The past few weeks have been fairly ‘quiet’ regarding bank failures, but, much like a hurricane, we’re in a bit of an ‘eye of the storm’. There are several graphics that follow which will hopefully reinforce the main point – the crisis is nowhere near over. While getting direct information has become quite challenging, we maintain several data series that were previously discontinued by the publishers.
Graphic #1 – Monthly Changes in Bank Deposits – as of March 2023
In the chart above, you’ll note the timeline on the x axis. The data stream begins in 1971. March of 2023 just provided the LARGEST single month drop in bank deposits – EVER. We had nearly a trillion dollar bank run during the month of March and not a single word was uttered by any official, policymaker, or media talking head. This should not be much of a surprise – the financial industry and government have learned extremely well the lessons of Cyprus and other places in the past decade. Transparency is the mortal enemy of a fiat money system.
Let’s not split hairs here – there isn’t a single commodity-backed currency on the planet at this time so everyone else is doing the same thing we’re doing here in the US.
1930-1932 Reboot?
It certainly appears that is a distinct possibility. We’ve opined for many years now, much to the chagrin of readers, that the not-so-USFed would indeed try to rescue the dollar one last time before the cycle ended. What we’ve seen over the past few months are the possible beginnings of a contraction in the monetary aggregates (Deflation). We’ll let them graphic below speak for itself:
The above graphic is M1 in the United States. The timeline starts in 2000. The incredible spike towards the middle/end of 2019 is responsible for the massive spike in price inflation that we’ve seen in the past 18 months. There’s a delay of between 9 and 21 months from spikes in money supply to the knock-on price increases. Note that the spike in M1 started pre-pandemic.
We’ll show one more chart before we close this brief update. United States M2 – now the broadest (officially) tracked monetary aggregate. It’s painting a similar picture. The timeline is set to that of the M1 graphic above for easy comparison.
M2 tends to move more gradually than M1 because it contains more subtypes of money. We’ll post a chart at the end of the piece where you can see the various components of the aggregates. But what is noteworthy about the above M2 graphic – we’re seeing the first actual deflation in almost a century. This isn’t price deflation (falling prices), this is the actual removal of dollars from the system. If the deflation of 1930-32 was truly the accident that everyone claimed, then policymakers ought to know well enough to avoid it again.
In a fiat monetary system, only the central bank can remove money from the system. Ours did it at the beginning of the depression and it certainly looks as though they’re doing it again. We’ll deal with the fallout that will result in the next update. To give a small hint – think about debt that was taken when the money supply was at its peak.
The chart of monetary aggregates in the United States is directly below.
-Not sure the words of our fabulous ‘leaders’ are resonating. I’ve had several calls today from people I know asking about this whole situation. Some of them are business owners wondering about the safety of their operating accounts. It’s very hard for them to keep these in cash. I did recommend switching to credit unions wherever possible. This should have been done 15 years ago, but better late than never.
-Stock prices and health of a bank are NOT directly related. Banks will cannibalize each other and what I’m seeing on several of these medium to smaller banks is a pretty overt effort to drive the share prices down – probably so they can be bought out by the bigs at a steep discount. Short positions are way up. I’ll bet more than a few of these make the Reg SHO lists this week for failures to deliver (naked shorting – yes it still goes on).
-The promise of a full backstop by the not-so-USFed and treasury is telling. Yellen, in particular, should be skewered. You can’t bailout anyone vis a vis the government without using taxpayer dollars. It’s that simple. I’ve gotten a couple of emails as well from My Two Cents readers who claim that the coupons they were issued last week are still in force – in other words, there’s NO backstop and they might get something when everything is wound down. I’ve asked for documentation and will post it to the group if/when I get it.
-If the not-so-USFed does the bailing out, then it’ll be inflationary. They’re double talking as usual, trying to have it both ways. Can’t be a dove and a hawk on inflation at the same time. I’d say they’ll sacrifice the dollar further to save their precious financial system – that nobody needs anyway.
