hyperinflation – Dennis Tubbergen

Consequences of Debt Excesses and Irresponsible Currency Creation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Viola! Problem solved!

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

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

You do realize this is dumb, right?

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

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

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

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

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

Fat chance of that.

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

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

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An Inevitable Outcome

Last week, I discussed that stagflation was the most likely immediate economic outcome in my view.

Just in case you missed last week’s post, stagflation is defined as price inflation combined with a shrinking economy.

Ultimately though, I believe we will see a very painful deflationary environment that may rival the 1930s. This past week, Mr. Egon von Greyerz, whose work I follow and admire, analyzed the current situation. Excerpts from his piece follow: (Source: https://www.silverdoctors.com/headlines/world-news/viscous-cycle-of-self-destruction-gold-outperforming-all-asset-classes/)

The current fake monetary system will collapse under its own worthless weight…

“The first panacea of a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permeant ruin. But both are the refuge of political and economic opportunists.”

-Ernest Hemingway

As the West is standing on the edge of the precipice, there are only unpalatable outcomes.

At best, the world is facing a hyperinflationary depression later followed by a deflationary depression.

But sadly, there is today much more at stake as the West is frenetically escalating the sound of war drums against Russia’s invasion in Ukraine.

As the global economy reaches the point of collapse, countries get the leaders they deserve. There is today no leader or statesman in the West who can stand up to Putin in order to negotiate peace. Biden sadly neither has the vigor nor the ability to play any significant role in solving the conflict. Also, he has the neocons pressuring him to attack and defeat Russia. And Biden’s rhetoric against Putin is certainly not conducive to peace, with words like war criminal and genocide. Biden mustn’t forget that just like in the Vietnam war, the North Vietnamese and Viet Cong are estimated to have lost one million soldiers and two million civilians. Unprovoked wars are, of course, always senseless, whoever starts them.

President Zelensky is doing all he can to involve the rest of the world militarily by demanding more money and more weapons from the West rather than putting his efforts into peace negotiations. Ukraine can, of course, never win the war against Russia alone. And dragging in the US and NATO can only lead to a war of incalculable consequences and potentially a WWIII which could be nuclear.

And in the West, not a single leader is making a serious peace attempt. From Biden to Johnson, Macron, and Scholz, we only hear talk of more weapons and more money for Ukraine. This is terribly tragic and a sign of totally incompetent leadership in the West.

So the US and the West have no ability or desire to achieve peace. And Boris Johnson has welcomed the war as a diversion from his domestic “Partygate” political pressures and therefore has taken an aggressive position against Russia rather than finding a peaceful solution.

Macron is an opportunist who stands with one foot in each camp by being chummy with Putin and at the same time condemning him.

And Scholz, the German chancellor, is in an impossible position caused by Merkel’s poor management of Germany’s energy position. The three remaining German nuclear power stations will be closed down, and fossil fuels are politically unacceptable. Nearly 60% of German gas imports come from Russia. German industry would not survive without Russian gas. So Scholz wants to have his cake and eat it, sanctioning Russia on the one hand and simultaneously spending billions of Euros buying their energy and other natural resources, including food.

Quite a precarious position for Germany to be totally dependent economically on its war enemy. At the same time, this is good for the world as Germany has a vested interest to achieve peace.

But we must remember that only a minority of countries are backing the actions of the US and Europe. Africa, South America, and most of Asia are not taking sides and continuing to trade with Russia, and these regions represent around 85% of the world population.

So the vast majority of the world has no desire for war with Russia, but their voice is seldom heard in the Western-dominated media.

Politics and money cannot be separated, and the geopolitical situation that has now arisen will act as a perfect catalyst to the end of the monetary era since the creation of the Fed in 1913.

But what we must remember is that it is primarily the Western-controlled monetary system (including Japan) which will come to an end.

America’s and the EU’s final desperate attempt to save their broken system by sanctions on world trade will eventually fail as the Western economies gradually decay in an economic and social breakdown brought about by a quagmire of currency collapse, deficits, debts, and history’s most epic of asset bubbles.

The Phoenix emerging will clearly be the East, led by China, with Russia as an important partner. China is, population-wise, the biggest country in the world and will soon be the biggest country in GDP terms. With total US assistance in the form of know-how and technology, China has built up a strategic and advanced manufacturing base with dominance in many sectors.

