Thomas Jefferson – Dennis Tubbergen

An Artificial Economy

The March “You May Not Know Report” discusses how the current economy (since the time of the Great Financial Crisis) is artificial- the result of easy money policies by the Federal Reserve and government stimulus.

History teaches us that when governments overspend and central banks over print, eventually, reality sets in. One of the founding fathers, Thomas Jefferson, told us that we could expect inflation followed by deflation and that is exactly the track on which we now find ourselves.

Inflation has not subsided; the most recent data shows that inflation is accelerating exactly as Jefferson suggested it would. And Americans are suffering as a result. There are now also signs of deflation setting in as well. This from Michael Maharrey writing for Schiff Gold (Source: https://schiffgold.com/commentaries/this-strong-economy-is-a-facade-built-out-of-debt/):

Retail sales surged in January, creating the impression that the economy is humming along nicely. After all, there can’t be a problem if consumers are out there consuming, right?

But a lot of people are ignoring a key question: how are people paying for this shopping spree?

As it turns out, they’re putting a lot of this spending on credit cards.

Even with a big 1.8% decline in retail sales in December, revolving credit, primarily reflecting credit card debt, grew by another $7.2 billion that month, a 7.3% increase.

To put the numbers into perspective, the annual increase in 2019, prior to the pandemic, was 3.6%. It’s pretty clear that Americans are still heavily relying on credit cards to make ends meet.

Meanwhile, household debt rose by $394 billion in the fourth quarter of 2022. It was the largest quarter-on-quarter increase in household debt in two decades.

Debt balances have risen $2.7 trillion higher than they were at the beginning of the pandemic.

Clearly, this isn’t a sign of a healthy economy. Americans are spending more on everything thanks to rampant price inflation that doesn’t appear to be waning, and they’re relying on credit cards to do it. Saving has plunged. This isn’t a sound economic foundation, and it isn’t even sustainable. Credit cards have a nasty thing called a limit. And with credit card interest rates at record-high levels, people will reach those limits pretty quickly.

I ran across something the other day that provides an even more striking example of just how reliant the US economy is on debt.

A company called the Wisconsin Cheeseman sells gift packs of cheese, candies and other treats. And you can buy the gifts on their in-house credit plan.

Let this sink in for a moment. A primary pitch from a gift company is that you can buy on credit.

The annual percentage rate will run you a modest 5.75% to a hefty 25.99% depending on the state. (Most states are currently above 20%. But don’t worry. Your payments can be as low as $10 a month.) Just don’t think about the fact that you’ll probably be paying for this cheese for years to come.

There are other companies facilitating borrowing this doesn’t even show up in the official debt figures.

The use of BNLP services such as Affirm, Afterpay and Klarna has exploded in the last couple of years. These services allow consumers to pay off purchases through installment payments, often interest-free. In a December 2021 report, Cardify CEO Derrick Fung said buy now, pay later has rapidly become more mainstream.

“The consumer over the last 12 months has become more compulsive and BNPL products are the result of us being locked up for too long and wanting more instant gratification,” he said.

Buy now, pay later is a convenient way to spread out spending, but there is a dark side. It encourages consumers to spend more. Nearly 46% of those polled said they would spend less if BNPL wasn’t an option.

The rise of buy now pay later (BNPL) is another sign of a deeply dysfunctional economy. Americans are piling up millions of dollars of additional debt using BNPL on top of their credit cards.

So, while the mainstream pundits tell you the economy is strong, they are looking at a facade. It’s a house of cards. And eventually, it will collapse.

American consumers continue to “support the economy” by spending money today despite rising prices. But they’re borrowing to do it. Tomorrow is fast approaching. And with it depleted savings, higher interest rates, and looming credit card limits. This is simply not a sustainable trajectory, no matter how the mainstream press tries to spin it.

Consumers are struggling. That means that the deflation part of the cycle that Jefferson warned us about may be about to emerge in earnest.

As I have stated in the past (and there are many analysts who would disagree with me), I expect that the Federal Reserve will reverse course and begin pursuing easy money policies once again.

Should I be right about this, we will have to wait and see if the Fed can be effective. I have my doubts. Consumers are accumulating too much debt.

The chart below breaks down debt accumulation by age. Alarmingly, those age 60 plus are accumulating more debt on a percentage basis than other age groups. That should serve as a huge red flag and warning sign.

This time will be no different.

Deflation will, at some point, become the prevalent economic force.

That will be more bad news for stocks and real estate.

Stocks are already feeling it, and real estate is now beginning to dramatically unwind in many parts of the country.

