The Current Level of Money Creation is Unsustainable

         This week, I want to focus once again on proposed money changes being discussed and implemented around the world.

         I will preface this discussion by once again stating the obvious – the current level of money creation is completely unsustainable.  History teaches us that money printing always ends badly and the end of the cycle sees money printing occurring in exponentially greater amounts.

          The primary reason money printing occurs is government overspending.  While most governments overspend, as long as the government is reasonably credit worthy and the over spending is within what is generally reasonable, the overspending government is able to sell bonds to investors who are willing to help the government finance its deficit spending in exchange for interest paid to the investor on the amount loaned to the government.

          However, chronic, perpetual overspending eventually leads to money creation as investors become ever more skeptical of a government’s ability to repay the loan.  Once the money creation begins, it occurs in ever increasing quantities.  It’s a self-feeding cycle that ends with a loss of confidence in the currency.

          With that overview, there are two topics I want to discuss in this week’s issue.  Both suggest we are getting closer to that end point.

          First, past radio program guest, Peter Schiff wrote an article this past week that I discuss in more detail on this week’s program.  The podcast version of the radio show is available via the RLA app and at

          Mr. Schiff makes the point that the primary creditors of the United States have lost their appetite for US Government debt.  That means that the monster deficit spending of the United States’ government is being financed by the central bank of the US, the Federal Reserve.  To state the obvious, the Federal Reserve has no money to loan the government without creating it out of thin air.

          Here is a bit from Mr. Schiff’s piece (emphasis added):

Over the last year, the US government had borrowed over $4.2 trillion. The national debt now stands well above $27 trillion. There is no end in sight to the borrowing and spending and that raises a significant question: who is going to buy all of the bonds necessary to finance the government spending machine?

Not too long ago, Uncle Sam could count on foreign investors to gobble up a big chunk of his IOUs, but times are changing. In 2008, foreign investors held more than half of the outstanding Treasury debt. Today, that amount has plunged to the lowest level since the turn of the century.

China and Japan have been the biggest foreign buyers of US debt in recent years. Japan ranks as the largest foreign creditor. The Japanese have continued to buy Treasuries over the last year but at a much slower pace. The country increased its holdings by just $15 billion in Q3. Over the last year, Japan has increased its US debt holdings by $130 billion.

Meanwhile, China is dumping Treasuries. It sold off about $13 billion in US Treasuries in Q3 and has shrunk its holdings by $40 billion over the last year.

Over the past five years, Japan’s and China’s combined holdings of US Treasuries have remains relatively stable.

          Over the past five years, the two largest foreign buyers of US Treasuries have not increased their holdings.  So, how has all the deficit spending over the past five years been financed?

          You already know the answer.  Here is more from Mr. Schiff’s piece:

It looks like the responsibility (for financing US Government deficit spending) will increasingly fall on the Federal Reserve. In fact, the Fed is already backstopping the market and making this borrowing binge possible.

In Q3, the Fed bought $240 billion in US Treasuries. That brought its total Treasury holdings to $4.44 trillion. The central bank now holds a record 16.5% of the US debt load.

In the last 12 months, the Fed has doubled its holdings of Treasuries, adding a staggering $2.4 trillion in US government bonds to its balance sheet – most of that since March. The Fed’s total share of US debt has spiked from 9.3% in Q1 to 16.5%.

Without the Fed’s intervention in the bond market, it would be virtually impossible for the US government to borrow money at the current level. As we’ve seen, foreign demand is already waning, even with prices artificially inflated.  Interest rates would have to soar in order to entice average investors to buy US Treasuries. The market would collapse.

            As noted, the Fed cannot backstop this market forever.  Artificial markets always fail.

          It seems that there are now many central banks around the world who are openly stating that the easy money policies being pursued by most world central banks will soon have to come to an end.

          As we have noted in previous newsletters, there will have to be a reset.  The reset will either be reactive in response to a currency collapse, or proactive, in an effort to avoid that outcome and have a more favorable end result.  Many central banks are now publicly agreeing.

          This from the Central Bank of Italy:

“Gold is an excellent hedge against adversity and high inflation. Gold cannot depreciate or be devalued. Gold … is not an asset ‘issued’ by a government or a central bank and so does not depend on the issuer’s solvency.”