For example, 18% of all US imports come from China, including 35% of all computers and electronics. Chinese sellers represent 40% of all top brands on Amazon and 75% of all new sellers.

The US and the rest of the world criticize Germany for being dependent on Russian energy, but the US folly of shifting much of its manufacturing to China certainly qualifies for joint first prize in commercial and strategic idiocy.

Since gold is the ultimate money and the only money that has survived in history, it will have a very important role in the coming years as the fiat currency system collapses.

Empires normally suffer a drawn-out and painful death. The fall of the US and the West has certainly been long, starting over half a century ago. But the fake prosperity has benefitted a small elite and lumbered the masses with colossal debts.

In 1971, US debt was $1.7 trillion, and 50 years later, it is $90 trillion, a mere 53x increase.

As the finale of the debt and currency collapse approaches, the desperation rises exponentially. Consequently, increasing amounts of money need to be created and wars initiated to justify the debt explosion, all in a vicious cycle of self-destruction.

For over half a century, the US has destroyed its currency and initiated unprovoked military actions in numerous countries – virtually all of them unsuccessful.

Yes, the US has certainly experienced a temporary false prosperity. But that could only be achieved with deficits, debt, and printing fake money.

The massive cost of the failed Vietnam war led to Nixon closing the gold window in 1971.

As Nixon said at the time, “the strength of the currency is based on the strength of the economy”!

Hmmm, half a century later, that currency has lost 98% in real terms (GOLD), and the Federal Debt has grown 75-fold from $400 billion to $30 trillion. It took 22 years, from 1971 to 1993, for the debt to expand by $15 trillion. Just in the last 2 years, the debt is up by the same amount of $15 trillion.

This debt will ultimately have to be dealt with. Simple math has one concluding that this level of debt can never be paid.

It is the massive defaults on debt that will have to come that will ultimately lead to a painful deflationary environment.

Stocks will fall, real estate prices will collapse, and unemployment will soar.

It’s ironic that the currency creation that has taken place on such a reckless scale since the financial crisis has allowed the debt to build.

Worldwide, at the time of the financial crisis, total debt was $120 trillion. Today, worldwide debt stands at $300 trillion. That’s an eye-popping increase of 250%!

This can’t possibly end well.

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.

Anatomy of an Inflation

The Federal Reserve announced a $15 billion per month taper and markets rallied.

All markets rallied as noted in the databox above; stocks, bonds, and precious metals all moved higher.

The Dow to Gold ratio remained in the neighborhood of 20. I stand by the forecast of an ultimate ratio value of 1 or 2.

In the “Headline Roundup” today, I discussed the anatomy of inflation. Despite the fact that the Federal Reserve continues to describe the high level of inflation as transitory, it seems that it is here to stay.

The taper announced by the Fed while leaving interest rates unchanged is, in my view, more symbolic than substantive.

I expect that at the first sign of market distress, the Fed will reverse course and make the ‘adjustments’ they stated were possible in their taper announcement.

Assuming I am correct, today’s discussion of the anatomy of inflation could especially relevant. In the article, “Is the World About to Be Weimared?”, the author describes the progression of inflation or hyperinflation. (Source: https://www.pgurus.com/is-the-world-about-to-be-weimared/#)

The author also discusses the probable political outcome of such a hyper-inflationary event pointing to the Weimar, Germany hyperinflation and the rise of an authoritarian government.

History points to this political outcome time after time.

Extreme economic circumstances have the populace embracing extreme political solutions that often turn out to not be solutions at all. That was the case in Weimar, Germany and we can all hope and pray that is not the solution presently should the current inflationary climate evolve into an environment that is hyperinflationary.

To prevent such an outcome, it’s important to understand the inflationary cycle. The author of the article referenced above published a chart that does a good job of explaining the cycle.

As you’ll note from the chart, the first stage in what the author describes as the inflationary death-spiral is the development of the attitude that “deficits don’t matter”.

This attitudinal change among the ruling class is almost necessary since government spending is out of control and balancing a budget would require significant pain and a huge amount of public sacrifice, both of which are politically unpopular.

Here is a bit from the article (emphasis added):

“Given above is the typical scenario of how “well-meaning” governments end up causing depressions and high inflations. Starting out in a benign commodity cycle where the monetary inflation does not directly translate into consumer price inflation, governments reach the absurd but very convenient conclusion that “deficits don’t matter”. The Keynesian stimulus appears to work under these conditions and the governments get away scot-free from their monetary sins. Albeit temporarily.”