The best advice that I can offer is to have some of your assets that will be protected from a prolonged decline in stocks and real estate and other assets that will perform well in an inflationary environment.

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

Weak Stocks, Raging Inflation and Where We Probably Go From Here

Financial markets continued to reflect a weakening economy last week. Stocks, measured by the Standard and Poor’s 500 are now down nearly 25% year-to-date. This from “Yahoo Finance” (Source: https://ca.finance.yahoo.com/news/asian-stocks-set-fall-global-223134465.html)

US stocks suffered their worst monthly rout since March 2020 after markets were repeatedly pummeled by the Federal Reserve’s resolve to keep raising interest rates until inflation is under control.

The S&P 500 closed a volatile session lower. The index posted its third straight quarter of losses for the first time since 2009. US Treasuries dropped Friday after a late selloff into the month-end, with the benchmark 10-year yield around 3.82%.

Fed Vice Chair Lael Brainard briefly assuaged concerns on Friday after she acknowledged the need to monitor the impact rising borrowing costs could have on global-market stability. But markets continued to be on the edge as investors contended with continued strength in personal consumption expenditure, one of the Fed’s preferred inflation gauges.

Risk assets have been in a tailspin since the central bank delivered a third jumbo hike last week and officials repeatedly warned of more pain to come. UK markets added to the stress this week, after the government unveiled sweeping tax cuts that threatened to exacerbate inflationary pressures, and the Bank of England attempted to manage the mayhem that ensued.

Investors are now awaiting jobs data next week for further clues about the Fed’s rate-hike trajectory. Upcoming inflation and GDP readings will also provide details on whether price pressures are easing meaningfully. All eyes will be on the earnings season, which starts next month, for insight into how companies are managing through headwinds that include a strong dollar, rising expenses and slowing demand. Fears of a global recession are still mounting as the threat of higher rates saps growth.

I find it interesting how perspective has changed over time. The Fed increased interest rates by .75% to 3.25% and it’s called a ‘jumbo’ rate hike. The fact that the S&P 500 is down nearly 25% year-to-date and the Fed Funds rate is just over 3% shows you just how addicted to easy money this market and economy have been.

The Fed narrative is that interest rates are being increased to get inflation under control. But, as I have often noted, it is unlikely that inflation is subdued until we get real positive interest rates. We are still a long way from that and inflation is not yet slowing.

The July reduction in the core inflation rate turned out to be the exception rather than a new, viable trend. This from “Wolf Street” (Source: https://wolfstreet.com/2022/09/30/feds-favored-inflation-index-says-underlying-inflation-just-isnt-slowing-down/):

Just briefly here: The Fed uses the “core PCE” inflation index, released by the Bureau of Economic Analysis, as yardstick for its inflation target. This “core PCE” index – the overall PCE inflation index minus the volatile food and energy components – is therefore crucial in the current rate-hike scenario, amid red-hot inflation, when everyone wants to know when inflation is finally going to cry uncle.

Some folks thought that happened in July, when the month-to-month “core PCE” inflation slowed to “0%” (rounded down).

Turns out this much-ballyhooed month-to-month “core PCE” reading in July of “0%” was just a one-off event. In August, according to the BEA today, the core-PCE inflation index jumped by 0.6%, same as the multi-decade records in June 2022 and in April 2021 (all rounded to 0.6%). As Powell had said during the FOMC press conference: Underlying inflation is just not slowing down.

This “core PCE” is the lowest lowball inflation index the US government provides. But it is crucial in figuring out where the Fed’s monetary policy might go, and how far the Fed might go with its rate hikes, and when it might pause.

Compared to a year ago, the “core PCE” price index rose 4.9% in August, up from 4.7% in July.

This year-over-year measure is what the Fed uses for its 2% inflation target. But given the huge volatility in inflation last year, Powell said that they would be looking at month-to-month developments to get a feel of where inflation might be headed. They’re looking for “compelling” evidence that inflation is headed back to the 2% target.

Seems we now find ourselves in a place where financial assets are losing value, but inflation is still a huge economic factor. The question remains if the Fed will maintain its resolve to continue to increase interest rates until the 2% target is reached, or if they will capitulate and once again look to support the financial markets and the economy via easy money policies.

I believe the latter is more likely by sometime next year which will likely mean a continued wild ride for financial markets.

The Bank of England just reversed its tightening program, doing an about face and once again beginning to create currency in order to buy gilts, or bonds issued by the British government.

