changing, rather as counter-trend rallies. The Dow to Gold ratio continued to fall last week. As currency devaluation continues, this is an indicator that becomes more meaningful in my view.

At its last meeting, the Federal Reserve increased interest rates by .25%. As I have been stating, I expect Fed action to counter inflation will be more form than substance. This increase of .25% certainly fits in that category in my view.

There is more to this inflation story than meets the eye. While an increase in the currency supply leads to inflation, it also creates other undesirable side effects, particularly when the currency is the world’s reserve currency.

As long-time readers of “Portfolio Watch” know, I have often discussed the concept of a ‘crack-up boom’ put forth by Austrian economist, Ludwig von Mises. For newer readers of “Portfolio Watch”, a crack-up boom is defined as currency inflation or hyperinflation coupled with a simultaneous recession or depression.

Current monetary policy and credit expansion, if it continues, could lead to such an outcome. Arguably, we are on the fringe of such an outcome presently.

Larry Lepard, manager of the EMA GARP fund recently commented on the probability of such an outcome in light of the Russia-Ukraine situation. (Source: https://www.zerohedge.com/markets/fiat-currencies-are-going-fail-spectacularly-lawrence-lepard). Here are some excerpts from his excellent analysis piece:

What just happened in the last two weeks is enormously important and misunderstood by many investors.

The Russian invasion of Ukraine and the corresponding Western sanctions and seizure of Russian FX reserves are nothing short of a monetary earthquake. The last comparable event was Nixon’s abandonment of the gold standard in 1971.

Russia, with the backing and support of China, just told the world that it is no longer going to sell its oil, gas, and wheat for Western currencies which are programmed to debase.

The West in its response just said to all countries around the world: “If you have foreign exchange reserves, held in our system, they are no longer safe if we disagree with your politics.”

It is similar to what the Canadians did when they moved to seize the bank accounts of Canadians who had demonstrated support for the truckers without due process of law.

Both of these political moves are blatant advertisements for what I call “non state controlled money without counterparty risk”, like gold and bitcoin. If governments can weaponize their money when they do not like what you are doing, what is the natural defense?

The US Dollar has been the reserve currency of the world since WW II and the Bretton Woods agreement. This has given the US an enormous advantage and subsidy from the rest of the world because everyone else needs to produce goods and services to obtain dollars and the US can simply produce dollars at no cost by printing them.

Putin is now cast in the role of Charles de Gaulle who complained about the “exorbitant privilege” of the US with its dollar hegemony. As we all know, de Gaulle demanded gold in exchange for France’s US dollar FX surpluses and this outflow forced Nixon to close the gold window.

Recall that post this event, gold went from $35 per ounce to $800 per ounce (23x). Russia’s move will lead to a similar move in favor of gold. Putin could see that the US fiscal and monetary situation was becoming untenable and he decided to use this to create an existential threat to the US and the world financial system.

He undoubtedly knows that the West has artificially suppressed the price of gold and that is why he has been building his gold reserves steadily for the past 20 years.

Putin just shot “King Dollar” in the head.

We can see it in the financial markets, as the price of everything commodity-related is going up relentlessly in dollar terms.

Russia is long commodities, long gold, and doesn’t need fiat currency. His debt to GDP ratio is low and taxes are low. If the world financial markets collapse on a relative basis, the position of Russia will be improved significantly. This is what I believe he is playing for. If investors do not recognize this, they will be caught wrong-footed as I believe many are today.

The implications for investors are quite clear. None of us own enough gold, real assets or commodities. Fiat currencies are going to fail spectacularly, and soon, in my opinion.

In the April issue of the “You May Not Know Report”, I report on another potential development that, should it occur, will be another blow to diminishing US Dollar dominance. “The Wall Street Journal” ran a story (Source: https://www.wsj.com/articles/saudi-arabia-considers-accepting-yuan-instead-of-dollars-for-chinese-oil-sales-11647351541) reporting that Saudi Arabia is now in serious discussions with China to price the kingdom’s oil sales or at least part of the oil sales in the Chinese currency. Here is an excerpt:

Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan, people familiar with the matter said, a move that would dent the U.S. dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia.

The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom, the people said.

The Saudis are angry over the U.S.’s lack of support for their intervention in the Yemen civil war, and over the Biden administration’s attempt to strike a deal with Iran over its nuclear program. Saudi officials have said they were shocked by the precipitous U.S. withdrawal from Afghanistan last year.

China buys more than 25% of the oil that Saudi Arabia exports. If priced in yuan, those sales would boost the standing of China’s currency. The Saudis are also considering including yuan-denominated futures contracts, known as the petroyuan, in the pricing model of Saudi Arabian Oil Co., known as Aramco.

