Inflation and Deflation Perspectives

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

          I agree with Mr. Turk.

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

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

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

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

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

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

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

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

          Gold is constant money.

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

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

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

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

          In response, many world central banks are raising interest rates to attempt to suppress inflation.  Wolf Richter (Source:  reported last week that the central banks of Czechoslovakia, Russia, England, Norway, the European Central Bank, Mexico, Chile, Hungary, Pakistan, Armenia, Peru, Poland, Brazil, Korea, New Zealand, South Africa, Iceland, and Japan have all increased interest rates.

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

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

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About Stocks and Bonds

          The stock market highs of November have not yet been taken out and my long-term trend-following indicators continue to become more bearish.  At this point, a “Santa” rally looks less likely especially given the Fed’s recent statements about accelerating the taper or slowing the rate of currency creation.

          As the longer-term readers of “Portfolio Watch” are aware, I believe the Fed’s taper talk is just that.  The math doesn’t lie; the federal government cannot fund its deficit spending without currency creation.  While the Fed may taper officially, liquidity will have to be made available in order to close the budget gap.

          Of course, common sense dictates that this process of currency creation will have to cease at some future point.  When it does, it is my belief that a reset will have to occur that will affect many assets including stocks and real estate.

          Both stocks and real estate are in a bubble in my view.

          David Stockman, former budget director, penned an article last week that examines just how extended stocks likely are.  Here is a bit from Mr. Stockman’s piece (Source:

The fundamental consequence of 30 years of Fed-fueled financial asset inflation is that the prices of stocks and bonds have way overshot the mark.

That’s why what lies ahead is a long stretch of losses and investor disappointment as the fat years give way to the lean.

These will hit hard the bullish investor herd and aggressive buyers of calls who can’t imagine any other state of play. They will be shocked to learn — but only after it is way too late — that the only money to be made during the decades ahead is on the short side of the market by buying puts on any of the big averages: the FANGMAN, S&P 500, NASDAQ 100, the DOW and any number of broad-based ETFs.

The reason is straightforward. The sluggish, debt-ridden Main Street economy has been over-capitalized, and it will take years for company profits and incomes being generated to catch up to currently bloated asset values. Accordingly, even as operating profits struggle to grow, valuation multiples will contract for years to come, owing to steadily rising and normalizing interest rates.

We can benchmark this impending grand reversal on Wall Street by reaching back to a cycle that began in mid-1987. That’s when Alan Greenspan took the helm at the Fed and promptly inaugurated the present era of financial repression and stock market coddling that he was pleased to call the “wealth effects” policy.

At the time, the trailing P/E multiple on the S&P 500 was about 12X earnings — a valuation level that reflected a Main Street economy and Wall Street financial markets that were each reasonably healthy.

The US GDP in Q2 1987 stood at $4.8 trillion and the total stock market was valued at $3.0 trillion, as measured by the Wilshire 5000. Back then, Wall Street stocks were stably capitalized at 62% of Main Street GDP.

Over the next 34 years, a vast unsustainable gulf opened up between the Main Street economy and the Wall Street capitalization of publicly traded stocks.

During that three-decade period, the Wilshire 5000 market cap rose by 1,440% to $46.3 trillion. That’s nearly four times the 375% gain in nominal GDP to $22.7 trillion.

Accordingly, the stock market, which was barely three-fifths of GDP on Greenspan’s arrival at the Fed, now stands at an off-the-charts 204% of GDP.

If we assume for the moment that the 1987 stock market capitalization rate against national income (GDP) was roughly correct, that would mean that the Wilshire 5000 should be worth $14 trillion today, not $46 trillion. Hence, the $32 trillion of excess stock market valuation hangs over the financial system like a Sword of Damocles.

In fact, we believe that the gulf between GDP and market cap has been growing wider and more dangerous since the Fed sped up money printing after the Lehman meltdown. To wit, since the pre-crisis peak in October 2007, the market cap of the Wilshire 5000 is up by nearly $32 trillion, while the national income to support it (GDP) is higher by only $8 trillion.