-Beware of bail-ins. It’s legal now – since 2013. Credit unions will be safer than commercial banks. Again, that recommendation is at least 10 years old. Credit unions are not allowed to get into the stinkpot of derivatives and they’re not allowed to run broker/dealer operations either. Not saying they’re immune, but as fast as safety goes, I’d give commercial banks a 1/10 and credit unions a 6 or 7 for the reasons stated above. However, if we end up with a CBDC out of this, then credit unions won’t offer any protection at all.
-Direct registration of securities (stocks only) is advisable. Direct registration takes the shares out of ‘street name’ and your ownership is registered through the stock issuer’s transfer agent rather than your broker. This is a MUST, but it’s for individual stocks. Some mutual funds offer partial protection in this regard, but only if you bought your mutual fund units direct through the fund issuer. If you got it through a brokerage, this doesn’t apply. If there are questions on direct registration, please let me know. I have an article from 2013 that runs through the pros/cons and process. It’s not hard to do. DRS does not apply to ETFs, closed-end funds, and mutual funds purchased through a brokerage. If you own stocks through a brokerage, you can DRS them easily, however.
Opinion – ignore the politicization of this. Stick to the events. Most of the financial system is outside the purview of our politicians – at least on a day to day basis. This isn’t Biden’s mess or Trump’s mess. It’s the not-so-USFed’s mess. They’re supposed to be stewards of the financial system even though it falls outside their dual mandate of price stability and maximum employment. But remember, the chartered banks own the not-so-USFed, NOT the other way around. Talk about a recipe for malfeasance.
Yes, we are still alive! And kicking too – at least most days! It’s been two years since we published anything, but we’ve been very busy, nonetheless. We’d like to take a moment to point out a few indisputable (and very provable) facts.
Let’s play connect the dots, shall we? This is a bit off-topic of the day but might be instructive for some in your spheres of influence.
1) MMT (Modern Monetary Theory) is in full force. The ‘Fed’ – and the rest of the world’s central banks – are printing funny money like crazy. Hence no more M2 here in the US. For reference, M3 was discontinued in March 2006.
2) That funny money is pushing consumer prices at an admitted rate of 4+% annualized. Let’s assume that’s true even though we know it’s much higher.
3) GDP in every major economy is measured in currency, NOT units of goods and services produced/purchased/sold.
Therefore, even if every single American business, middleman, and consumer conducted the exact same amount of economic activity (produced/sold/purchased) as last year, GDP will STILL rise by more than 4% on an annualized basis. What exactly is going on here?
We all know. The international bankers are doing exactly what Thomas Jefferson said they would do – robbing us blind first by inflation, then by deflation. Lest I digress too much, GDP is NOT an accurate way to measure any kind of economic growth in its current form, especially because one of the components is government spending (look at the deficit spending last year alone!).
The Cobb-Douglas production model that Graham and I tweaked to include more modern components of the global economy and have been running for the last decade STILL shows America in a protracted recession. It’s not a perfect model, but it’s a lot better than the one that is spouted about 4 times a year on CNBC, etc. If you haven’t already, feel free to download, read, and spread our 2019 commentary on Modern Monetary Theory. The link is at the end of the email.
Spread it far and wide. Delete our names if you wish. We want neither credit nor accolades. We just want people who are looking for a little common sense to know there’s some out there. The article isn’t perfect, but it’s the effort of two guys who love their country and feel stewardship of the blessings we’ve been given is very important.
Next up? The ’new’ Bretton Woods and an analysis of Schwab’s ‘Great Reset’. Purely in economic terms.
Neel Kashkari is hardly a household name. We’d speculate that most people wouldn’t recognize it. Neel was the Goldman Sachs alum who was hand-picked by Hank “A Strong Dollar is in the National Interest” Paulson back in 2008 to handle the disbursement of the TARP bailout money. That’s the $750 billion bailout that was initially shot down by the House, but eventually passed a few days later after Paulson did some rather heavy handed and unapologetic arm-twisting.
We’re going to link up a couple of videos throughout as sort of a walk down memory lane. 2008 was, after all, a dozen years ago already.
Ok, so what? What does this have to do with Neel? Well, after the bailout was passed, an odd thing happened. Instead of being used to buy troubled assets, the money went right to the banks. Kashkari was grilled by then Rep. Dennis Kucinich about his activities. Kashkari had already mastered the thousand-yard stare while being grilled which immediately caught our attention. He’d been trained for this.