As I discuss in detail in the April “You May Not Know Report”, since 1974, all of the oil exports of Saudi Arabia have been priced in US Dollars. Should that change, it will be more bad news for the US Dollar and more inflation as there will be another reason not to inventory US Dollars by other countries around the world.

Of course, none of these developments is at all surprising or shocking. History teaches us that fiat currency systems have a 100% failure rate. We are not debating the ‘what’, we are only debating the ‘when’.

In the meantime, we will probably continue to see accelerating inflation or hyperinflation which will be coupled with an economic slowdown as von Mises described the ‘crack up boom’.

There is growing evidence that we are now in a recession or, at the very least, moving toward one. The Federal Reserve Bank of Atlanta recently revised 1^st quarter growth projections to 0%. This from “Seeking Alpha” published prior to the Fed’s ¼ point rate hike (Source: https://seekingalpha.com/article/4492503-stagflation-warning-atlanta-fed-cuts-q1-gdp-projection-to-zero_):

On Tuesday, the Atlanta Fed cut its GDP estimate for the first quarter of 2022 to zero.

Just a few days ago, the estimate was for 0.6% growth. That was down from 1.3% just a few days before that.

This is not an encouraging trend.

Keep in mind, Atlanta Fed GDP estimates tend to start high and then fall as the quarter progresses. We’re still early in the quarter.

Just a few weeks ago, a collapse in economic growth seemed impossible. We’re coming off 7% GDP growth in Q4, capping off the fastest growth year on record.

But here we are.

Stagflation is defined as little to no economic growth coupled with high inflation.

And here we are.

This puts the Federal Reserve in a nasty spot. The central bank would typically respond to an economic contraction with rate cuts and quantitative easing. But the Fed is supposed to be tightening monetary policy to deal with surging inflation.

In the book “New Retirement Rules”, I wrote about the two potential economic paths that were before us. Inflation followed by deflation or we would go direct to deflation. The latter could only happen if the Fed ceased easy money policies.

The Fed did not cease easy money policies but instead, doubled down on them. The inflation followed by deflation that I wrote about, now looks a lot like a ‘crack-up boom’.

What is Real and Where are We Heading?

While I don’t typically publish the databox above in my blog each week, I am including it this week for reference.

The Dow to Gold ratio continued to fall last week. As currency devaluation continues, this is an indicator that becomes more meaningful in my view.

If you are not familiar with the Dow to gold ratio, it is simply the Dow Jones industrial average priced in gold. The Dow to gold ratio began the year at about 20 and it currently stands just under 16 1/2. That is a decline in stocks when measured in gold of almost 18%.

To calculate the Dow to gold ratio, one takes the value of the Dow priced in dollars and divides by the price of gold per ounce also priced in dollars. The current value of the Dow, 32,944.19 divided by the price of gold per ounce of 1999 results in a doubt to gold ratio of 16.48.

As currency is devalued, the nominal value of stocks increases. That can result in the illusion of an appreciating stock market when the reality is a depreciating currency, not a stock market that is increasing in real terms.

If we go back to the beginning of calendar year 2000, we find that the Dow Jones industrial average was at about 11,500. Presently, the Dow is nearly triple that level.

The question is, does that mean stocks have tripled in value, or does it mean that the US Dollar just buys a lot less?

By pricing the Dow in gold, we can get an idea.

In January of 2000, gold was selling for about $280 per ounce. To price the Dow Jones Industrial Average in gold, one would take the value of the Dow, 11,500 and divide by the price of gold per ounce, $280, resulting in a Dow to gold ratio of about 41.

In other words, if you were going to use gold to buy the Dow instead of US Dollars, you’d need 41 ounces of the yellow metal to own the Dow. (You can’t actually buy the Dow, but this is a good comparison.)

Today, the Dow is at about 33,000 and the price of gold per ounce is about $2,000. Taking the value of the Dow and dividing by the price of gold per ounce, one finds that the Dow to gold ratio is 16.5. In other words, 22 years later, stocks when priced in gold have fallen nearly 60% while the same stock index priced in US Dollars has nearly tripled.

While that comparison may not conclusively answer the question posed above, another example may.

According to the United States Census Bureau, the median price of a home in calendar year 2000 was $119,600. (Source: https://www.census.gov/data/tables/time-series/dec/coh-values.html)

If you were using gold to buy the new home in calendar yar 2000 rather than US Dollars, a new home would have set you back about 427 ounces of gold.

Fast forward to today and the National Association of Realtors reports that the median price of a home is $358,000. (Source: https://www.newhomesource.com/learn/cost-to-build-house-per-square-foot/) Given that gold is about $2,000 per ounce, a new home could be had for about 179 ounces of gold.

Like stocks, home values have roughly tripled in the last 22 years when priced in US Dollars. But, priced in gold, real estate values have declined just like stock values.