In my view, this accurately describes the time frame from 2011 to 2019. The Federal Reserve was creating currency and expanding the money supply, a.k.a monetary inflation, but the only apparent inflation was that of asset prices like stocks and real estate.

More from the article (emphasis again added):

“When the payback time arrives, and it always does without exceptions, the monetary stimulus has the effect of pushing on the strings from a “growth” perspective. The higher deficits translate into consumer price inflation while the growth seems to falter. The currency weakens, there are greater trade deficits and the recessions and consumer price inflation both worsen. Stagflation, Misery Index (unemployment + inflation) are some of the more commonly used phrases to describe these economic conditions and this is where the US, and perhaps the world at large is headed in the immediate future.”

I would argue this is where we are presently. The US just recorded the largest trade deficit in history due in large part to importing a lot more energy than just a year ago. This from “United Press International” (Source: https://www.upi.com/Top_News/US/2021/11/04/trade-deficit-809-billion-imports-exports/2021636046685/):

The U.S. trade deficit reached an all-time high of $80.9 billion in September, sparked by consumer demand for computers, electric equipment, and industrial supplies, the Commerce Department said Thursday.

The Commerce Department said year-to-date, the goods and services deficit increased $158.7 billion, or 33.1%, from the same period in 2020. Exports increased by $274.1 billion or 17.4%. Imports increased by $432.8 billion or 21.1%.

And, even using the highly manipulated Consumer Price Index measure of inflation, consumer price inflation is at levels not seen in years while economic growth is slowing.

The next stage of the inflationary death spiral is described in the article (emphasis added):

Of course, the US Fed neither believes in the transitory nature of the CPI nor in the “strong economy” opinion that they voice in the public domain. The only reason why the US Fed has not raised the interest rates is that they understand the inflationary death spiral that the US economy/dollar is about to enter. Let’s say the Fed manages to hike the rates to a very nominal 1%. That would still leave the real interest rates negative by a massive 4%. But this 1% interest rate would deliver a devastating blow to both the housing and bond hyper-bubble markets that the US economy cannot possibly hope to recover from.

That would indeed set off a chain reaction of a recession forcing the government to step in with a big stimulus which would lead to even higher CPI. In fact, this is exactly the same phenomenon that we have witnessed in many banana republics but perhaps for the first time, we will witness this happening to the world’s reserve currency in the years ahead.

In other words, once this cycle begins, it is self-feeding.

The reality of currency creation is quite sobering when one compares the levels of currency creation by the Federal Reserve to that of Weimar, Germany.

The chart above illustrates the amount of currency created by the Federal Reserve. Notice in calendar year 2020, the expansion of the money supply went nearly vertical and has continued for about two years.

The next chart below shows the level of currency creation in Weimar, Germany after World War I. Notice the eerily similar chart patterns with the currency creation that led to hyperinflation and the destruction of the German Mark occurring largely over a two-year time frame.

The Fed has arguably already created enough currency for a hyperinflationary outcome.

The difference between the German Mark of Weimar, Germany, and the US Dollar of today is that the US Dollar is still used as a reserve currency.

It is my view that without that status, we would perhaps already be experiencing a hyperinflationary climate similar to that of Germany after World War I.

As I noted last week, the only way to solve this problem is a balanced federal budget so currency creation is unnecessary. Given the recent passing of a monster infrastructure spending package that adds to the level of deficit spending, we are moving in a fiscal direction that almost ensures the inflationary death spiral continues.

Money Printing, Inflation and Unintended Consequences

As I have been discussing for a very long time, the current economic policies being pursued will likely result in the realization of Thomas Jefferson’s warning to us more than 200 years ago.

If you are a new reader, Mr. Jefferson warned us that we should not allow private bankers to control the issue of our currency. Should we do so, he cautioned, first by inflation then by deflation the banks and corporations that will grow up around us will deprive the people of all property until our children wake up homeless on the very continent our fathers conquered.

In the “New Retirement Rules” class that I taught beginning in 2011, I suggested that there were two potential economic outcomes depending on what the policy of the Federal Reserve was moving ahead. We would have deflation, like we saw in the 1930’s during The Great Depression or we would have inflation followed by deflation as Mr. Jefferson suggested should the Fed elect to print money.