         The Central Bank of Italy is suggesting that holding central bank-issued, fiat currency is not without risk.  Perhaps even more notably, the central bank is suggesting that gold is a good way to hedge this risk.

The Central Bank of Uzbekistan has begun to issue gold as a currency in the form of sealed gold bars.

          Starting last month, the central bank of Uzbekistan (yes, that IS a real country in central Asia) began to issue sealed gold bars with a QR code to allow for real time verification.  The central bank is looking to encourage the use of gold for storing wealth while also increasing the circulation of gold.

          The gold bars issued by the central bank of Uzbekistan are sealed with a unique membrane that changes color when broken, have a unique serial number and a QR code to allow for instant verification.

          The gold bars are produced in different sizes:  5, 10, 20 and 50 grams.  The bars are all sealed in packages that are the approximate size of a credit or debit card.  The gold bars can be purchased at any of 28 commercial banks in the country and can be sold back to the bank at any time, even if the seal is broken.

          The move to encourage the circulation of gold by the central bank is Uzbekistan is a logical extension of the bank’s internal policies.  Presently 57% of the bank’s reserves are held in gold.

          This development is positive in my view.  It’s a step toward a proactive reset of a currency system.

          As time passes, I would expect to see more of this by central banks, perhaps even a gold backed digital currency.

          While the ‘when’ is more difficult to predict than the ‘what’, it is clear that massive money creation will have to lead to a reset.  History teaches us that a currency reset, whether proactive of reactive, ends in gold or gold and silver as currency.

          While there are many cryptocurrencies that have performed well of late, I am still more confident that gold and silver will eventually, ultimately, be the currency of choice as they have been for most of history.

          Ultimately, it is my belief that we will see a ‘marriage’ between central bank issued or government issued digital currencies and precious metals.

          I am hopeful that it will be proactive rather than reactive.

          Since, as we move into 2021, some type of reset seems inevitable in the relatively near future, I would suggest that many investors have up to 20% of their portfolio in tangible assets such as gold and silver.

          That recommendation to put 20% of one’s portfolio into precious metals could increase again in the future should next year see the US move into full-blown modern monetary theory (massive additional money printing) as a result of increased federal spending and deficits.

          Although silver and gold rebounded last week, I am of the opinion that it’s a good time to add to precious metals holdings since prices are still down from recent highs.

Bailout or Not: Many States and Cities Are In Trouble

As I suggested might happen on my “Portfolio Watch” live webinar last week, both gold and silver pulled back after big, parabolic moves up.  It would not be unusual to see the pullback continue for a bit or to see these markets consolidate.  From a fundamental perspective, I remain bullish on precious metals. 

By my technical measures, stocks are now once again in an uptrend.  I remain very skeptical of stocks given that stock valuations using the market capitalization to gross domestic product ratio is at all-time highs.

This week, I’ll examine the financial state of many states and cities around the country.  In a word, many states and cities have finances that are abysmal. 

John Rubino of and past RLA radio guest had this to say on the topic last week (emphasis added):

Lacking monetary printing presses, US cities and states tend to behave more like normal economic entities than do most nations. That is, they’re always balanced on the knife-edge of insolvency as taxes fail to cover the promises, legitimate and otherwise, that mayors and governors have made to voters.

Toss in the covid-19 lockdowns and – in a few especially badly-run places, continuing riots – and many if not most American cities and states are looking at functional bankruptcy, featuring mass layoffs of teachers, cops, librarians and pretty much every other kind of employee. Trash won’t be collected, libraries won’t open, 911 calls won’t be taken.

To repeat the guiding prediction of this series, American towns will look more like Caracas than Zurich.

The one hope mayors and governors have been nursing is a massive federal bailout that papers over unfunded pensions and ongoing operating deficits alike with trillions of newly created dollars.

This prospect seemed imminent just a couple of weeks ago. After all, in an election year how can Washington allow the above carnage? But now imminent seems to be off the table and even “inevitable” is in question. Republicans (who don’t much care about big cities run by the opposition) and Democrats (who desperately want a bailout, but maybe not as much as they want to crush Trump in November) can’t agree on a new plan and have, for now at least, given up trying.

