Fifty Years of Fiat

          An important anniversary is approaching this week.  Although it won’t be widely observed or likely even mentioned, it’s the anniversary of the event that led to current economic and investing conditions.      

          This coming Sunday, August 15 will mark 50 years since the US Dollar became a fiat currency.  On August 15, 1971, President Richard Nixon gave a televised speech during which he announced he would be instructing Treasury Secretary Connolly to temporarily suspend the redemptions of US Dollars for gold to protect the US Dollar from speculators.

          Nixon, during his speech, also stated that he wanted to address a ‘bugaboo’, namely that there were many who were concerned that the move would negatively impact the purchasing power of the US Dollar.  Nixon stated that you might spend more if you wanted to buy a foreign car or take an overseas trip, but if you were among the overwhelming majority of Americans who didn’t make those purchases, your dollar would buy just as much in the future as it did presently.

          50 years later, we know that the redemptions have been permanent, and the US Dollar has lost more than 95% of its purchasing power.

          As I have often discussed, it was at that point in time that the US Dollar began to be loaned into existence.  At that point in time, money became debt, and the money supply was expanded by expanding credit.

          More debt meant more money.

          The Austrian economist, Ludwig von Mises, perfectly articulated the outcome of this money transformation in my view.

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

          In other words, the currency creation ceases, and the crash happens, or the currency is destroyed, and the crash occurs.  Neither outcome is desirable and both eventualities are painful to endure.  Survival requires an understanding of this principle and preparation in your personal finances.

          Egon von Greyerz, who often offers perspectives on this topic wrote another piece last week as the US Dollar’s fiat currency birthday approaches.  (Source: https://kingworldnews.com/greyerz-warning-we-are-now-headed-for-a-catastrophic-global-crack-up-boom/)

The beginning of the end of the current monetary system started exactly 50 years ago. In the next few years, the world will experience the end of another failed experiment of unlimited debt creation and fake fiat money.

Economic history tells us that we need to focus on two areas to understand where the economy is going – INFLATION AND THE CURRENCY. These two areas are now indicating that the world is in for a major shock. Very few investors expect inflation to become a real problem but instead believe interest rates will be subdued. And no one expects the dollar or any major currency to collapse.

But in the last two years, money supply growth has been exponential with for example M1 in the US growing at an annual rate of 126%!

Von Mises defined inflation as an increase in the money supply. The world has seen explosive growth in credit and money supply since 1971 and now we are seeing hyperinflationary increases.

Hyperinflation is a currency event. Just since 2000 most currencies have lost 80-85% of their value. And since 1971 they have all lost 96-99%. The race to the bottom and to hyperinflation is now on.

          Mr. von Greyerz published this chart that illustrates the price of gold per ounce in various currencies.  Using this metric, from 1971 to the present, the US, the UK, Europe, and Canada have seen their respective currencies decline by 96% to 99%.

          To say that we are on a slippery slope would not be accurate, we have already made the slide down the proverbial slippery slope, we are now just awaiting the outcome that von Mises forecast.

          As many past guests on RLA Radio have stated, hyperinflationary events tend to escalate rapidly and climax relatively quickly as well.

          Von Greyerz offers some terrific perspectives on this principle too.  This is from his piece:

Since the Great Financial Crisis in 2006-9, there has been an exponential growth in US Money Supply.

Looking at US M1 money supply, the graph below shows how it grew from $220 billion in August 1971 to $19.3 trillion today.

From 1971 to 2011 the growth seems modest at a compound annual growth (CAGR) of 6%. If the dollar purchasing power declined by the same rate, it would lead to prices doubling every 12 years. Or put in other terms, the value of the currency on average would drop by 50% every 12 years.

Then from 2011 when the Money supply started growing in earnest, M1 has grown by 24% annually.  This means that prices in theory should double every 3 years.

Finally, from August 2019 to August 2021 M1 has gone up by 126% a year. If that was translated to the purchasing power of the dollar it would lead to prices doubling every 7 months.

          Von Greyerz goes on to explain that von Mises defined inflation as an expansion of the money supply rather than an increase in prices.  To this point, there has not been a lot of price inflation experienced by consumers but there has been inflation in asset prices as I have discussed in previous issues of “Portfolio Watch”.

          Von Mises and von Greyerz are discussing the same phenomenon that Thomas Jefferson described when he warned of inflation followed by deflation if the American people ever allow private bankers to control the issue of their currency.

          Historically speaking, this cycle has repeated itself with amazing frequency.  Fiat currencies have a 100% failure record.

          I remain solidly in this camp even though there are many respected, highly educated analysts who have different opinions.  Those who believe the US Dollar will be a safe haven moving ahead are coming to that conclusion assuming confidence in the US Dollar continues.

          While confidence may continue for a period, over the longer term, confidence will have to disappear unless as von Mises said, there is a voluntary abandonment of credit creation.  While that would be the preferred outcome of the two von Mises describes, it does not seem that the current crop of politicians and policymakers will pursue this ugly, yet more desirable outcome.  Instead, they appear to be opting to kick the can down the road as long as possible, postponing the crash for as long as possible even though the crash will be worse as a result.

          My new book “Retirement Roadmap” an updated version of last year’s “Revenue Sourcing” book will be released within the next 10 days.  It offers strategies for you to consider in your own, personal financial situation to help protect you from this eventuality.

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.

Crack-Up Boom Coming

Have you ever heard of a ‘crack up boom’?

You may want to get familiar with the term and what it means before you experience it.

Let me state at the outset of this piece that I am biased, some might even say extremely biased.  And they may be right.

I am biased in the sense that I am firmly against Keynesian economic policies which are currently dominating US economic and monetary policy even more than in the past.  That’s a big statement given the massive quantities of money that the Federal Reserve has manufactured from thin air over the past several years.