Past guest on the RLA Radio Program, Alasdair Macleod, had this to say on the topic (Source: https://www.goldmoney.com/research/the-crisis-is-upon-us)

The big news was the collapse of the UK gilt market’s long maturities, which required the Bank of England to intervene, buying £65 bn in long gilts on Wednesday. The situation arose out of pension funds leveraging their gilt portfolios through interest rate swaps and repurchase agreements up to seven times in an attempt to match their actuarial liabilities through liability-driven investing (LDI). With over £1 trillion outstanding, a doom-loop of selling to meet margin calls was an emerging crisis which had to be stopped.

It’s been a wake-up call for investors who were not even aware of LDI’s, let alone the Lehman moment they brought about. LDI’s are also common in the EU and the US so the problem is unlikely to be confined to London.

The pension funds in the UK had taken on a lot of leverage to attempt to get returns that would allow them to meet their obligations. Pension funds in the US have done the same thing as I have written about previously.

It would not be surprising to see something similar happen here. That would force the fed to reverse course and begin easy money policies once again. While the crisis even here in the US may not be pensions, there are a number of other crisis-type events that could trigger the Fed’s policy reversal.

While I don’t know what that event might be, I expect it will happen and we will once again see the Fed pursuing easy money policies.

Ultimately, we will not avoid a deflationary event that will be unlike anything any of us have ever seen in my view.

As I write this the sage wisdom of Thomas Jefferson keeps running through my mind (if you’re a long-time reader, you’ve heard this before):

“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 very continent their fathers conquered.”

Forecast on Target

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

THEY ARE VASTLY DIFFERENT.

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

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

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

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

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

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

Can those numbers be accurate?

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

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

Wow.

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

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

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

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

I thought that Wayfair was doing quite well.

I guess not.

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

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

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

Unfortunately, this is just the tip of the iceberg.

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

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

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

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

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

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

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: https://www.bloomberg.com/graphics/2021-central-banks-binge/). 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 www.RetirementLifestyleAdvocates.com. Our webinars, podcasts, and newsletters can be found there.

Thomas Jefferson’s Prediction is Coming True

In last week’s post, I looked at various sectors of the economy and offered perspective on these sectors as we move into the New Year. To briefly summarize, I am bullish on companies that can benefit from commodity price inflation including mining companies.

Ever since the book “New Retirement Rules” was published more than five years ago, I have been forecasting one of two economic outcomes. Deflation or inflation followed by deflation.

It now seems fairly evident that the latter is the path on which we are traveling.

This chart illustrates the growth in the M2 money supply. M2 is immediate money as well as ‘near-immediate money’. M2 includes currency and deposits that are immediately available like checking accounts and money that is available but may be subject to withdrawal penalties like time deposits and money market accounts.

Notice from the chart (Source: https://www.silverdoctors.com/headlines/world-news/us-money-supply-was-up-37-percent-in-november/) that the money supply increased by 37% year-over-year in November.

That is simply mind-boggling when you let that fact sink in.

The chart was originally published in an article authored by Ryan McMaken of the Mises Institute. In the piece, Mr. McMaken noted that the Fed’s assets are up about 600% from just before the 2008 financial crisis. The Fed’s balance sheet now stands at $7.2 trillion which, in plain terms, means that is how much money the Fed has literally created out of thin air.

History teaches us that massive levels of money creation leads to price inflation; should the money printing continue long enough at a high level; currencies are eventually affected. Money creation happens when debt levels are too high to manage using ‘honest’ means. When currencies fail, debts don’t vanish, they are simply redenominated in a new currency that the population accepts.

That’s when deflation kicks in.

Collectively, we’ve wandered a long way from the vision of our founding fathers in many ways. As far as currency is concerned, Thomas Jefferson gave us sage advice that we have totally ignored. Here are a couple of relevant quotes from Mr. Jefferson:

“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.”

“I believe that banking institutions are more dangerous to our liberties than standing armies.”

Now, it seems, that Mr. Jefferson’s warnings of inflation followed by deflation are becoming reality, barring a pro-active currency reset which seems unlikely.

Absent a proactive reset, the reactive reset predicted by Mr. Jefferson will be the ultimate outcome.

As noted, we are already on that path. The signs of inflation are here and intensifying.

This chart of corn prices shows that corn prices have risen about 40% since the first of August.

Granted, corn prices have been depressed, which has some analysts arguing that prices were due to rebound. But it’s interesting that corn prices rose 40% and the M2 money supply increased by about the same percentage year-over-year.

It’s not just corn prices moving up, the same pattern can be seen in many commodities as we have been noting on our weekly update webinars. (The webinar replays can be found at www.RetirementLifestyleAdvocates.com. The replays are also available via the Your RLA app which is also available at www.RetirementLifestyleAdvocates.com.)

This chart shows the soybean index, the grains index, and the agricultural and livestock index all rising dramatically since early 2020 when the extremely aggressive money creation began.