          Mr. Rubino references an Associated Press article in his piece (emphasis added):

Stay-at-home orders in the spring, business shutdowns and tight restrictions on businesses that have reopened are slamming state and local government revenue. In a June report, Moody’s Analytics found that states would need an additional $312 billion to balance their budgets over the next two years while local governments would need close to $200 billion.

Many states already are staring at ledgers of red ink. Texas is projecting a $4.6 billion deficit. In Pennsylvania, it’s $6 billion. In Washington state, the deficit is expected to be nearly $9 billion through 2023. California’s budget includes more than $11 billion in cuts to colleges and universities, the court system, housing programs and state worker salaries.

            Will the Washington politicians bail out state and local governments?

          This being an election year, there will probably be some additional form of stimulus package and it’s important to remember that regardless as to the extent that state and city governments are included in the package, there is no money to pay for such a package without once again resorting to the printing press and simply creating the money that is needed to fund any additional spending.

          That’s the problem.  Nothing is free.  There is ALWAYS a tax to pay, either an actual tax where the government has you parting with some of your hard-earned dollars or an inflation tax where the value of the currency is diminished.

          An inflation tax punishes savers and investors.

          On this week’s RLA Radio program, guest expert, Peter Schiff, commented that presently 60 cents out of every dollar that the United States spends is created by the Federal Reserve.

          As next weeks’ RLA Radio guest, Jeff Deist, president of the Mises Institute and former advisor and chief of staff to congressman Ron Paul noted, when the year 2020 began a $1 trillion operating deficit at the federal level was anticipated.

          Now, however, the reality of the situation is that the United States could finish the year with an operating deficit that exceeds total tax receipts.  That is simply remarkable when you think about it.  And, it’s completely unsustainable.

          While it remains to be seen if the Washington politicians decide to bail out states and cities and to what extent, it’s likely that many states and cities will require more than one bailout even if they get their first one.

          I reach this conclusion for a couple of reasons.

          First, state and city tax revenues will continue to decline as lockdowns in response to COVID continue to force more businesses to permanently close.  As I have reported here, many businesses that closed temporarily to comply with lockdown restrictions are now closed permanently.  Businesses that are permanently closed no longer pay taxes.

          Second, there is literally an exodus taking place from many states and municipalities as people are seeking out peaceful country living.  This will further diminish tax revenues in these areas.  Past RLA Radio program guest, Jim Rickards had this to say on the topic (emphasis added):
I want to discuss some of the permanent changes that the national economy is going through. It has to do with what you might call the Great American Exodus. There’s a massive migration out of the big cities. Millions of Americans are fleeing the cities for the suburbs or the country from coast to coast.

There’s hard data to support that claim.

For example, let’s say you want to rent a U-Haul trailer from New York City to the Catskill Mountains, which are not that far away. Or you want to rent a U-Haul trailer from Los Angeles to, maybe Sedona, Arizona.

It’ll cost you much, much more than if you were going the other way. If you went from Sedona to LA, or the Catskills to New York, the price is only about one quarter as much. In other words, you have to pay a 400% premium to get the trailer going out of town, but U-Haul will practically pay you to bring it back in.

And there are shortages. If you’re moving out of your apartment to a house or another apartment outside of the city, try getting movers. I’ve done this recently myself, and know others who have. It was very hard to book moving companies or something as simple as a U-Haul trailer.

So the mass exodus out of cities is a real phenomenon, backed by solid evidence.

This is a shift we probably haven’t seen since the 1930s, when people left the Dust Bowl and moved out to California, looking for jobs in the agricultural industry. That was a mass migration. We’re seeing another one now, except this one’s going in the opposite direction.

And that’s a big problem for the economy because cities are centers of economic activity that contribute a lot to GDP. 

          Rickards cites three reasons for this mass migration.

          One, millennials are getting older.  The first of the millennial generation will turn 40 in a couple years.  It’s normal for people who enjoyed living in the city in their 20’s and 30’s to want to move to the country as they get older.

          Two, the pandemic.  Highly populated areas are inherently more dangerous when it comes to virus transmission.  Many people are looking to minimize that risk by moving to less populated areas.

          Three, the riots.  Peaceful protests are protected by the constitution.  Peaceful protests against injustices should be supported.  But, no one has a right to loot stores and burn buildings; that shouldn’t even be a debate.