The stock market’s capitalization should be falling, not soaring into the nose-bleed section of history. After all, since the financial crisis and Great Recession, the capacity of the US economy to generate growth and rising profits has been sharply diminished. The real GDP growth rate since the pre-crisis peak in Q4 2007, for instance, is just 1.5% per annum, which is less than half its historical trend rate of growth.

Back in October 2007, the stock market’s capitalization was 106% of GDP and in just 14 years it has soared to the aforementioned 204%. So even as the growth rate of the US economy has been cut in half, stock market capitalization has doubled.

Given that the stock market has gotten way, way ahead of the economy, the longer-range implication is a long spell during which financial asset prices will stagnate or even fall until they eventually recover the healthy relationship to national income.

Looking at this from a different angle, the current $46 trillion market cap of the Wilshire 5000 would not return to 62% of GDP until US GDP reaches $75 trillion. At an average of 3.3% per annum increase in nominal GDP since Q4 2007, it would take 38 years to get there!

That’s right. The massively over-valued stock market is currently capitalizing on an economy that might exist by the year 2060… if all goes well.

            Mr. Stockman offers a terrific perspective on where stock valuations have moved since the Fed began the ‘temporary’ policy of currency creation.

          Real estate has followed a course similar to the course tracked by stocks.

          The Case-Shiller Housing Index is the commonly used metric of housing values.  The chart illustrates housing values for the past 25 years.

          Looking at the chart, one can see the decline in housing values at the time of the financial crisis.  The index fell from 200 to about 150. 

          Notice that housing values began to increase in earnest after the Fed began quantitative easing.  Since that time, housing prices have nearly doubled.

          And, as inflated as housing prices were at the time of the financial crisis, they are far more inflated presently – they are about 50% higher than they were prior to the collapse that began in 2007.

          Of course, as we have demonstrated many times in the past if real estate and stocks were priced in gold rather than depreciating US Dollars, one gets a completely different perspective.  In 2007, gold was about $650 per ounce.  Today, the spot price of gold is about $1800.  That’s an increase of about 275%.  Priced in gold, both stocks and real estate have declined in value which one would expect given the massive levels of debt that exist.

          The reality is that the US Dollar and every other fiat currency around the world is no longer an accurate metric when examining economic data and asset pricing.

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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:

          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:

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.

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

Gold Price Analysis

          Stocks continued their rally last week, with many indexes making new all-time highs by the slimmest of margins.

          I noted last week that the ‘gaps up’ on the daily price chart are most often closed by falling prices.  This is still a possibility but last week’s price action muddies up the waters from a technical analysis perspective.

          We will need to see how this week’s price action plays out and assess where we are.

          By now, clients and subscribers have received the October issue of the “You May Not Know Report”.  In it, I offer an analysis of gold, silver, and oil relative to the expansion of the money supply.

          I offer that explanation here again for context before discussing a recent article published by Mr. Egon von Greyerz that validates this analysis using a completely different method of analysis.  I hope you find it interesting.

          This is from the October “You May Not Know Report”:

I’ve had conversations with many readers, radio show listeners, and clients about the recent decline in the price of precious metals.  Those conversations always lead to two topics of discussion.  One, where should the price of precious metals be from a fundamental viewpoint?  And, two, why is the current reality not reconciling with the fundamentals?

          In this update, I’d like to address both topics.  Let’s begin with the fundamentals.  I’d like to have this conversation from the perspective of the expansion of the fiat money supply and then compare the expansion of the money supply to the price of gold, silver, and another commodity – oil.  This comparison is easy to do when  The screenshot on this page is taken from that website.

          Notice from the screenshot that the dollar-to-oil ratio, the dollar-to-silver ratio, and the dollar-to-gold ratio in 1913 are all noted.

          The ratio is calculated by taking the total increase in the money supply and dividing it by the yearly production of either oil, silver, or gold depending on the commodity one is examining.  For example, the dollar to oil ratio in 1913 was calculated by taking the total increase in the money supply and dividing it by the total world oil production.  A review of the history of oil prices concludes that the actual price of oil per barrel in 1913 closely tracked the price forecast using this simple formula.