After the brewing scandal was snuffed out by further epic plunges in global financial indices, Kashkari was quietly taken off the scene and ran like a refugee to a cabin in the woods of Northern California. He would remain there until 2016 when he was called off the bench to head up the Minneapolis Fed. That really got our attention. From a cabin in the woods to an extremely high level position in one of the most corrupt enterprises man has ever known after spending more than a half dozen years in exile? We should be so lucky.
Unfortunately, that’s not where the saga ends. Lately Neel Kashkari has been going around the talk show circuit saying that the only way to save the USEconomy is by doing essentially a full lock down on the US. Again, we’ll post some link to videos. We think Kashkari’s words carry a bit more weight just because of his pedigree and prior experience in sticking it to the taxpayers of this crumbling nation. How does a lock down save the economy?
We have a theory and we’re going to lay it out. The graphic below shows the rather alarming – and rapid – departure from the USDollar from two of the biggest up and coming economic powers out there: Russia and China. There are other countries engaged in similar activity and Andy has spoken on Liberty Talk Radio about these events for several years.
The USDollar’s reserve currency status is gone.It was in serious jeopardy going into this year, but after the blowout federal deficit even the dimmest bulb can see there is no way and certainly no will to ever pay off the national debt. Hyperinflation might be a tactic and we’ll talk about that eventually as well, but countries are bailing. It should be noted that the US is sanctioning EVERY SINGLE ONE of these countries at this moment and urging allies to do the same.
Other tripe and banal reasons are given, but this is clearly a move to protect the Dollar as long as possible. The house of cards is shaking and is about to get blown away like the houses of the first two of the three little pigs.
So why the call for a lock down? We’ll use basic economics to lay out our theory. When global demand for dollars decreases, those dollars need to go somewhere. If countries are using other currencies for international trade, their FOREX reserves will be changed to reflect this. Simply put, they won’t need to keep as many dollars. And why buy USGovt debt? It pays next to nothing – well below even the most cooked levels of price inflation. And there’s the very real possibility of switching to negative yields – especially in the series of shorter maturities.
These unneeded, unwanted dollars are starting to come home. Add to that all the funny money that has been created by the not-so-USFed to ‘buy everything’ in sight to keep financial markets stable. There are no reserve requirements, so the banking level can create massive inflation from making new loans. This is why the NASDAQ and S&P500 are at record highs. The repatriated dollars are being poured into financial markets and blowing up all manner of bubbles.
What is also happening is that consumer price levels are starting to rise at frightening levels. The change from May to June was .5654%, and the change from June to July was .5867%. These are annualized rates of around 7%. The central bank’s ‘comfort zone’ ends around 2.5% annualized.
Kashkari’s argument for a lock down now makes perfect sense. If America goes back to lock down, we’ll see consumer prices drop from lack of demand as was seen in March, April, and May. A lock down would hide the effects of all this funny money flowing back into the US.
Let’s fold into the mix our paper on Modern Monetary Theory from last summer. The first premise is that a central bank/government that acts as its own bank cannot go broke. It can print until the lights go out in Tennessee. BUT.. when consumer prices start to go up, the next step is raise taxes to pull money from the system. There have been quite a few articles talking about higher taxes. With real unemployment and underemployment where they are, does anyone think a tax increase would fly?
A lock down might not fly either, but any decrease in aggregate demand that Kashkari is able to squeeze from his bully pulpit is going to ‘help’ the situation. Note – it’s not going to help the average person. This is a move to protect a broken currency regime, the institution that brought it to fruition, and the total corruption of fiat currencies in general.
Keep in mind that the partial lockdowns from March through June caused a 33% contraction in GDP according to the USGovt. Our model showed a 43% contraction. Given that we use a totally different methodology, the difference isn’t surprising. Since the USGovt’s GDP model uses the purchase of finished goods rather than intermediate goods, we can say that aggregate demand fell by about a third in the second quarter. You can see in the chart above the impact that had on consumer prices. Kashkari and his ilk are looking for more of the same.