          Rickards adds that calls to defund the police are making many city dwellers see the writing on the wall and they’re opting to move while they can.  Rickards notes that crime rates in New York are already rising and since the riots, retirement applications among police officers have increased by 400%.

          No matter the amenities offered by city life; if citizens perceive it to not be safe, many will understandably opt to move.  And they are.

          Rickards concludes by saying (emphasis added):

Now, you cannot underestimate the economic impact of this. The cities are where most 80% or more of the population, economic output, job creation, and R&D are centered. And who’s leaving the cities?

It’s the people who can have the option to leave. It’s the talent. It’s the money. It’s the energy. It’s the people that you most want in your cities who have the ability to leave.

And of course, now we have this whole work from home model. So a lot of corporations are saying, we don’t need 10 floors on 53rd and Park Avenue. We can do two floors of shared conference facilities, with a shared receptionist. So the commercial real estate market faces some strong headwinds.

The bottom line is, we’re looking at a substantial drag on economic recovery based on this migration out of the cities. It’s a big story that’s not getting nearly enough coverage.

          As economic recovery lags, so do tax revenues.  As people leave cities, taxes these people would have paid leave with them.

          The facts are pretty clear.  One bailout of states and cities will lead to another.  And if you’re a saver or investor, you’ll be paying for the bailout via the inflation tax. 

          There is still time to protect yourself.  If you’ve not already done so, consider using the two-bucket approach to manage your assets.

          You might also be wise to see if it makes sense for you to eliminate the tax liability on your IRA or 401(k) while tax rates are lower.  My office can help.  If you’d like an analysis done on your ultimate income tax liability on your retirement account(s), give the office a call at 1-866-921-3613.

Economic Recovery and the Possible Future of Money

This past week, I had many conversations with clients and other financial professionals about where the economy goes from here.

There is no shortage of strong opinions about the current economic environment brought about by the restraints placed on the economy with the stated goal of protecting public health.  I’m sure you have your opinion too.

I’ll put all that aside and focus on where we go from here economically speaking.  Will we have a V shaped recovery?  L-shaped?

I commented on this in my June newsletter soon to be sent to our firm’s clients. 

I have long been skeptical as to the health of the US economy and have stated so often over the past several years.

That is not an indictment of any current or prior politician or policy; rather it has been a sharp criticism of Federal Reserve policies which were creating what I perceived to be an artificial economy.

Peter Schiff recently commented on this(emphasis added):

The economy was booming. The stock market was setting records. Then coronavirus came along and governments shut things down to minimize the pandemic. That led to massive layoffs and a nasty recession. But once states open up, things will spring back to life and the economy will go back to being great again.

That’s the mainstream narrative. But it’s not based on reality.

In truth, the economy was a Fed-induced bubble before the pandemic. The central bank has managed to reinflate the stock market bubble despite the economic destruction, but it is nothing but a Fed-induced sugar high.And the economy won’t likely rebound quickly, even after things open up.

There are all kinds of reasons to doubt the quick economic recovery narrative. We’ve reported on the number of over-leveraged zombie companiesskyrocketing household debtthe battered labor market, and a potential cash-flow crisis even after the economy gets moving.

Now we have another sign of long-term economic troubleA survey conducted by financial services company Azlo found that nearly half of small business owners think they will eventually have to close their businesses for good.

Forty-seven percent of the small business owners surveyed said they anticipate shutting down, and 41% said they are looking for full-time work elsewhere.

This is on top of the small businesses that have already shut down and will never reopen.

The survey also asked questions about the Paycheck Protection Program (PPP) instituted through the CARES Act. The results were less than stellar, as Newsweek reports.

Less than half of participants—38 percent—involved in Azlo’s recent survey applied for PPP loans. Of those who did apply, 37% said the program was slow to distribute funds and 20% described the process as ‘painful,’ the company reported.”

It’s absurd to think the economy is going to come roaring back when nearly half of small business owners expect to shut down. Small businesses employ 58.9 million Americans, making up 47.5% of the country’s total employee workforce.

That’s not good news, quite the opposite – it’s dismal news.

The Fed’s response as Mr. Schiff notes is more of the same. 

I am reminded of what Albert Einstein said about the definition of insanity – doing the same thing over and over again while somehow expecting to get a different result.