In rough terms, the soybean index is up about the same 40% as is corn, the more general grains index is up slightly less than that, and the agricultural and livestock index is up a bit more than 30%.

This is significant food price inflation in a noticeably short period of time.

Does this rapid, massive inflation signal the beginning of hyperinflation?

Past radio guest Jeff Deist, President of the Mises Group, recently penned a piece that suggested Americans read the book “The Death of Money” by Adam Fergussen. I have read the book and would also suggest adding it to your reading list.

Mr. Deist correctly notes that many Americans can’t even consider the prospect of hyper-inflation. That’s something that happens in faraway places, banana republics if you will, not in the world’s largest and most prosperous economy. Here is a bit from Mr. Deist’s piece (I’ve added the emphasis):

Ours is a nation willfully lacking in knowledge and understanding of money; a cynic might think this lack of apprehension is by design. Money is seldom discussed in schools, popular media, or politics. And almost a century after the stark lessons of 1923 Germany, the West is convinced it can’t happen here. In our overwhelming material abundance, aided by the natural deflationary pressures of markets, we simply have lost our ability to imagine a hyperinflationary scenario. Sure, there have been currency meltdowns since the two world wars in places like Yugoslavia, Zimbabwe, Bulgaria, and Argentina. Yes, Venezuela and arguably Turkey face currency crises today. But we need not worry about this, because modern central banks—especially the US Federal Reserve and the European Central Bank—have tamed inflation through sheer technocratic expertise and a willingness to use extraordinary monetary policy tools. Asset purchases and balance sheet expansion, ultralow or negative interest rates, and a determination to provide as much “liquidity” as an economy needs are the new normal for central bankers. Thanks to this open embrace of centrally planned money, former Fed chair (and likely future Treasury secretary) Janet Yellen assured us we need not expect another financial crisis in our lifetime.

Despite the assurances of central bankers that everything is under control and there is nothing to worry about, money creation has been off the charts and is now beginning to create inflation, food inflation in particular.

It is inflation in essentials that accelerates hyperinflation. Once the average citizen fully wakes up to the fact that it’s better to have something tangible than to have fiat currency; we will reach a tipping point. At that tipping point, the price inflation numbers go off the charts.

Given the inflation numbers that I reviewed in this week’s “Portfolio Watch”, that tipping point is fast approaching. Our team has been working for many years to help people prepare for this inflation followed by deflation outcome that now seems more certain absent a thoughtful proactive currency reset.

Owning more tangible assets now before the tipping point is reached, will be key to surviving significant price inflation.

And, as for Ms. Yellen’s assurance that there will never be another financial crisis in our lifetime; I don’t find much comfort from it. History teaches us that never is an exceedingly long time and each time current policies have been pursued, the outcome has been the same, 100% of the time. Make sure you’re prepared.

Inevitable Outcomes?

While last week was quiet in the markets, over the long term, I expect markets to be anything but quiet; central bank policies will see to that.

I have long been critical of central bank policies and, truth be told, I am fundamentally opposed to private bankers controlling monetary policy which is the case worldwide today.

History teaches it never works in the long term. To think that private bankers are putting the interests of the public ahead of their own interests is as unrealistic as it is naïve.

Thomas Jefferson, one of the founding fathers who understood this well, had a lot to say on this topic. One of his quotes, becoming more famous due to present monetary policy rings true:

“If the American people ever allow private bankers to control the issue of their currency, first through inflation, then through deflation, the banks and corporations that will grow up around them will deprive the people of all property until they wake up homeless of the continent their Fathers conquered.”

Then there is this one, also attributable to Jefferson:

“I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”

While central banks, controlled by private bankers, still enjoy a fair amount of believability worldwide, the day is soon coming when the central bankers will be recognized as the cause of the problem rather than the solution to all things economic.

Francesco Brunamonti, writing for the Mises Institute had this to say in a piece he wrote recently titled, “Central Banks Are Just Getting Warmed Up” (Source: https://mises.org/wire/central-banks-are-just-getting-warmed) (emphasis added):

According to all central banks, one of the main problems they are called to solve is that countries cannot reach their inflation target of (close to but below) 2 percent. Even their religious trust in the long-discredited Phillips curve cannot explain why price inflation is low in many countries despite historically low unemployment rates. Nonetheless, central banks still enjoy immense credibility. It’s common to hear such sentences as “never bet against the Fed,” the “ECB has big bazooka primed”… and all market participants monitor each public meeting to understand what the next policy could be and how they should be positioned when it arrives.1