This brings me to my point this week, in real terms (gold) we are experiencing deflation. Measured in US Dollars we have inflation.

As I discussed on my “Headline Roundup” webinar this week, Egon von Greyerz had some great observations along these same lines last week. Here is a bit from his article (Source: https://goldswitzerland.com/global-monetary-commodity-inferno/):

Inflation leading to hyperinflation was always guaranteed in the current debt-infested era, although the Fed and other Western central banks have never understood what inflation is. Just as they didn’t understand that their fake and manipulated inflation figures couldn’t even reach the Fed target of 2%. Now with real US inflation exceeding 15% (see graph below), the Fed has a new dilemma that they are totally unprepared for.

The US government conveniently changed the calculation of inflation to suit their purpose. Had they stuck to the 1980s established method, official inflation would be over 15% today and rising.

For years, the US Fed unsuccessfully tried, with all the king’s horses and all the king’s men, to get inflation up to 2%. In spite of throwing $ trillions at the problem and keeping interest rates at zero, they never understood why they failed.

In spite of printing unlimited amounts of counterfeit money, inflation for years stayed nearer 0% than 2%.

Now with official inflation at 7% and real at 15%, the Fed can’t understand what has hit them as we know from their laughable “transitory” language.

So now a quick volte-face for the Fed to figure out how to reduce inflation by 5 percentage points and more likely by 13 to get inflation down to 2% instead of up to 2%.

Clearly, the Fed can never get it right but many of us have known that for a very long time.

If the Fed studied and understood Austrian economics rather than defunct Keynesianism, they would know that the real inflation rate depends on growth in money supply rather than the obsolete consumer price model.

So let’s take a look at the growth in Money Supply. Since 1971, M2 has grown by 7% annually. A 7% growth means that prices double every 10 years. Thus 100% total inflation over 10 years rather than the 2% per annum that is the Fed target.

But as the chart above shows, the exponential phase started in March 2020 with M2 growing by 19% annually since then. That means a doubling of prices every 3.8 years.

Since the money supply is growing at 19% annually, this means that inflation is also 19% based on our Austrian friends.

And this is what the US and the world were facing before the Ukraine crisis. But now there is a lot of explosive fuel being poured on the global inflation fire.

Russia has the biggest natural resource reserves in the world which include coal, natural gas, oil, gold, timber, rare earth metals, etc. In Rubles, these reserves will obviously appreciate substantially with the falling currency.

In total, the Russian natural resource reserves are estimated at $75 trillion. That is 66% higher than the second country USA and more than twice as much as Saudi Arabia and Canada.

Even if the total Russian supply is not lost to the world, it is clear that the West is determined to punish Russia to the furthest extent possible. Therefore, as we have already seen in the major escalation of oil and gas prices, the shortages will put insufferable pressure on the prices of natural resources.

I have for quite a few years warned about the coming inflation, leading to hyperinflation, based on unlimited money printing.

But the dynamite of a global commodity crisis and shortages thrown into the already catastrophic debt and global monetary fire will create an inferno of nuclear proportions.

If a miracle doesn’t stop this war very quickly (which is extremely unlikely), the world will soon be entering a hyperinflationary commodity explosion (think both energy, metals, and food) combined with a cataclysmic deflationary asset implosion (think debt, stocks, and property).

The world will be experiencing totally unknown consequences without the ability to solve any of them for a very long time. All the above would most likely happen even without a global war. But if the war spreads outside Russia and Ukraine, then all bets are off. At this point, I am not going to speculate about such an outcome since what is standing in front of us currently certainly is bad enough.

The Fed, the Economy and the Markets

The double top theory for stocks that I called at the end of 2021 and have been discussing this month still looks intact despite a bit of a rally in stocks last week.

There was a lot of volatility in stock markets last week and a week end rally propelled stocks into positive territory for the week.

The big news last week was the Federal Reserve’s meeting. This from MSN about how investors may view the Fed’s post-meeting statement: (Source: https://www.msn.com/en-us/money/markets/what-to-expect-from-markets-in-the-next-six-weeks-before-the-federal-reserve-revamps-its-easy-money-stance/ar-AAThaoB)

Federal Reserve Chairman Jerome Powell fired a warning shot across Wall Street last week, telling investors the time has come for financial markets to stand on their own feet, while he works to tame inflation.

The policy update last Wednesday laid the groundwork for the first benchmark interest rate hike since 2018, probably in mid-March, and the eventual end of the central bank’s easy-money stance two years since the onset of the pandemic.

The problem is that the Fed strategy also gave investors about six weeks to brood over how sharply interest rates could climb in 2022, and how dramatically its balance sheet might shrink, as the Fed pulls levers to cool inflation which is at levels last seen in the early 1980s.