          The same conclusion is reached when looking at the formula-derived prices in 1913 and the actual prices.  Gold was $20 per ounce in 1913 and silver was between $1 and $2 per ounce.

          Here’s the point, in calendar year 1913, using the formula of taking the increase in the money supply and dividing by annual world production of oil, silver, or gold; one arrives at a forecasted number that reasonably tracked reality.

          Fast forward to September 2021 and one discovers that this forecasting tool seems to have broken for gold and silver but still works for oil.  Observe from the screenshot that taking the total increase in the money supply presently and dividing by world oil production, one gets a forecasted estimate of about $72 per barrel.  Like in 1913, that tracks reality reasonably closely.  The current price of one barrel of oil as this issue goes to publication is about $75.

          However, when looking at the forecasted price of silver and gold, one reaches a much different conclusion.  The forecasted price of silver is more than $3,000 per ounce while physical silver is presently selling somewhere in the mid-$20 range.  The forecasted price of gold is more than $21,000 per ounce while reality has physical gold selling for around $1900 per ounce.

          The article in the “You May Not Know Report” goes on to discuss why gold and silver prices have not reacted to the expansion of the money supply like oil prices have, citing one of the reasons as price manipulation via the highly leveraged futures markets.

          This past week, as noted above, Mr. Egon von Greyerz looked at this topic from a fiat currency devaluation perspective.  Here is a bit from his excellent piece (Source:

The US annual Federal Spending is $7 trillion and the revenues are $3.8 trillion.

So the US spends $3.2 trillion more every year than it earns in tax revenues. Thus, in order to “balance” the budget, the declining US empire must borrow or print 46% of its total spending.

Not even the Roman Empire, with its military might, would have got away with borrowing or printing half of its expenditure.

The most obvious course of events is continuous shortages combined with prices of goods and services going up rapidly. I remember it well in the 1970s how for example oil prices trebled between 1974 and 1975 from $3 to $10 and by 1980 had gone up 10x to $40.

The same is happening now all over the world.

That puts Central banks between a Rock and a Hard place as inflation is coming from all parts of the economy and is NOT TRANSITORY!

Real inflation is today 13.5% as the chart below shows, based on how inflation was calculated in the 1980s

The central bankers can either squash the chronic inflation by tapering and at the same time create a liquidity squeeze that will totally kill an economy in constant need of stimulus. Or they can continue to print unlimited amounts of worthless fiat money whether it is paper or digital dollars.

If central banks starve the economy of liquidity or flood it, the result will be disastrous. Whether the financial system dies from an implosion or an explosion is really irrelevant. Both will lead to total misery.

Their choice is obvious since they would never dare to starve an economy craving for poisonous potions of stimulus.

History tells us that central banks will do the only thing they know in these circumstances which is to push the inflation accelerator pedal to the bottom.

Based on the Austrian economics definition, we have had chronic inflation for years as increases in money supply is what creates inflation. Still, it has not been the normal consumer inflation but asset inflation which has benefitted a small elite greatly and starved the masses of an increase standard of living.

As the elite amassed incredible wealth, the masses just had more debts.

So what we are now seeing is the beginning of chronic consumer inflation that most of the world hasn’t experienced for decades.

This is the inevitable consequence of the destruction of money through unlimited printing until it reaches its intrinsic value of Zero. Since the dollar has already lost 98% of its purchasing power since 1971, there is a mere 2% fall before it reaches zero. But we must remember that the fall will be 100% from the current level.

As the value of money is likely to be destroyed in the next 5-10 years, wealth preservation is critical.  For individuals who want to protect themselves from total loss as fiat money dies, one or several gold coins are needed.

The 1980  gold price high of $850 would today be $21,900,  adjusted for real inflation

So gold at $1,800 today is grossly undervalued and unloved and likely to soon reflect the true value of the dollar.

          While it is difficult to pinpoint timing, from a fundamental perspective, it is my strong conviction that precious metals prices will have to reflect the real value of fiat currencies at some future point.