To reach the inflation targets and “stimulate the economy,” central banks regularly meet to devise ever-new stimulus programs, and do not despair when, inevitably, the one-off unconventional interventions quickly become the new normal. For example, the world-famous Quantitative Easing (QE) was supposed to be a one-time emergency response to the 2008 crisis, except it has now become one of the many tools of regular monetary policy, and a key component in market demand for financial assets. An undesired but perfectly predictable side effect of QE is that it allows governments to increase their spending without care for the deficit, and still pay negative interest rates in real terms, so no discipline is imposed, except for some empty promise to reduce the deficit sometime in the future, if the opportunity comes. Several Western countries have embarked in QE, some in many consecutive rounds, but there is no mention of a reverse-course, an eventual, opposite Quantitative Tightening (QT). Only the United States have tried QT, and the Fed has even announced that they were on a stable and data-driven process back to normalization, to try to maintain their reputation of scientific management of the monetary aggregates. However, the Fed had to quickly abandon the plan, and its balance sheet remains massively bloated under any historical measure. It is abundantly clear that markets are doing well only thanks to monetary life support, and the help provided by QE cannot be taken out without provoking a serious crisis across all the whole investable universe.2 Now the Fed has embarked in a new round of QE, although Powell denied in the most absolute terms that it is QE.

Some comments.

First, Mr. Brunamonti states that central bankers have ‘religious trust’; in the Phillips curve. The Phillips curve simply theorizes that the relationship between unemployment and inflation is inverse. In other words, when unemployment is low, inflation is high and when unemployment is high, inflation is low.

The Phillips Curve was first discussed by its developer Bill Phillips in 1958. In developing this economic theory, he studied nearly 100 years of wage inflation and unemployment in the UK. After his theory was introduced, it was met with skepticism by other notable economists such as Edmund Phelps and Milton Friedman who argued that wages would automatically adjust to the market on an inflation-adjusted basis.

Given that the official unemployment rate is very low as is the official inflation rate, that would seem to make the case for Phelps and Friedman’s argument.

The bigger point here is that central banks, as Mr. Brunamonti states, are regularly meeting to try to figure out new, ever-more innovative ways to stimulate the world economy.

Consider central bank actions since the financial crisis and you’d have to conclude that central banks are increasingly desperate.

Remember 10 years ago when the central bankers decided to engage in a program of quantitative easing, a.k.a. money creation out of thin air coupled with zero interest rates? As Mr. Brunamonti correctly states it was to be a one-time, emergency measure that would never be used again.

Yet, despite the insistence that interest rates would return to more normal levels, it took only a couple of rate hikes to throw the financial markets into absolute turmoil.

Now, in addition to negative interest rates (not just zero interest rates), central bankers are continuing their program of quantitative easing although according to Mr. Powell, current Federal Reserve Chair, we are not to call it quantitative easing.

This latest decision to engage in quantitative easing (I don’t know what else to call it) came about so the Fed could prop up the repo market.

The repo market refers to repurchase agreements or the lending in which financial institutions engage among themselves. Last month, the Fed injected cash into this market when the interest rate for overnight loans jumped from a couple percent to nearly 10%.

The Fed hadn’t been forced to put cash into this market in over 10 years, since the time of the financial crisis and the failure of Lehman.

There was never an official explanation given for the Fed’s latest foray into the repo market, but, reading between the lines, one would have to assume that there were banks worried about getting repaid on their short term loans perhaps because a big bank was once again looking shaky?

This suggests that despite more aggressive monetary policy – negative interest rates and money creation – there are once again problems with the financial system.

Makes me wonder what money experiment central bankers might try next although I am very sure they will come up with something.

Regardless as to what the next money experiment is, Mr. Brunamonti has, in my view, stated the inevitable outcome of such an experiment.

This from the article quoted above (emphasis added):

There is today a veritable alphabet soup of monetary policy tools (QE, OMT, TLTRO, APP, ABCP…) and the result is that no asset class is free of distortion, including the key markets of foreign exchange and corporate debt. All these tools are only more of the same: they apply the same means (create new money out of thin air) to reach the same end (artificially decrease the interest rate). Clearly, these interventions have the same side effects as a regular, conventional decrease of the interest rate. Chief among these problems are a general hunt for yield in all markets, the setting in motion of boom-bust cycles, and the inability for pension funds to provide savers with a long-term real return to support retirement and future consumption. Far from being problems confined to banks and the ultra-rich, this diverts resources from savers and wealth generators to the politically-connected.

The behavior of central bankers is not likely to change. That means your investment behavior needs to change.

You need to have a deflation hedge to protect you from boom and bust cycles and an inflation hedge to protect the purchasing power of your savings.