Instead of soothing market jitters, the wait-and-see approach has Wall Street’s “fear gauge,” the Cboe Volatility Index up a record 73% in the first 19 trading days of the year, according to Dow Jones Market Data Average, based on all available data going back to 1990.

“What investors don’t like is uncertainty,” said Jason Draho, head of asset allocation Americas at UBS Global Wealth Management, in a phone interview, pointing to a selloff that’s left few corners of financial markets unscathed in January.

Even with a sharp rally late Friday, the interest-rate-sensitive Nasdaq Composite Index remained in correction territory, defined as a fall of at least 10% from its most recent record close. Worse, the Russell 2000 index of small-capitalization stocks is in a bear market, down at least 20% from its Nov. 8 peak.

“Valuations across all asset classes were stretched,” said John McClain, portfolio manager for high yield and corporate credit strategies at Brandywine Global Investment Management. “That’s why there has been nowhere to hide.”

The Fed announced after its two-day meeting that rates hikes would likely begin in March and would end its quantitative easing program at about the same time. The Fed noted that it is considering how quickly to end that program.

I find it curious that despite near-record inflation, the Fed opted to wait a month before taking any action. Seems that if subduing inflation was the goal, action sooner rather than action later would be warranted.

As I’ve discussed in past issues of “Portfolio Watch” and on the weekly “Headline Roundup” webinar update that is broadcast live each Monday at Noon Eastern, I believe it will be difficult for the Fed to end its quantitative easing program.

There are many reasons I have reached this conclusion. Let me cover a couple of them with you.

First, via member banks, the Fed is helping the government cover its massive level of deficit spending. Since the spending by the Washington politicians is totally out of control, this will be a difficult thing for the Fed to get done.

Second, in my view, the economy isn’t strong enough to handle monetary tightening. Should the Fed follow through with its latest policy statement, I believe the economy and the financial markets will quickly and negatively react. Arguably, they have already begun to react adversely.

Every week, I read articles that tout the economic recovery. Most of these are published by media with an agenda in my view which has now sadly become the norm. I believe these stories to be more rhetoric than fact.

This from “Zero Hedge” (Source: https://www.zerohedge.com/economics/atlanta-fed-shocker-us-economy-verge-contraction) (Editor’s note: The acronym BTFD defined and sanitized, means “buy the dip”)

Nothing says “BTFD in stocks” like collapsing sentiment (UMich 10 year lows this morning) and crashing growth expectations and no lesser entity than The Atlanta Fed just released its latest GDPNOW forecast for Q1 economic growth in the US… and it’s a doozy.

US macro data has been disappointing recently…

All of which have sent the initial GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2022 to just 0.1 percent on January 28, i.e. on the verge of contraction.

The chart on the right illustrates the GDPNow model. Note that it is at the zero line indicating the Atlanta Fed’s research has the economy on the verge of recession.

The Atlanta Fed is not alone in this opinion.

This from another “Zero Hedge” piece (Source: https://www.zerohedge.com/markets/recession-deck-bofa-slashes-gdp-forecast-sees-significant-risk-negative-growth-quarter)

Which brings us to the current Wall Street landscape where some banks, most notably the likes of Goldman, continue to predict even more rate hikes while ignoring the risk of a slowdown, its entire bullish economic outlook for 2022 predicated on households spending “excess savings” which they have spent a long time ago (expect a huge downgrade to GDP in 2022 from Goldman in the next few weeks as the bank realizes this), while on the other hand we have banks like JPMorgan, which recently pivoted to the new narrative, and as we reported last weekend, now sees a sharp slowdown in the US economy following a series of disappointing data recently…

… and as a result, JPM now “forecast growth decelerated from a 7.0% q/q saar in 4Q21 to a trend like 1.5% in 1Q22.“

And while not yet a recession, today Bank of America stunned the market when its chief economist joined JPM in slashing his GDP for 2022, and especially for Q1 where his forecast has collapsed from 4.0% previously to just 1.0%, a number which we are confident will drop to zero and soon negative if the slide in stocks accelerates due to the impact financial conditions and the (lack of) wealth effect have on the broader economy.

For a long time, I have been discussing my belief that the economy and the markets were artificial and a day of reckoning would have to come.

That day of reckoning would be inflation followed by deflation.

We are now in the inflation part of that pattern, headed at some future point for deflation.

The question is how out-of-control will inflation get before we see deflation that is likely to be on par with the deflation of the 1930’s.

The answer to that question, in my view, depends entirely on Fed policy.

I remain skeptical that the Fed will follow through completely with its rather vague promise to tighten monetary policy.

The Recent Stock Bull Market – Real or Nominal?

The double top theory for stocks that I suggested at the end of 2021, is looking like the right call at this point.

Stocks suffered their worst week since March of 2020 last week despite a 4-day trading week.