          Holding physical metals with part of your portfolio is critically important for many investors in my view.

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

The Fed to Raise Interest Rates? I Wouldn’t Hold Your Breath

          Many of the world’s central banks are beginning to raise interest rates in response to higher levels of inflation.  The chart, from “Bloomberg”, shows which countries’ central banks have increased interest rates, cut interest rates, or left interest rates unchanged.

          The blue-shaded countries on the chart have not changed interest rate policy, the red-shaded countries on the chart have reduced interest rates, and the yellow-shaded countries on the chart have increased interest rates.

          The Central Bank of Mexico recently increased interest rates for the second consecutive month.  This from “The Wall Street Journal” (Source:

The Bank of Mexico raised interest rates for a second consecutive meeting Thursday, citing persistent price pressures and supply shocks that it expects will keep inflation above its 3% target into early 2023.

The board of governors voted 3-2 to increase the overnight interest-rate target by a quarter of a percentage point to 4.5%, in line with market expectations. Deputy governors Galia Borja and Gerardo Esquivel voted to leave the rate at 4.25%.

          The Mexican Central Bank’s actions mirror that of many other countries including Uruguay with a base interest rate of 5% and Russia.  This is from “Market Watch” on July 23, 2021. (Source:

Russia’s central bank on Friday raised its key interest rate in response to a stronger-than-expected pickup in inflation as the economy recovers from the effects of the Covid-19 pandemic and demand for energy rises.

In a statement, the Bank of Russia said it had lifted its key rate to 6.5% from 5.5%, having begun to tighten its policy in March, when its key rate stood at 4.25%. It said more rate rises are likely over the coming months.

          There is talk of the US Central Bank, the Federal Reserve beginning to tighten as well for the same reasons.  I believe that this talk is just that – talk, unlikely to be followed by action any time soon.

          I come to this conclusion for one main reason – current debt levels cannot be financed at higher interest rates.  In the recent past, I have presented the argument that current levels of inflation rival levels seen in the late 1970’s into the early 1980’s.

          It was at that time that the Federal Reserve, responding to high levels of inflation raised interest rates.  Going into 1981, the Fed Funds rate was effectively 20%.  The 30-Year US Treasury Bond followed suit, increasing to about 15% as noted from the chart.

          Going into 1981, the US had about $900 billion in debt.  If the entire debt had to be financed at 15%, that would have amounted to interest payments on the debt of $135 billion. 

          In the fiscal year 1981, US tax revenues totaled about $600 billion.  The national debt was about 150% of total tax revenues and interest payments on the debt would have consumed about 23% of tax revenues.

          Given that the official calculation methodology has changed significantly since 1980 to make the reported inflation rate look more favorable, as I have often discussed here and on the radio show and podcast, the officially reported inflation rate today is far lower than the officially reported inflation rate in 1980.

          The real inflation rate, using similar methods to those used in 1980 to calculate the inflation rate, is on par with 1980.

          Should the Fed follow the lead of many other world central banks and hike rates to contain inflation, the Fed creates another problem – financing debt.

          To subdue inflation the way the Fed did in 1980, interest rates might have to be raised to nearly 20% again.  Should that happen and should the 30-Year US Treasury yield rise to 15%, the situation today would look far different than more than 40 years ago.

          Presently, the official national debt is pushing $29 trillion.  Total federal tax revenues for the fiscal year 2021 are projected to be $3.86 trillion.  (Source:  Using the same assumption as above, should today’s Federal debt levels need to be financed at 15%, interest on the debt would amount to about $4.35 trillion, more than total tax revenues.

          In 1981, the federal debt was about 150% of tax revenues, today the national debt is approximately 750% of tax revenues or about 5 times higher using the same comparison.  In 1981, interest on the debt would have consumed 23% of total tax revenues using the assumptions outlined above, today interest payments would consume 113% of all federal tax revenues using those same assumptions.  That’s also about 5 times higher than in 1981.

          It’s for that reason that I conclude that the Fed may engage in ‘taper talk’, but it will be, only talk.  There may be a symbolic increase in interest rates, but in my view, nothing meaningful enough to get inflation under control.