Another such drop in prices would enable them to repatriate even more dollars without it become too noticeable in the real economy. We might get Dow 30K, NASDAQ 14K and S&P500 4K, but that is the ‘good’ kind of price inflation. If consumer goods went up in proportionate amounts, there would be even more rioting than there is at present.
Why not just destroy the unused currency? Most of it is digital anyway. That’s the most common question we are expecting. It is very important to understand that true deflation doesn’t occur unless money is actually destroyed. Falling prices do not mean deflation. You can create a little deflation on your own if you pull all the ‘money’ from your bank account in cash, then set it on fire. Why would I do that, I can still use it!!! And that’s the answer. The repatriated dollars aren’t going to be destroyed because they can still be used. Not by Mr. and Mrs. Joe Average, but by the banking system.
The next step in this decoupling process is for major trading partners to start requiring the US to settle transactions in some other currency or possibly even gold. Make no mistake, that is why this campaign of sanctions and threats of military action are in place against countries like Venezuela and Syria. When in doubt, follow the money. Forget the terrorism for a minute and follow the money. Nicholas Maduro and Bashar al-Assad are a clear and present danger to dollar hegemony because they’re stepping out of the dollar for international trade. Andy analyzed the situation in Syria almost 7 years ago and accurately predicted that Russia would not leave Syria hang out to dry. And even more importantly, WHY they wouldn’t leave Syria – and why they have yet to do so.
On a day the S&P500 recouped ALL of its losses due to a global pandemic that the experts are telling us is going to only get worse, we can look at the above mechanism and understand exactly how all those gains took place. It is perhaps ironic that over the past few month the USDollar has struggled mightily – even against other fiat currencies backed by nothing but the never-ending stream of hot air from bankers the likes of Neel Kashkari.
Graham Mehl is a pseudonym. He is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as a policy analyst for several hedge funds and has consulted for several central banks. Among his research interests are finding more reliable measurements of economic activity than those currently available to the investing public using econometric modeling and collaborating on the development of economic educational tools.
Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of econometric modeling with constant reflection of economic history. His focus is also educating young people about the science of Economics using an evidence-based approach
Andy’s Notes: As always a big ‘thank you’ to Joe Cristiano for having me back on the show. Pieces are beginning to fall into place regarding the economic situation both here in the US and abroad. Incidentally, Graham and I ran our alternative GDP model for the second quarter in the US and it showed a -43% ‘growth’ rate, which was 10 percentage points lower than what the Commerce Department reported.
Joe and I discussed MMT, the USDollar as world reserve, inflation, price inflation, actions overseas by trade partners and predators alike, and finished up with some fairly straightforward advice to listeners. This is actionable general financial information. If you’ve read or listened for any length of time you’ve heard this before, but there are new people coming into the arena, so we felt a little repetition might be a good thing. Thanks again Joe!
Andy’s Notes: During 2010, the US Consumer paid down a significant amount of debt. It scared the moneychangers quite magnificently. In an fractional reserve, fiat monetary system, ‘growth’ comes at least in part by inflation of the money supply and the subsequent effect on prices. One of the biggest ways monetary inflation occurs is when money is placed on deposit at a bank and nearly all of that money is then lent out by the bank – at interest. Every loan increases the money supply. When loans stop?
The summer data will be very interesting to say the least. Keep in mind that this paydown happened with the federal government handing out cash – again. It could very well be that in 2020, much like 2007, the ‘stimulus’ money went to help repair balance sheets rather than to accumulate more stuff.
As always it was a pleasure getting together with Joe Cristiano. We never seem to be able to stop at our 20 minute target, however! We talking about the Russia-China trade situation where they’re slowing backing out of the $USD, what happens when global demand for the $USD drops, some mild to moderate capital and price controls that have emerged under the cover of NCV and other useful tidbits. The link for the YouTube video is below.
For the past 8 years, wise investors have chosen to ignore the confusion and in many cases unplugged themselves from the traditional financial system, opting to become their own central bank and invest in gold and silver. Others have used a hybrid model of investing partially in the physical metals and partially in shares of precious metal miners and related companies. This has undoubtedly been the right move. The recent correction included, gold prices alone are up an amazing 45% just since my Survival Guide was published on 10/23/2006. For those who have been in since the beginning of the move, the gains have been even larger.