As I have been suggesting here each week, when stock gains are largely attributable to an artificial market environment created by easy-money policies, a correction will have to ensue.

My February special report will be an analysis of stocks. Look for an opportunity to get the report in the February issue of the “You May Not Know Report”. (If you’re not a subscriber, call the office to request a complimentary copy – 1-866-921-3613)

Given the dismal performance of stocks last week, ironically after I wrote about and offered evidence of a bubble in stocks last week, I thought it would be appropriate to dig into this topic a little more deeply.

But I want to examine this topic from a different viewpoint – the effect that currency devaluation has on stock prices.

Long-time readers of “Portfolio Watch” have seen this analysis in a similar form in the past, but the analysis is important to understanding what is largely behind the stock bull market.

This analysis requires that we define two terms – nominal and real.

Nominal is defined as ‘in name only’. When I say that stocks increased nominally, I am stating that stocks increased in name only.

Real is defined as an actual thing, not imaginary.

The most recent bull market in stocks has been in nominal terms not real terms.

Here is an excerpt from the February Special Report to explain.

Stock analysts rarely discuss the key relationship between stock prices and currency devaluation.

Simply and succinctly stated, as currency is devalued stocks priced in that currency rise in price. This increase in the value of stocks due to currency devaluation is nominal rather than real.

The same currency devaluation or inflation that causes the price of groceries to increase also causes the price of stocks to increase.

Let’s look at an example to make the point.

This is a chart of the Dow Jones Industrial Average going back to 1971.

An initial perusal of the chart has one concluding that the Dow reached a level of about 12,000 in 1999 at the peak of the tech stock bubble and a high of about 14,000 at the market peak when the Great Financial Crisis began in 2007. Presently, the Dow has reached about 36,000 at the high.

Nominally speaking, since 1999, the Dow has risen in value by about 300%, from about 12,000 to about 36,000. But what did the Dow rise in real terms?

There are many different methods that are used to calculate the inflation rate. There is the official CPI or Consumer Price Index, as well as more accurate alternate, private-sector inflation calculation methods.

The official inflation rate as measured by the CPI is very manipulated. Alternate measures of inflation offered by www.ShadowStats.com or The Chapwood Index offer better, more accurate inflation estimates but the most accurate measure of inflation is determined by looking at the purchasing power of gold.

It’s been said that a loaf of bread priced in gold costs exactly the same today as it did during the Roman Empire more than 2000 years ago. For more than 5000 years and throughout most of history, gold has been money.

To determine the real performance of stocks, it is helpful to price stocks in gold rather than US Dollars.

In 1999, when the Dow reached a level of 12,000, an ounce of gold was around $250. To price the 1999 Dow in gold, one would take the value of the Dow (12,000) and divide by the price of gold per ounce ($250). That math has us concluding that the Dow was 48 because it took 48 ounces of gold to buy the Dow.

Let’s fast forward to the present time. The Dow was recently 36,000 while gold’s spot price was about $1,800 per ounce. The same math has us buying the Dow for 20 ounces of gold.

Gold, over that 20-year time frame, has been constant. An ounce of gold has not changed over the last 20 years, 100 years or even 5,000 years. It is a constant metric. An ounce of gold is the same today as it was at any time historically.

When one looks at the performance of stocks from this perspective, pricing stocks in gold, stocks have actually declined by more than 58% since the tech stock bubble of about 20 years ago in real terms.

Priced in US Dollars, stocks have rallied more than 300% since the tech stock bubble. However, when priced in gold, stocks have fallen more than 58%!

From this analysis, one can conclude that the rally in stocks since the tech stock bubble has been in nominal terms rather than real terms.

A loss in purchasing power causes inflation in consumer items and asset prices – that perfectly explains what we are now experiencing.

The Fed is now painted into the proverbial corner as, at this point, it seems the financial markets have begun to unravel. This piece discussed in the February “You May Not Know Report” newsletter explains. (Source: https://thebaddaddy.com/the-rock-and-the-hard-place/)

Inflation or depression, the authorities are trapped.

They should know this but are drunk on hubris, blinded by money-printing, schmoozed by lobbyists, and too busy insider-trading to care. If they understood this predicament, they’d have retired years ago.

The real problem? In the DC halls of power and its feeder universities, they don’t understand economics. Instead, they parrot dogma dressed up in complex math to justify central planning and fiat money.

Models that actually work (from the Austrian school) are ignored or obfuscated because they don’t consolidate power into a crony, captured system.

Inflation or depression, how did we get here? Ludwig von Mises explained (in 1949)-

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

US stock and bond markets are in an epic bubble, and can only be propped up with more money-printing. But that will cause the prices of beef, milk, eggs, rent, and energy to soar.

The inflation genie is out of the bottle.

To put her back in, they need to stop the easy-money policies, but that will crash the markets, a cascade of debt-deflation (like 2008) that also torpedoes the real economy.