          Options traders evidently agree with me.  This from “Yahoo Finance” (Source: (emphasis added)

Treasury yields are rising amid optimism over the global recovery but there has been a run on Eurodollar options betting the Federal Reserve will opt not to raise interest rates at all.

Traders this week have been busy snapping up Eurodollar call options on underlying March 2025 futures that target three-month Libor to fix below 0.5%. These pay off if markets price the Fed keeping its benchmark at its lower bound until then. Futures markets are currently anticipating Libor will rise to about 1.47% by the first quarter of 2025.

This tail-risk hedge, a position aimed at protecting against extreme outcomes, has been bought repeatedly over the past week. Thursday’s session saw purchases of more than 110,000 of the options, according to traders in London and Chicago familiar with the transactions. The preliminary release of open interest data, which measures outstanding positions, has ballooned to more than 153,000 from about 22,000 a week ago.

A scenario where the Fed ends up holding rates near record lows through to 2025 would probably mean that the global economy fails to recover from the pandemic, resulting in central banks maintaining their ultra-easy policy.

Traders have already ponied up around $6.5 million on the Eurodollar hedge. While the underlying contract targets rates in March 2025, the option has a seven-month expiry, rolling off in March 2022, or what’s commonly known as a mid-curve option.

          Given this likely outcome, you may want to consider using the recent dip in gold and silver prices to add to your precious metals holdings.

          My new book “Retirement Roadmap” was released last week and achieved #1 best-seller status on Amazon as well as a ‘hottest new release’ ranking.  Thank you for your support!

          It is very much appreciated.

          The book, as well as the Kindle version of the book, are both available from Amazon.

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

A Perspective on Currency Creation

         While doing my research this past week, I found an article published on “Bloomberg” that offered some great perspective on the amount of currency that has been created literally out of thin air since early in calendar year 2020.

          The article is titled, “A $9 Trillion Binge Turns Central Banks Into the Market’s Biggest Whales” (Source:  Here is an excerpt:

Since the start of the pandemic, central banks in the U.S., Europe, and Japan have been on a $9 trillion spending spree.

That binge has turned the U.S. Federal Reserve, the European Central Bank, and the Bank of Japan into the ultimate market whales, swelling their combined assets to $24 trillion. Now, talk is shifting to winding down the banks’ massive monetary stimulus and the challenge that presents for the economies they support.

          To get some perspective on $24 trillion, the article published an interactive chart that allowed the reader to select companies from a list, and then the chart added together the market capitalization of each company until the total combined value of the companies totaled $24 trillion.

          I’ve reproduced the chart that I built here.

          It took 77 of the world’s largest companies to get the total combined value of the companies to $24 trillion!

          These corporations are some of the largest in the world.  To reach a combined value of $24 trillion, these companies had to develop products and services that consumers desired and then build their businesses over time.

By contrast, the central banks of the United States, Europe, and Japan simply created $24 trillion.

As we all know, currency creation is simply out of control.  The article offers some comparisons:

The Fed bought a higher proportion of mortgage-backed securities than its counterparts, desperate to shore up a sector that caused so much trouble during the global financial crisis of 2008. In fact, it spent enough on these assets to buy more than a million homes in New York. Some Fed officials think that mortgage-backed securities are where spending should slow first.

The ECB and BOJ did more with loans, keeping businesses afloat, workers in jobs, and preventing bad debts from piling up at banks. Indeed, the Japanese central bank’s extra lending would cover the debts of every company that has gone out of business in the country since the autumn of 2003.

            This currency creation, ostensibly to help those who were most adversely affected by the economic fallout that occurred as a result of the COVID response, actually ended up helping the wealthy more than any other group.  This from the article:

           But it’s also clear that many asset classes such as technology stocks and real estate—and the people who own them—have fared better than the average worker over the past year or so. The Fed has the best data illustrating how the rich got richer and the poor slipped even further behind.

            This chart was published in the article using data from the Federal Reserve.