Many in the mainstream press will quickly scoff at the idea of holding Gold and Silver because they don’t pay dividends. So to be fair to their argument, I calculated the movement in the S&P500 Dividend Reinvested Index from 10/31/2006 to the last report at the end of this past July. Even with dividend reinvestment, the S&P500 is down 4.78% while Gold is up nearly 50%. This takes the primary argument against owning real money and blows its doors off. Granted, we’re only looking at a period of not quite 2 years here, but given the macroeconomic events that have transpired it is clear that real money was the way to go.
The question we need to ask now is pretty simple. Is anything going to change moving forward that will reverse this trend? Or, put another way, what would need to happen to make precious metals unsuitable for investment? There are dozens of prerequisites, but we’ll stick to the Big Four.
Since precious metals, particularly Gold are proxies for inflation, we would need to see worldwide inflation slow dramatically. A quick look at the chart below tells us this is nowhere near happening. The global supply of money in US$ terms has increased by 12.4% since mid-2007 from $53.7 Trillion to $60.3 Trillion. We’re still inflating like crazy. (Chart Compliments of dollardaze.org)
Geopolitical risk would have to decrease. Risk tends to be friendly towards precious metals. This because deep down, most people understand that fiat money is not real money, but only has value because its backing government says it does. Its value is based almost entirely on perception. Wars and rumors of wars tend to undermine political and therefore financial stability. On the other hand, gold has been recognized as real money for thousands of years because it is desirable, portable, homogeneous, and scarce. Scarcity and fiat money are 180 degrees diametrically opposite to each other.
Systemic risk to the financial system would need to be swept away. This is no simple task and, despite what Bernanke & Company choose to say, it is clear that the systemic risk to the financial system is nowhere near close to abating. Bank failures are on the rise and credit spreads are at record levels. The housing debacle has left many financial hand grenades in the portfolios of investment and commercial banks the world over and many have yet to go off.
Inflationary expectations would need to decrease significantly. Again, perception tends to be reality and if people are convinced that prices are going to continue to rise, then they will behave accordingly. They will seek out assets that protect their purchasing power. Commodities generally assume this role due to scarcity: they cannot be printed or digitally created like fiat money. And the more funny money that sloshes around chasing a finite quantity of goods, the more those goods will increase in terms of the fiat currency. To reverse this trend, people worldwide would have to get the idea that their money is going to buy more, not less. It is going to be difficult to accomplish that feat with the price of almost everything (except housing and stocks) going up.
Given just this cursory analysis, it is easy to see why Gold is a slam-dunk choice in terms of protecting wealth. Certainly, gold is prone to nasty corrections. Too often, people buy gold with the idea that they’re going to get ‘rich’. These folks fail to properly understand why it is they should own gold in the first place and are easily shaken out when a correction occurs. Gold should not be purchased with the expectation that it will make you rich. It should be acquired to protect your purchasing power. The recent rout in precious metals presents a fantastic opportunity for new buyers to get on board and for people who already have positions to add to them as circumstances permit.
One caveat that needs to be mentioned is the fact that the precious metal markets are prone to intervention and manipulation. These activities are disruptive to normal market function and can create disparities between the price of futures contracts and the actual metals themselves. GATA covers these activities in great detail and has done a masterful job assimilating a vast array of resources, articles, and other materials related to this topic. I highly recommend getting up to speed on this important issue before investing – particularly if you’re new to these markets.In totality, the recent correction in precious metals should be viewed not as a tragedy, but rather as the opportunity of a lifetime.
This is something we have been talking about what seems like forever. The move away from the dollar. It was always a matter of when rather than if and unfortunately we’ve reached the point now where the majority of transactions between these two growing economic powers is done away from the $USDollar. This has many, MANY implications for all Americans and anyone else who uses the $USD as their primary means of storing wealth.