So, which will it be, inflation or depression?

It’ll be an epic tug-of-war as they try to thread the needle. They’ll tighten this year until things start to break, then panic and turn the money spigots back on.

I believe that this excerpt is spot on. Inflation followed by deflation, as I’ve discussed often is the only possible outcome at this point.

Inflation and Deflation Perspectives

Despite last week’s rally in stocks, the highs of mid-November remain the market’s high point. As I have been noting, my long-term, trend-following indicators remain negative.

This past week, I began to read the most recent book by James Turk, a past guest on my radio program. Mr. Turk’s book is titled, “Money and Liberty; in the Pursuit of Happiness and the Natural Theory of Money”.

In the book, Mr. Turk offers a perspective similar to the perspective I have offered in the past regarding money and currency and the difference between the two. Currency is used in commerce and money is a good store of value over time. Sometimes in history, currency and money have been the same thing, other times, including the present time, they are not the same thing.

Mr. Turk offers the example of West Texas Intermediate crude oil. When a barrel of oil is priced in US Dollars, Euros, or the British Pound, one concludes that the price of crude oil has risen significantly since 1950.

However, when priced in gold grams, the price of a barrel of crude oil hasn’t changed since 1950.

Fiat currencies, over time, are devalued by central banks or governments. That makes fiat currencies poor measuring units.

Economic output, or gross domestic product, is measured in fiat currencies. Devalued currencies make the reported economic output number look better than it is in reality.

The same is true when it comes to stock values. Stock prices reported in fiat currencies move up as the currency is devalued. The same devalued fiat currencies that make the price of consumer goods like groceries rise also make the price of stocks increase.

Historically speaking, this devaluation of currency is controlled and gradual initially, but then the politicians and policymakers lose control of the devaluation process and inflation gets out of control.

Economist John Meynard Keynes, the father of the loose money policies that are being pursued worldwide today, knew that control over the devaluation process would eventually be lost with dire consequences.

In 1923, Keynes wrote a tract on monetary reform. The second chapter of the tract is titled, “Inflation as a method of taxation”. Keynes, in his writing, discusses devaluation of a currency or inflation as a method of taxation that allows a government to survive when there is no other means of survival. This from his tract (Source: https://delong.typepad.com/keynes-1923-a-tract-on-monetary-reform.pdf):

A government can live for a long time, even the German Government of the Russian Government, by printing paper money. That is to say by this means, secure the command over real resources – resources just as real as obtained through taxation. The method is condemned, but its efficacy, up to a point, must be admitted. A government can live by this means when it can live by no other. It is the form of taxation which the public finds hardest to evade and even the weakest governments can enforce when it can enforce nothing else.”

Keynes indirectly states that the positive effects of currency printing diminish over time when he states that “its efficacy, up to a point, must be admitted.”

Keynes clearly understood that in the long run, the point is reached when currency devaluation doesn’t work and the adverse consequences of currency creation emerge. One of Keynes’ most infamous quotes is “in the long run, we are all dead.” Keynes clearly understood that eventually, this monetary policy would fail but it would be long after he and his cohorts exited the planet.

Mr. Turk, in the aforementioned book, has this to say about Keynes’ statement.

“These words, which are frequently quoted, are among the most grossly irresponsible statements ever spoken by an economist. Actions have consequences and planning for the next generation is an essential element of economic activity. What is important to society and indeed our civilization is not just how we live, but what we leave for future generations. That the planet’s environment has become so scarred is an indication of how much we have accepted the ills of progressivism, socialism, and authoritarian control by the State and moved away from capitalism, private property, and individual liberty. The State today rarely leaves people alone.

Keynes’s comment is typical of socialists and progressives who focus on satisfying their innate yet perverse need to control others rather than where their attention should be directed, which is the consequence of their actions. For example, they proclaim their vision that forces the world to drive electric cars so that we do not inhale the emissions from exhaust pipes, yet they are blind to the number of plants needed to generate the electricity to power all those new cars. Decisions cannot be made on emotion. In our world of limited resources, they must be made based on sound economics and that requires trustworthy money spent and invested at a true cost of capital. These are requirements that only gold can provide. Further, to achieve the best possible outcome decisions need to be unfettered by government involvement and their market interventions.

For Keynes, the long-run has arrived, and he wrote his own fitting epitaph:

‘Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist. Madmen in authority, who hear voices in the air are distilling their frenzy from some academic scribbler of a few years back.’

It’s time to bury Keynes, Keynesianism, and socialism.”

I agree with Mr. Turk.

But abandoning currency creation will come at a cost. A deflationary period of time will materialize. Continuing with the Keynesian policies of currency creation will not avoid the deflationary period, it will only make the eventual deflationary period worse.