Today’s monetary policies fit Mr. Einstein’s definition of insanity perfectly.

Each time a bubble bursts, and the current bubble is now unraveling, the monetary policies pursued to create the illusion of prosperity become more extreme and less effective.  In other words, it takes more stimulus to get fewer results.

I have my doubts about an instant recovery.

Small business destruction eliminates vital employment infrastructure that won’t quickly be replaced.

Entrepreneurs will be hesitant to invest in a new business given the lockdown response of many states to the COVID 19 situation.  Regardless as to how you feel about the policies that have been pursued in response to COVID 19, the fact is that there will be far fewer entrepreneurs investing in the economy moving ahead since there is a real possibility that a fledgling enterprise could be shut down and destroyed by a future executive order.

Instead, it’s my view that most would-be entrepreneurs or investors in the economy will simply opt to “keep their powder dry”, preserving investment capital until the dust settles at some future point.

And, many will never invest.  They won’t trust the politicians to allow them to pursue their small business dreams.

That, in my view, will be the biggest obstacle to a viable economic recovery.

As far as the stimulus packages that have been passed (and more proposed), these economic aid packages referred to as stimuli should actually be called sustenance packages.  Stimulus encourages investment; these programs largely provide money to allow the recipients to subsist for a while.

On another note, Federal Reserve Board nominee, Judy Shelton, whose appointment seems to be stalled at the moment made some interesting comments last week.

In an interview, she stated that she favors a gold-backed digital currency.  Not surprisingly many of the Washington politicians are opposed to Ms. Shelton’s appointment.  A gold-backed currency automatically imposes fiscal restraint on politicians making wild, out of thin air, money creation impossible.

Since my clients and friends are savers and investors, I side with them.  Such a monetary system would help to preserve the purchasing power of the money they’ve saved in IRA’s and 401(k) plans.

Ms. Shelton recently offered her views10 on how a system based on gold might work in a recent interview (emphasis added).

“I don’t see it so much as returning [to the gold standard], more like ‘back to the future.’ I think that what a gold standard stands for is monetary discipline for its own sake. Money is supposed to be a unit of account, a reliable measure and a dependable store of value. It really shouldn’t be subject to who’s the chairman of the Federal Reserve.” 

This from the article reporting on Ms. Shelton’s thoughts (emphasis added):

According to Shelton, a “futuristic” vision of the gold standard may involve a digital currency component. She said that central banks are “not serving the private sector in providing that reliable unit of account […] under the gold standard, you did have that stability, and I think that’s what’s missing […] it could be used in a very ‘cryptocurrency way.’” 

Engaging with the emerging sector of digital currencies is not wholly new for Shelton, who has previously advocated for a digital dollar’s potential in helping to “preserve the primacy” of the U.S. currency worldwide.

For Shelton, the U.S. needs a “reset” away from the “distortions” of the Fed over the past half-century. She has previously argued that the Federal Reserve’s current mandate flies in the face of a market-led society.

Central bank activism, for Shelton, hinders the ability of the market to function free from centrally planned overreach. Here she overlaps with proponents of Bitcoin (BTC) who argue that blockchain technology can ensure that the currency will remain immune to any single entity’s attempts to “manipulate” its value. 

Shelton might well be sympathetic to advocates of digital scarcity who claim that Bitcoin can induce a deflationary monetary policy by serving as a reserve currency with a finite supply.

Yet she has also said that she is open to an approach where the Fed would target a dollar price for gold “by linking the supply of money and credit to gold”.

Moving ahead, as I have stated, I believe we will see deflation followed by inflation assuming money creation continues.

Should money printing continue, it’s inevitable that at some future point a monetary system like the one that Ms. Shelton is discussing will be adopted somewhere in the world.  And, when it is put into use, it will in all likelihood become very popular very quickly.

I believe the two-bucket approach remains the best tactic to utilize in your portfolio from my perspective since the timing of the transition from deflation to inflation is very difficult to determine. 

My Interpretation of the Dow to Gold Ratio – Why Stocks Have More Downside and Why Gold Has More Upside

Stocks rebounded again last week as metals retreated slightly. 

The Dow to Gold ratio now stands at 17.78.  For those of you unfamiliar with the Dow to Gold ratio indicator, it is calculated by taking the price of the Dow Jones Industrial Average and dividing by the price of gold per ounce.