It is now clear that we are on the latter path and the one that Mr. Jefferson warned us about.

Signs of inflation are everywhere.

In last week’s issue of “Portfolio Watch”, I discussed the statements made by Warren Buffet at the Berkshire Hathaway meeting. During his lengthy address, Mr. Buffet stated “We are seeing very substantial inflation. We are raising prices. People are raising prices to us and its being accepted.”

That statement (and reality) flies in the face of recent statements made by Federal Reserve Chair, Jerome Powell who insisted that inflation is “transitory”. To think that the Fed has expanded the money supply by ridiculous amounts and we will have only short-lived or temporary inflation is ludicrous.

Bank of America this past week suggested something similar. The bank stated that the US will experience a “transitory hyperinflation”. (Source: https://www.zerohedge.com/economics/and-now-rents-are-soaring-too)

To some extent, that statement is accurate. History teaches us that hyperinflations are typically temporary and often last until faith in the currency is lost at which point a reset has to occur.

For many years, I have been suggesting a two-bucket approach to managing assets with one bucket invested to protect assets when the deflation part of the cycle hits and another to hedge from what is now inevitable inflation.

Just this past week, reliable news sources reported on the ever-increasing levels of inflation now hitting the economy as a result of the Fed’s money printing. And now, with talk of another $4 trillion stimulus package heating up, more money creation to fund more spending is probably on the horizon.

At the risk of being too political for this publication, in which I try to focus on economic and investing issues, there are actually politicians (in both parties) who are calling the proposed $4 trillion stimulus package an ‘investment’ not an expense.

That is pure rhetoric and not based in fact. In order to make an investment, you need to have money to make the investment.

As we all know, the government has no money, and the current levels of debt and unfunded liabilities simply cannot be funded by any kind of tax increases. As I’ve discussed in the past, 100% of household wealth in the US could be confiscated via a 100% wealth tax and the financial house of the US would still not be in order.

The reality is this. Current policies being pursued by the Fed will result in a tax on savers and investors.

Not in the form of a physical tax, but rather an inflation tax that sees the purchasing power of investments and savings diminish.

As I’ve been noting here each week, it seems that the inflation part of the cycle is now upon us. What we’ve been discussing as theory for the past several years is now transforming into an ugly reality.

Rents are increasing significantly. This will adversely affect the lower income workers who typically rent and don’t own their home.

This from “Zero Hedge” (Source: https://www.zerohedge.com/economics/and-now-rents-are-soaring-too):

On Thursday, American Homes 4 Rent, which owns 54,000 houses, increased rents 11% on vacant properties in April, the company reported in a statement:

. .. Continued to experience record demand with a Same-Home portfolio Average Occupied Days Percentage of 97.3% in the first quarter of 2021, while achieving 10.0% rental rate growth on new leases, which accelerated further in April to an Average Occupied Days Percentage in the high 97% range while achieving over 11% rental rate growth on new leases.

Invitation Homes, the largest landlord in the industry, also boosted rents by similar amount, an executive said on a recent conference call. Or, as Bloomberg puts it, record occupancy rates are emboldening single-family landlords to hike rents aggressively, testing the limits of booming demand for suburban rentals.

While soaring housing costs had put homeownership out of reach for most Americans, rents had been relatively tame for much of 2020. But in recent months, rents have also soared as vaccines fuel optimism about a rebound from the pandemic, and a reversal in the city-to-suburbs exodus. The increases, as Bloomberg so eloquently puts it, “may add to concerns about inflation pressures.” Mmmk.

“Companies are trying to figure out how hard they can push before they start losing people,” said Jeffrey Langbaum, an analyst at Bloomberg Intelligence. “And they seem to be of the opinion they can push as far as they want.”

The article states that “Bloomberg” eloquently stated that increasing rents ‘may add to concerns about inflation pressures’. I’d suggest it’s evidence of inflation.

There are many other examples of ‘inflation pressures’. One of these examples, food, also disproportionately affects lower income households. Michael Snyder commented this past week (Source: http://theeconomiccollapseblog.com/what-will-you-do-when-inflation-forces-u-s-households-to-spend-40-percent-of-their-incomes-on-food/)

Did you know that the price of corn has risen 142 percent in the last 12 months? Of course corn is used in hundreds of different products we buy at the grocery store, and so everyone is going to feel the pain of this price increase. But it isn’t just the price of corn that is going crazy. We are seeing food prices shoot up dramatically all across the industry, and experts are warning that this is just the very beginning. So if you think that food prices are bad now, just wait, because they are going to get a whole lot worse.