The choices are grim; an ugly deflationary period, or an uglier deflationary period. The longer currency creation continues, the more severe the resulting deflationary period will be. Keynes touched on this in his 1923 tract:

“In the first place, deflation is not desirable because it effects, what is always harmful, a change in the existing Standard of Value, and redistributes wealth in a manner injurious, at the same time to business and social stability. Deflation, as we have already seen, involves a transference of wealth from the rest of the community to the rentier class and to all holders of titles to money; just as inflation involves the opposite.”

“But, whilst the oppression of the taxpayer for the enrichment of the rentier is the chief, lasting result, there is another more violent disturbance during the period of transition. The policy of gradually raising the value of a country’s money to (say) 100% above its present value in terms of goods, amounts to giving notice to every merchant and every manufacturer, that for some time to come his stock and his raw materials will steadily depreciate on his hands and to everyone who finances his business with borrowed money that he will, sooner or later, lose 100% on his liabilities. Modern business, being carried on largely with borrowed money, must necessarily be brought to a standstill by such a process.”

If you’re not familiar with the term ‘rentier’ class, it refers to someone who relies on a pension, rents, or other fixed-income sources.

These people benefit from a currency that buys more over time.

On the other hand, borrowers benefit from a currency that buys less over time. Mortgage holders, business owners with debt, and the government all benefit from a currency that is being devalued. In this scenario, dollars borrowed, buy more than dollars that are used to pay back the debt.

When Keynes fails to acknowledge in his 1923 tract is constant money.

Gold is constant money.

When we go back and revisit the example of West Texas Intermediate crude oil that Mr. Turk used in his book, we find that the barrel of crude oil that sold for $2.57 in 1950 now costs more than $70 to purchase when using US Dollars in the transaction.

That barrel of oil purchased with gold grams in 1950 and today would cost the same amount. Gold has historically been constant money.

At different times in history, the paper currency has been only partially backed by gold which allows for more currency creation and is inflationary.

Today, there are zero currencies in the world with any level of gold backing. Currency creation worldwide has been expanding and consumer price inflation is now manifesting itself in earnest.

In response, many world central banks are raising interest rates to attempt to suppress inflation. Wolf Richter (Source: https://wolfstreet.com/2021/12/22/end-of-easy-money-global-tightening-in-full-swing-fed-promises-to-wake-up-in-time/) reported last week that the central banks of Czechoslovakia, Russia, England, Norway, the European Central Bank, Mexico, Chile, Hungary, Pakistan, Armenia, Peru, Poland, Brazil, Korea, New Zealand, South Africa, Iceland, and Japan have all increased interest rates.

The Fed has kept interest rates at zero; look for more inflation before we see deflation.

As for Keynes, he was right about being dead in the long run. Keynes passed away in 1946.

The Fed’s Conundrum

Stocks rallied last week interrupting what looked like a possible set-up for a correction. Despite the rally stocks are extended here.

Gold and silver continued their respective rallies as did US Treasuries.

As inflation is heating up worldwide, there is growing interest in protecting oneself from the loss in purchasing power that comes with higher levels of inflation.

Russia recently passed legislation to allow the country’s sovereign wealth fund to invest in gold. This from “Zero Hedge” (Source: https://www.zerohedge.com/commodities/russia-lines-new-gold-buying-through-its-sovereign-wealth-fund) (emphasis added):

In a significant and strategic development for monetary metals, the Government of the Russian Federation has just introduced legislation which will allow Russia’s giant National Wealth Fund (NWF) to invest in gold and other precious metals. The NWF is Russia’s de facto sovereign wealth fund, and has assets of US$185 billion.

Introduced as a resolution to the procedures for managing the investments of the National Wealth Fund and signed off by the Russian prime minister Mikhail Mishustin on Friday 21 May, the changes will allow the National Wealth Fund to buy and hold gold and other precious metals with the Russian central bank, the Bank of Russia.

In a note accompanying the gold announcement, the Russian government refers to gold as a traditional protective asset, and says that the move to add gold will introduce more diversification into NWF’s investment allocation, while promoting overall safety and profitability for the fund.

Up until now, the National Wealth Fund, through its 2008 investment management decree has been allowed to allocate funds to all main financial asset classes, such as foreign exchange, debt securities of foreign states, debt securities of international financial organizations, managed investment funds, equities, Russian development bank projects, and domestic bank deposits. The latest amendment now adds gold and precious metals to that list.

As the NWF soon will begin to buy and hold gold as part of its investment remit, it will be interesting to watch the NWF’s asset allocation reports, which can be found in the statistics section of the NWF pages of the Russian Ministry of Finance website here.

If this recent news about the NWF investing in gold look familiar, that’s because it is. Back in November 2020, the Russian government proposed a plan to allow the NWF to buy and hold gold, at the time introducing draft legislation for that purpose. It is this draft legislation which has now been signed into law on 21 May by Prime Minister Mikhail Mishustin.