The Dow began the week at 26,797.46 while gold was at 1507.50.  That makes the Dow to gold ratio 17.78 (26,797.46/1507.50)

My long-term forecast continues to be that this ratio will reach 1 which means more downside for stocks and more upside for gold. 

Given the current level of 17.78, that last sentence may be an understatement. 

The reality is that in order to hit that target of 1, stocks will have to significantly fall, and gold will need to rally strongly.

In my view, economic circumstances that exist around the world presently suggest that is a likely outcome.

As crazy as that prediction might sound to you, her me out.

To begin with, much of the rally in stocks over the past couple of years has been due to stock buybacks of their own stock by companies.

This from CNN on August 22 (

Corporate America’s epic buyback mania may finally be succumbing to gravity.

The 2017 corporate tax cut left US businesses flush with cash. S&P 500 companies responded by rewarding shareholders with record amounts of buybacks in 2018, with each quarter setting an all-time high. 

However, that record-shattering pace appears to be slowing. S&P 500 companies executed $165.7 billion of buybacks during the second quarter of 2019, according to preliminary estimates by S&P Dow Jones Indices. Although that’s still a stunning amount of repurchases, it marks a 13% decline from the same period a year ago. 

The slowdown in buybacks, which have become a lightning rod for criticism among some in Washington and even on Wall Street, underlines the impact the tax law had last year as companies steered a sizable chunk of their windfall to investors.

As stock buybacks slow, one of the activities that has been supporting the stock market becomes less supportive making stocks more susceptible to a decline.

Secondly, margin debt is higher month-over-month.  Margin debt is debt that an investor incurs to purchase securities, usually stocks.  As long as margin debt keeps rising, it helps create more demand for stocks. 

While margin debt is near an all-time high on a nominal basis, on a real basis, adjusted for inflation, margin debt is still below all-time highs.  Perhaps there is a little more room to add to margin debt, but I wouldn’t count on it.

Thirdly, one of Warren Buffet’s favorite indicators to gauge stock valuation, market capitalization to Gross Domestic Product is inflated.

The chart printed here illustrates market capitalization to GDP.  Note that the ratio remains slightly below the levels prior to the tech stock crash but is much higher than just prior to the financial crisis about one decade ago.

Finally, “Fortune” magazine had this to say recently about stocks (Source: (emphasis added):

Robert Shiller’s cyclically-adjusted price-to-earnings (CAPE) ratio has only breached 30 three times in history. 

The first time was in 1929, just a few short months before the stock market was trounced in one of the worst crashes in history during the Great Depression. Almost 70 years later, it happened again in 1997 and stayed above that level for nearly 5 years as the dot-com bubble deflated. The most recent flirtation with a CAPE of 30 began in the summer of 2017, where it has remained in a tight range ever since.

This chart, printed with the article, illustrates.

As far as gold is concerned, central bank policies are improving the fundamentals for gold.

Money creation via quantitative easing programs worldwide are bullish for tangible assets, gold in particular.

Peter Schiff, past guest on RLA Radio, had this to say this past week about his call for gold reaching $5,000 per ounce this past week (Source:

Most investors think my $5,000 gold call is crazy. But what’s crazier negative interest rates or $5,000 gold? In the insane world of negative interest rates, $5,000 gold is the one thing that makes sense. In fact, $5,000 for an ounce of gold will likely prove to be a bargain!

This week’s guest on Retirement Lifestyle Advocate’s Radio, Mr. Michael Pento of Pento Portfolio Strategies had this to say about gold.

He explained that when interest rates are up, keeping money in cash in a deposit account makes sense.

Given a choice between depositing money in a deposit account yielding 6% interest or buying gold that yields 0, mot investors will choose the deposit account and capture the investment yield.

On the other hand, if both cash accounts and gold are yielding zero, most investors would opt for the tangible asset, gold rather than keeping assets in a fiat currency.

Today, however, for many investors the choice is even more obvious.  Given a choice between gold and a negative-yielding cash account, the gold becomes a ‘no-brainer’.

As central banks continue to pursue crazy monetary policies like negative interest rates, that will likely be bullish for gold.

The entire radio program and the interview with Michael Pento are now posted at