Typically, Americans spend approximately 10 percent of their disposable personal incomes on food. The following comes directly from the USDA website…

In 2019, Americans spent an average of 9.5 percent of their disposable personal incomes on food—divided between food at home (4.9 percent) and food away from home (4.6 percent). Between 1960 and 1998, the average share of disposable personal income spent on total food by Americans, on average, fell from 17.0 to 10.1 percent, driven by a declining share of income spent on food at home.

Needless to say, the poorest Americans spend more of their incomes on food than the richest Americans.

According to the USDA, the poorest households spent an average of 36 percent of their disposable personal incomes on food in 2019…

Needless to say, the final numbers for 2020 will be quite a bit higher, and many believe that eventually the percentage of disposable personal income that the average U.S. household spends on food will reach 40 percent.

That would mean that many poor households would end up spending well over 50 percent of their personal disposable incomes just on food.

As benevolent and perhaps even as well-intentioned as stimulus to help those who have been harmed financially over the past year sounds, the fact that money has to be created out of thin air to fund stimulus payments ultimately ends up hurting those that were supposed to be helped.

Stagflation is here. The economy is contracting, and prices are rising. If you have not yet seriously investigated how the two-bucket approach to managing assets might help you navigate what lies ahead, I would urge you to do so.

And I would do so soon.

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.

Artificial Markets and Where We Go From Here

In my view, we are entering a time of significant financial transition. Most financial markets are now artificial. As I’ve discussed, the CARES Act changed the financial rules to allow for even more money creation. Prior to the CARES Act becoming law, the Federal Reserve, the central bank of the United States, could only purchase US Government bonds and US Government backed mortgage securities.

The CARES Act changed the rules allowing the Federal Reserve to loan money to the US Treasury to use to purchase corporate debt securities through the use of a SPV or special purpose vehicle.

Within a week of that rule change, the Fed also announced it would begin the direct purchase of junk bonds despite the fact that the central bank has no legal authority to do so.

Monetary policy change is as extreme as the policies themselves.

Despite the Fed’s venture into purchasing junk bonds, it seems that there will still be a record number of defaults on lower quality corporate debt issues. This from “Market Watch” (Source: https://www.marketwatch.com/story/feds-foray-into-buying-junk-rated-corporate-debt-wont-stop-wave-of-defaults-that-could-reach-21-analysts-warn-2020-04-17) (emphasis added):

Even with the Federal Reserve aiming a $750 billion fire hose at U.S. corporate debt markets to offset carnage from the pandemic, defaults at speculative-grade companies already are starting to climb as business buckle under their debts.

Frontier Communications Corp, LSC Communications Inc. and hospital operator Quorum Health Corp. in April defaulted on a combined $14.3 billion of speculative-grade (or junk-rated) bonds, a sharp uptick from the $4 billion seen earlier in the year, according to B. of A. Global analysts.

They called the Fed’s announcement last week to start buying riskier assets “bold, surprising, and reflecting its commitment to respond forcefully to signs of dysfunction in the key corners of U.S. debt funding markets,” in a client note Friday, but also cautioned that defaults among junk-rated U.S. companies will likely reach 21% over the next two years.

The Fed will be directly buying junk bonds. Yet, despite their aggressive purchases, Bank of America analysts forecast that 21% of junk bonds will default. That gives you an indication of how dismal the financial health of many smaller and already distressed companies really is.

“Forbes” reported that JC Penny elected to skip a $12 million interest payment that was due on April 15. (Source: https://www.forbes.com/sites/walterloeb/2020/04/17/pandemic-bankruptcies-threatens-jcpenney-neiman-marcus-and-many-others/#59e688354b10). “Business Insider” reported that the company was considering bankruptcy (Source: https://www.businessinsider.com/experts-say-several-retailers-to-consider-bankruptcy-amid-coronavirus-2020-4).