This move also explains the embracing of Knapp’s modern monetary theory that was soft-introduced back in 2018. We wrote an extensive paper on MMT and we’re posting this again below for anyone who hasn’t read it. We will be releasing another commissioned paper by Labor Day. We’ll also be re-posting relevant articles that were written between 2006 and the present on precious metals, the dollar standard, bail-ins, and general relevant macroeconomic articles as well.
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Andy’s Notes: The four requirements of any money are intrinsic value, a unit of account, a store of wealth, and a medium of exchange. These new minted ‘bills’ are able to be used locally, but the holders cannot compel any business or individual to accept them as legal tender. The US has legal tender laws that specify what may be used as legal tender. Does this make it a bad idea? Not necessarily. The USDollar doesn’t meet the ‘store of wealth’ requirement because of inflation and it is still accepted everywhere in the US. The Dollar also has little or no intrinsic value. The Tenino bills lack intrinsic value as well, but meet the other three requirements as long as everyone in the cohort is willing to accept them as legal tender and – this is a biggie – the bills are backed in such manner that whoever runs the printing press can’t print themselves a nice pile and go out and buy real goods with them.
The last sentence above is key to why banking systems fail over time. The temptation for the printers of money to run off currency beyond the backing is too much. This is why the banks of the 1800s failed so often. They’d over-issue silver certificates beyond the silver stored. The people would get wise to it and run the bank demanding silver and the banks would run out and have to close.
Since we no longer have redeemability on US currency, it makes over-issuance a real problem, especially in the digital age. Will the ‘wooden dollar’ experiment work? Time will tell. If nothing else, this is yet another signpost on the trek to the end of the road for the used and abused USPetrodollar.
Sutton/Mehl
TENINO, United States, July 9 (Thomson Reuters Foundation) – Tucked away under lock and key in a former railroad depot turned small-town museum in the U.S. state of Washington, a wooden printing press cranked back to life to mint currency after nearly 90 dormant years.
The end product: $25 wooden bills bearing the town’s name – Tenino – with the words “COVID Relief” superimposed on the image of a bat and the Latin phrase “Habemus autem sub potestate” (We have it under control) printed in cursive.
With the coronavirus pandemic plunging the United States into a recession, decimating small businesses and causing job losses across the country, some local governments are looking for innovative ways to help residents weather the storm.
For Tenino, the answer was the revival of the local currency that had bolstered the town’s economy in 1931 in the wake of the Great Depression.
“It was kind of an epiphany: Why don’t we do that again?” Mayor Wayne Fournier told the Thomson Reuters Foundation. “It only made sense.”
Tenino, a town of less than 2,000 people located about 60 miles (95km) southwest of Seattle, started printing the local banknotes in April, five weeks into Washington state’s lockdown.
Anyone with a documented loss of income as a result of the pandemic is eligible for up to $300 a month of the local currency.
Businesses up and down the town’s quaint Main Street accept the wooden note for everything except alcohol, tobacco, cannabis and lottery tickets.
Tenino’s city government backs the local currency, which merchants can exchange for U.S. dollars at city hall at a 1:1 rate.
Susan Witt, executive director of the Schumacher Center for a New Economics, a Massachusetts-based think tank, said alternative currencies like Tenino’s banknote are better than direct cash payments at boosting local economies.
“The City of Barcelona gave donations (in 2017/18) to sports teams and cultural groups as well as social programs (then) watched these donations go to big box stores,” she said in emailed comments.
“So, it created a local currency so that these ‘discretionary’ funds in its budget would circle back to support locally-owned businesses.”
‘WOVEN INTO OUR DNA’
Mayor Fournier noted that, for long-time Tenino residents, the wooden notes are nothing new.
The tiny town founded around a sandstone quarry achieved national prominence in 1931 when civic leaders printed a wooden local currency to restore consumer confidence after the town’s bank failed during the Great Depression.
“This is woven into the DNA of the community,” Fournier said. “My great aunt Erlene has the family collection all stashed away.”
The mayor brought the idea of resurrecting the town’s legacy project to the city council as a way to provide economic relief to businesses and residents suffering as a result of lockdown measures to slow the spread of COVID-19.
So far, 13 residents have successfully applied for the funds and some $2,500 worth of wooden bills have been issued, Fournier said, with donations upping the total funds available to $16,000.