For those unfamiliar with Keynesian economics, it is an economic theory advanced by John Maynard Keynes who advanced the idea that when an economy slows down and private sector spending wanes, the government needs to step in and spend to make up for the lack of spending in the private sector.

I am of the firm opinion that Keynesian policies don’t work and end badly because Keynes himself had the same opinion.

You can’t make this stuff up.

Keynes promoted and encouraged the pursuit of economic policies that he knew would eventually fail.  In a tract Keynes penned in 1923 on the topic of monetary reform, Keynes wrote this, “Long run is a misleading guide to current affairs.  In the long run, we are all dead.”  (Source:  https://www.azquotes.com/author/7958-John_Maynard_Keynes)

In my view, a better approach to economic policy is to take an Austrian view, as Ludwig von Mises did.

Examining where we are today from an economic policy standpoint, the predictions promulgated by Mr. von Mises are presently coming to pass. 

Janet Yellen, former chair of the Federal Reserve and experienced money printer had this to say in her Senate confirmation hearing last week.  Ms. Yellen has been nominated for the position of Treasury Secretary.  (Source:  https://www.zerohedge.com/economics/when-boom-turns-crack-boom)

“But right now, with interest rates at historic lows, the smartest thing we can do is act big.  In the long run, I believe the benefits will far outweigh the costs, especially if we care about helping people who have been struggling for a very long time.”  

You don’t have to be an economist to understand that Ms. Yellen is proposing more Keynesian solutions; more stimulus funded by more money creation out of thin air.

Mr. von Mises warned us of the ultimate outcome of these reckless policies.  This from a “Zero Hedge” article on the topic:

As credit expansion pumps money through the economy, wild and unpredictable things happen.  Austrian economist Ludwig von Mises, in his work, Socialism: An Economic and Sociological Analysis, explained:

“Credit expansion can bring about a temporary boom.  But such a fictitious prosperity must end in a general depression of trade, a slump.”

But what happens if a credit expansion is followed with an additional expansion of credit?  Does the debt ever have to be repaid?  With enough credit-based money, can’t the economic depression be postponed forever?

Even Mr. Keynes knew the answer to this question, he stated that ‘in the long run we are all dead’.  Keynes knew that he was mortgaging the future with his policies but calculated the fallout was a long way down the proverbial road.

More from the “Zero Hedge” article:

Again, we turn to Mises, this time his economic treatise, Human Action, for edification:

“If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders.”

The boom brought about by credit expansion at the beginning of the new millennium ended in 2008 with a massive financial crisis and economic recession.  The mammoth credit expansion that followed, floated the economy up on a rising tide of debt.  But it was not self-sustaining.

More and more credit has been needed to merely prop up GDP.  Economic growth’s dependent on greater and greater issuances of credit.  Without it a general economic depression would occur.

Perversely, the stability of the debt structure depends on additional credit and rising asset prices.  These, of course, ultimately make things more unstable.  Nevertheless, even with massive inflation of the money supply, central bankers are worried about deflation…not inflation.

Prices – including stocks, real estate, and college tuition – levitated by earlier credit expansions want to come down.  Central bankers want to push them up.

When central planners shut down the economy last year to bend the coronavirus transmission curve, they succeeded in collapsing the debt structure.  Putting moratoriums on evictions and foreclosures and placing a hold on student loan payments doesn’t solve this.  Nor does printing up trillions after trillions of dollars and pumping it into the economy as ‘stimulus’ to counteract the collapse.

The rapid vaporization of wealth the central planners have set us up for will be of scope and scale the world has never before seen.  We don’t know if the bottom will fall out next year or five years from now.  But we’re certain the boom has turned into the crack-up boom.

Here we’ll leave the final words to Mises, Human Action:

“The final outcome of the credit expansion is general impoverishment.”

The article that I’ve quoted above makes a couple well-founded points. 

One, the more money that the Fed has created out of thin air the less the impact on the economy.  Put another way, once significant levels of money are created through credit expansion, it takes even greater levels of money creation to just maintain the illusion of prosperity.

The second noteworthy point is a quote from von Mises, “if the credit expansion (money printing) is not stopped in time, the boom turns into the crack up boom; the flight into real values begins, and the whole monetary system founders”,

A ‘crack up boom’ is defined as an economic crisis that involves a recession in the real economy and a collapse of the monetary system due to continual credit expansion and resulting unsustainable, rapid price increases.

A ‘crack up boom’ has two characteristics:

One, excessive money creation that leads to significant inflation.

Two, inflation is followed by hyperinflation which ultimately ends in the abandonment of the currency by market participants and a simultaneous recession or depression.

Each week on the RLA radio program, I have the privilege to interview some very bright authors, economists, and money experts.  While each of these experts has a unique viewpoint, from my observation these expert’s opinions have us experiencing one of two outcomes.  In other words, these experts, in general terms, fall into one of two categories:

Category One:  we will experience deflation.  Large debt levels are without a doubt, inflationary.

Category Two:  we will experience deflation followed by deflation.  This is the outcome that Mr. von Mises described in his work.

Going back nearly 8 years to 2013 when I taught a class at a local university for aspiring retirees, I offered my opinion that we would have to see one of two outcomes, we would either experience deflation or inflation followed by deflation.

For the latter outcome to occur, we would need to see exceptionally large amounts of new money created.  I am now of the strong opinion that is the most likely outcome.

Sadly, it seems that both von Mises and Keynes will ultimately be correct in their forecasts.

The crack up boom that von Mises described would create a temporary illusion of prosperity before it caused significant if not irreparable damage to the currency.  He forecast inflation, followed by hyperinflation, followed by general impoverishment.

Keynes forecast that in the long run, he’d be dead. Looks like they may both be right.

If you know of someone who 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.