However, nearly a year earlier in December 2019, Russia’s Finance Minister Anton Siluanov had originally raised the idea that the National Wealth Fund should invest in gold, saying at the time that he saw gold “as more sustainable in the long-term than financial assets.”

Meanwhile, the United States Mint issued a statement last week about silver (Source: https://www.facebook.com/UnitedStatesMint/) (emphasis added):

The United States Mint is committed to providing the best possible online experience to its customers. The global silver shortage has driven demand for many of our bullion and numismatic products to record heights. This level of demand is felt most acutely by the Mint during the initial product release of numismatic items. Most recently in the pre-order window for 2021 Morgan Dollar with Carson City privy mark (21XC) and New Orleans privy mark (21XD), the extraordinary volume of web traffic caused significant numbers of Mint customers to experience website anomalies that resulted in their inability to complete transactions.

In the interest of properly rectifying the situation, the Mint is postponing the pre-order windows for the remaining 2021 Morgan and Peace silver dollars that were originally scheduled for June 1 (Morgan Dollars struck at Denver (21XG) and San Francisco (21XF)) and June 7 (Morgan Dollar struck at Philadelphia (21XE) and the Peace Dollar (21XH)). While inconvenient to many, this deliberate delay will give the Mint the time necessary to obtain web traffic management tools to enhance the user experience. As the demand for silver remains greater than the supply, the reality is such that not everyone will be able to purchase a coin. However, we are confident that during the postponement, we will be able to greatly improve on our ability to deliver the utmost positive U.S. Mint experience that our customers deserve. We will announce revised pre-order launch dates as soon as possible.

Interesting that Russia has adapted her laws to allow the National Wealth Fund to buy gold and the US Mint is openly stating that demand for silver is greater than the supply. This is something we have noted recently in obtaining precious metals for clients. We have been able to find the metals but its much more difficult.

There is a growing disparity between the spot price (paper price) of gold and silver that the price one pays (when buying) or receives (when selling) for physical metals. In the current market, with growing demand for physical metals, both purchases and sales take place above the metal’s spot price.

Despite the Federal Reserve’s insistence that inflation is ‘transitory’, actions of investors in the precious metals’ markets are telling us a different story. Simply put, precious metals investors don’t believe the Fed.

And with good reason.

When current levels of inflation are adjusted for reality, using inflation calculation methodologies that were used pre-1980, one would have to conclude that we are presently at or near 1970’s inflation levels.

In 1980, as we’ve discussed previously, the Federal Reserve increased interest rates to the 20% level to get inflation under control. It worked.

Would a similar policy response today do the same thing?

It would. Inflation is an expansion of the money supply so taking action to reduce the money supply would once again get inflation under control.

So can we expect the Fed to increase interest rates soon?

There are analysts who insist the Fed will have to do so or risk a hyperinflationary outcome. There are other observers, including me, who think the Fed will keep interest rates low and continue the policy of money creation for the near future.

I believe this is the case for a couple of reasons.

First, the recently proposed budget calls for more than $6 trillion in spending, the highest ever. (Source: https://www.zerohedge.com/political/biden-unveils-6-trillion-budget-will-raise-federal-spending-highest-post-ww2-level) Federal spending would reach $8.2 trillion by 2031. The budget deficit under the proposed budget would exceed $1.8 trillion and be twice the $900 billion deficit in 2019, pre-COVID,

Massive deficits combined with a declining economy mean that the Fed will be forced to continue to monetize government spending. And, I’d bet the biggest steak in Texas that should this proposed budget become reality, the deficit is bigger than the forecasted $1.8 trillion due to overly optimistic tax revenue assumptions.

More and more analysts are predicting deflation. This from “Fox Business News” (Source: https://www.foxbusiness.com/economy/stagflation-worries-comparisons-jimmy-carter-1970s) (emphasis added):

Surging consumer prices and gasoline shortages have sparked concerns the U.S. economy could relive the nightmarish stagflation of President Jimmy Carter’s administration in the late 1970s.

Stagflation is defined as a period of inflation with declining economic output.

Strategists at Bank of America predict the stagflation narrative will begin to take hold in the second half of this year.

Second, should the Federal Reserve go full Volcker and raise interest rates to fight inflation, a deflationary collapse is the likely result with real estate and stock valuations at nosebleed levels.

The Fed is painted into the proverbial corner.

Keep printing and the outcome is stagflation.

Begin to tighten monetary policy and risk a deflationary collapse.

Neither choice is a good one but past actions by the Fed and the politicians in charge tell us that they will make the choice that kicks the can down the road a little further. That probably leads to inflation followed by deflation as Thomas Jefferson predicted two centuries ago.

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