It is an accepted fact at this point that even if the constraints put in place to attempt to contain COVID 19 are soon lifted, the second quarter of this year, economically speaking, will be the ugliest in US history. “Market Watch” reported (Source: https://www.marketwatch.com/story/morgan-stanley-forecasts-38-drop-in-second-quarter-us-gdp-2020-04-03) that Morgan Stanley recently lowered second quarter economic expectations on what was an already dismal forecast (emphasis added):

Morgan Stanley has lowered its U.S. economic forecasts, as social distancing measures and closures of nonessential businesses have spread to an increasing number of states. The bank lowered its first-quarter GDP forecast to -3.4% from -2.4% and its second-quarter GDP forecast to -38% from -30%.

Later in the article, it was reported that Morgan Stanley expected 2020 GDP to drop more than at any time since 1946.

Meanwhile, over the past 4 weeks, stocks have rallied off their lows.

The stock rally in my view is reminiscent of past stock rallies – the Fed announces more radical monetary policies due to deteriorating economic conditions and stocks rally. Financial markets, as noted above, really are artificial at this point with markets reacting to more easy money the same way as an addict reacts to another hit.

Short-term the effect is positive, but long term it will be harmful. And, the longer the artificial market stimulus is applied, the worse the ultimate crash will be.

Back in 2011, when my book “Economic Consequences” was written and then again in 2015 when my “New Retirement Rules” book was published, I predicted a Dow to Gold ratio of 2, or more likely 1.

I still stand by that forecast. Now; however, it seems like there is a more obvious path forward to that eventual outcome.

Jim Rogers, billionaire investor, co-founder of the Quantum Fund with George Soros and past guest on my radio program has the same perspective. This from a recent interview with “Business Insider” when Rogers was asked if the current crash was going to be the big one. (Source: https://www.businessinsider.com/coronavirus-market-outlook-forecast-legendary-investor-jim-rogers-federal-reserve-2020-4) (emphasis added):

“In 2008 we had a very serious problem because of too much debt. Since then, the debt has skyrocketed everywhere, so it seems to me self-evident. The next one has to be worse than 2008. People seem to be surprised.

Anyway, so yes, this is probably it. I’m sure that the rally is going to be nice. It already is a nice rally. You know, governments all over the world are spending huge amounts of money, printing huge amounts of money. There is an election in November, so the rally will probably be nice, but it’s not over, Sara, it’s not over.”

When Rogers was asked how low stocks could go, this was his response (emphasis added):

I can tell you in history, bear markets go down 50, 60, 70% this is just history. This is not an opinion and many stocks go down 80, 90%. Some disappear. That’s just the way bear markets work.

It’s important to remember that markets rarely go straight up or straight down over the long term. That’s true of every market including stocks.

My opinion remains that we are likely going to see some initial deflation and then, assuming no change on monetary policy, probably significant inflation.

Egon vonGreyerz, founder of Matterhorn Capital Management, states that inflation or hyperinflation has to be the ultimate consequence to the greatest financial bubble in history. He forecasts that massive inflation, like coronavirus, will quickly move from one country to the next with very few being spared (Source: https://goldswitzerland.com/the-greatest-financial-crisis-hyperinflation/). This will be as a direct result of money printing by central banks which creates artificial markets. This excerpt from a piece recently written by Mr. vonGreyerz explains (emphasis added):

Ever since the last interest cycle peaked in 1981, there has been a 39-year downtrend in US and global rates from almost 20% to 0%. Since in a free market interest rates are a function of the demand for credit, this long downtrend points to a severe recession in the US and the rest of the world. The simple rules of supply and demand tell us that when the price of money is zero, nobody wants it. But instead debt has grown exponentially without putting any upside pressure on rates. The reason is simple. Central and commercial banks have created limitless amounts of credit out of thin air. In a fractional banking system banks can lend the same money 10 to 50 times. And central banks can just print infinite amounts.

Global debt in 1981 was $14 trillion. One would have assumed that with interest rates crashing there would not have been a major demand for debt. High demand would have led to high interest rates. But if we look at global debt in 2020 it is a staggering $265 trillion. So, debt has gone up 19X in the last 39 years and cost of debt has gone from 20% to 0% – Hmmm!

You don’t have to be an economist to understand that today’s markets are completely artificial. As Mr. vonGreyerz points out, when interest rates fall, it indicates no demand to borrow money. Yet, despite this, debt has ballooned to levels that are totally unsustainable.

That simple fact proves my argument that all financial markets are now artificial.

That’s also why I have long advocated the two-bucket approach to managing money. One bucket consisting of assets that are safe and stable to provide income needs and another bucket containing assets that will function as an inflation hedge.