            Notice that 60% of the net worth growth in 2020 went to the top 10% of the wealthiest households and only 4% of the net worth growth went to the bottom 50% of US households.

            This validates a point that I have long made – currency creation in the name of helping the poor, actually ends up hurting the poor more than it helps them.

            Eventually, inevitably, I believe these policies will hurt all Americans; however, the poor will likely continue to be disproportionately affected. 

            We have collectively ignored the sage advice given to us by one of the founding fathers, Thomas Jefferson who warned, “if the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.  The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

            I’m releasing a revised and updated version of the “Revenue Sourcing” book published last year.  Its title is “Retirement Roadmap: How Many Aspiring Retirees Can Use the Revenue Sourcing™ Process to Achieve a Secure, Tax-Free Retirement in Today’s Economy”.

            One of the themes of the book is the difference between currency and money.  At some points historically money and currency have been the same thing, but presently our currency is not money.

            While that may seem confusing on the surface, simply defined, money is a good store of value over time.  Currency, on the other hand, is what is used in commerce to buy and sell goods and services.

            Prior to 1971, the US Dollar had a direct link to gold which meant the US Dollar was money; it could be redeemed for gold which has always served as a good store of value over time.

            Once Nixon eliminated the convertibility of US Dollars for gold, all new currency was loaned into existence which transformed the US Dollar into a currency.  All currency today is a fiat currency which is nothing more than debt.

            The US Dollar was once an asset but is now a debt-based currency as are all other world currencies.  The huge amount of money created by world central banks is now causing an acceleration of inflation as Mr. Jefferson predicted.  At some future point, inflation will have to give way to deflation as debts go unpaid and debt-based money disappears from the financial system.

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

The Fed’s Conundrum

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

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

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

Russia recently passed legislation to allow the country’s sovereign wealth fund to invest in gold.  This from “Zero Hedge” (Source: (emphasis added):

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

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

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

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

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

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

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

Meanwhile, the United States Mint issued a statement last week about silver (Source: (emphasis added):

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

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

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

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

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

And with good reason.

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

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

Would a similar policy response today do the same thing?

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

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

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

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

First, the recently proposed budget calls for more than $6 trillion in spending, the highest ever.  (Source:  Federal spending would reach $8.2 trillion by 2031.  The budget deficit under the proposed budget would exceed $1.8 trillion and be twice the $900 billion deficit in 2019, pre-COVID,

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

More and more analysts are predicting deflation.  This from “Fox Business News” (Source: (emphasis added):

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

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

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

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

The Fed is painted into the proverbial corner.

Keep printing and the outcome is stagflation.

Begin to tighten monetary policy and risk a deflationary collapse.

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

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

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:

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:

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:

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  Our webinars, podcasts, and newsletters can be found there.

Inflation or Deflation?

The Federal Reserve is a little over a week into its program of buying private sector corporate bond ETF’s with newly printed money.  Not surprisingly, corporate bonds have rallied.

The most important analysis I can provide to my clients and friends in my opinion is the ongoing question of what the ultimate outcome will be as a result of extreme conditions in the financial markets.

Will there be severe deflation as a result of debt excesses?  Or, will there be inflation or even hyperinflation because of massive money printing?

Continuing to ask this question and looking for answers to this question supported by evidence and information from trustworthy will provide guidance as to how to manage investment assets moving ahead.

There is presently evidence to support both outcomes.

The evidence to support the deflation outcome is pretty strong at the moment.

Bankruptcies continue at an historical pace.  Rental car giant, Hertz, filed for bankruptcy protection last week as the company looks to downsize its fleet of automobiles.  This is deflationary as the company is flooding the already saturated used car market with still more inventory.

According to “Market Watch” (Source: used car prices fell more than 12% in April from the prior year.  That’s a huge decline and is deflationary.

Another deflationary symptom:  retail landlords are sending out thousands default notices to their tenants who are unable to pay rent.  This from “Bloomberg” (Source:

Retail landlords are sending our thousands of default notices to tenants, a situation that could tip already ailing retailers into bankruptcy or total collapse.

Department stores, restaurants, apparel merchants and specialty chains have been getting the notices as property owners who’ve gone unpaid for as long as three months lose patience, according to people with knowledge of the matter and court filings.

Many retailers have filed for bankruptcy protection already in 2020 including The Shurman Retail Group (Papyrus), Lucky’s Market, Earth Fare, Noah’s Event Venue, Pier One, Art Van Furniture, Modell’s Sporting Goods, Food First Global Restaurants, True Religion, J Crew, Neiman Marcus, Stage Stores, Garden Fresh Restaurants and JC Penney.

This is a very deflationary force.

Deflation, correctly defined, is a contraction of the money supply.  In today’s economy, money is loaned into existence.  That means that money is debt.  While it takes some thinking to get your head around that idea, once you come to grips with the fact that money is debt, it makes perfect sense that when debt levels get too high and defaults on debt occur, the outcome is deflation.

A symptom of deflation is delayed spending by consumers because prices drop.  This has a devastating economic impact on a consumer spending dependent economy like the economy of the United States as people put off spending in the hopes that future prices will decline giving them a better deal on whatever it is they need or want to buy.

Inflation, on the other hand, is defined as an expansion of the money supply.  One of the symptoms of inflation is rising consumer prices.  As the Federal Reserve creates money out of thin air there is potential for inflation if enough money is created.

The Fed is creating money at a rate never before seen – that’s undoubtedly inflationary.

Whether we have deflation or inflation would determine how one manages the invested assets in an IRA, 401(k) or other investment accounts.  Because where we go will depend largely on Federal Reserve policy, I have long recommended a two-bucket approach to managing money – one bucket of assets managed to perform well in a deflationary environment and another bucket of assets that is managed to perform well in an inflationary environment.

In my view, the most likely outcome at this point would be deflation followed at some future point by inflation or even hyperinflation if the Fed continues on its current course of action.

Short-term, I believe it will be difficult to avoid deflation given Depression levels of unemployment and bankruptcies.  Consumer spending will slow, and defaults will grow.

But, Jerome Powell, Chair of the Federal Reserve, has indicated the Fed will print as much money as they need to print for as long as they need to print it.  The Fed will do “whatever is necessary” according to Chairman Powell.

Of course, one of the problems with that policy is that money creation doesn’t have immediate cause and effect.  The full effects of Fed policy may not be totally felt for months or even years.

Another obvious problem with that policy is that the Fed doesn’t know how much money printing is too much.  I have my doubts that they will guess correctly since their forecasting track record is utterly dismal.

As I have previously noted, the US Government will need to sell nearly $3 trillion in debt to fund spending in the third quarter of this fiscal year alone.  That’s hard to imagine.

To help, here are some photographs.

Text Box:
The $2 Trillion Dollar Stimulus Package in $100 Bills

Keep in mind that the debt that needs to be financed in the third quarter alone needs to be 50% greater than the 20,000 pallets of $100 bills pictured in the last photo.

Each of these pallets contains $100 million dollars.

Assuming an 18-wheeler can carry 10 pallets of $100,000,000 each, that means the truck could haul $1 billion.

If the recently passed stimulus package was funded in $100 bills, 2000 semi-trucks loaded with $100 bills would be needed to transport the money.

To fund government spending in the third quarter, 3000 more 18-wheelers would be required.

As remarkable as it is alarming.

At some point, should money printing of this magnitude continue, the deflation will likely give way to hyperinflation.

The tipping point for inflation to appear in earnest is when the Fed has pumped so much money into the system that people begin to expect higher prices.  This is exactly the opposite of the price expectations for deflation.

When the inflation tipping point is reached and consumers expect higher prices, they begin to spend money faster to avoid paying higher prices for the items they desire.  It’s this spending pattern that causes inflation.

At this point, I am of the opinion that we will see short-term deflation followed by inflation unless the Fed changes course which also seems unlikely at this point and under current leadership.

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.  

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: (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:  “Business Insider” reported that the company was considering bankruptcy (Source:

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: 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: (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:  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.