BRICS, Inflation, Turmoil, and CDBC – What to DO?

Consumer Finance, Currencies, Geoeconomics, , , ,

Our column last week prompted so many questions from new readers that we decided to start from scratch. Long-time readers will recognize much of what we’re about to say, but we ask that you take the time regardless since we’re adding in valuable context that has been provided over time. Just looking at the world today, your first thought might be: crazy! However, compared with even a few years ago, things are much clearer. So, without further ado…

Fiat Monetary Systems

This is the first thing people need to understand. Most have heard the term, but don’t really understand what exactly a fiat monetary system is or how it works. This is not the fault of the general public. Any fiat monetary regime (system) is based on confidence. Confidence in the monetary unit. While we’re going to focus on the dollar, please keep in mind that every major economy on Earth uses a similar system and as such, what we’re saying here applies across the board. What will differ, however, is the stage of decay your particular system is at.

The fiat monetary system is one where the value (used loosely) is dictated to a certain degree by government or state ‘fiat’, hence the term and the rest of the value is dictated by the market. The market being all the economic actors who use that particular currency for any of their activities.

We’re not sure, even in 2024, that most people really understand the absolute destruction of the USDollar that has taken place already. People become acutely aware of price inflation starting in 2020. Previously most didn’t notice the 4-5% per annum decay in the purchasing power of their dollars. We’ll use a $20 gold piece from 1913 – the year the not-so-USFed was created to illustrate. Back then, the dollar had a redeemability feature – you could take your paper notes to a bank and exchange them for gold. Silver was used too, more as a currency, rather than a pure monetary metal. So we’ll focus on gold for now. In those days a $20 gold coin, weighing 1oz would buy a very nice suit of clothes. Think about that. Go to a tailor, get a suit cut, pay with $20. What will $20 buy you now? Not even a decent tie. BUT if you have a 1 oz gold coin – not a 1913 coin as that’s a whole different ballgame – you can redeem it for around $2,500 and STILL get yourself a very nice suit of clothes.

What changed? An ounce of gold is still an ounce of gold, right? The dollar is what changed. More specifically, the dollar, one of which used to purchase 1/20 oz. of gold now only purchases 1/2500 oz. The dollar’s purchasing power has been absolutely DESTROYED over time by the institution who had only two mandates – price stability (maintain the currency’s purchasing power) and maximum employment. Since this is about personal finance and defensive measures, we’ll save the maximum employment mandate for another time.

This went on for decades. It didn’t happen all at once otherwise people would have noticed. The two biggest flare-ups of price inflation were in the 1970s period after the US abandoned the gold standard and the current period since around 2020. There were other periods in there too, but for most readers, these are the ones you’ll remember – the most recent of which is still ongoing. “But the dollar still purchases things!”. Of course it does – and it will continue to do so until the cycle ends. That’s the rub – fiat monetary systems are doomed to failure because there’s nothing tangible backing the currency. It’s a confidence game. We could easily create a library of links to articles written for the sole purposes of maintaining that confidence just here in the US that it would dwarf all the books you’ve ever read.

Let’s get to business. The past four years (no, we don’t care about politics – this was inevitable regardless) have gotten people’s attention big time. Old, young, in between. We’ve all noticed. Confidence has been shaken. Bank failures are ongoing, but poorly publicized. It’s like 2008 without all the fanfare basically.

What to DO?

The first thing you need to do is have inflationary expectations. The rate of price increases will ebb and flow. Some goods will show it more than others because the value of the currency isn’t the only determinant in price. Supply/Demand, trade agreements, tariffs, weather, and myriad other factors play into price formation. What we’re talking about is the general price level. We’ve heard all this talk about US GDP (economic output) going up so much in recent years. Of course it did – people are paying more for things now than ever before and the dollar amount is what goes into GDP, NOT the number of items/units sold. It’s a huge flaw in measuring growth, but it’s part of the confidence game.

Having inflationary expectations means you expect that things will continue to increase in price and you adjust your spending accordingly. Capital expenditures like home improvements can be moved closer to the present instead of waiting. A friend of the authors had a new roof put on their house in 2019 and it cost around $9,000. Today, the same roof would cost almost exactly double that. The individual actually got a quote. Doubled in just 5 years. So, obviously this individual was very happy about the decision to do the roof in 2019, albeit a few years earlier than desired. With inflationary expectations, the bottom line is if you know you’re going to need something, plan on doing it sooner than later.

Our guess is that after the acute phase of the most recent price inflation, which according to our metrics is still ongoing, there will probably be a lull. The rate may slow a bit more, but things will still get more expensive. If our modeling is accurate, we’re looking at another shock (and we HATE doing this) sometime in the next 5 years. To provide a little background the modeling used for this ‘prediction’ has had 50 years’ worth of monetary and price data run through it and it held up; giving signals of previous shocks. Remember, this is consumer advice, NOT investment advice.

Put simply? Monetary inflation will continue. Price inflation will continue. Prepare accordingly. And ignore the mainstream news on these topics. There are hundreds of other analysts who will back us up on that score. The mainstream news is an unguent. A soothing ointment. Remember, it’s a confidence game.

The $35 trillion in national debt? That cannot be fixed at this point. That ship has sailed in our opinion. Even if it could be fixed, there’s absolutely zero will ANYWHERE to do it. The consumer insists on exacerbating the problem by excessive borrowing just like corporations, states, and the federal government. That’s another rub about a fiat money system – the consumer can be (and usually is) their own worst enemy.

The second thing you need to do is look at your personal balance sheet. Assets, liabilities, net worth. Figure out what your ‘stuff’ is worth. Your house, cars, any accounts, etc. Leave the household items out. Then look at your liabilities – what you OWE others. Mortgages, credit cards, student loans, auto loans, home equity loans, etc. Leave out the recurring monthly bills. We want a ballpark, not something that would survive an audit. Total up both columns: assets and liabilities. If your assets are greater than your liabilities, you have positive net worth. If it’s the opposite, then you’re underwater or upside down. Many American families are underwater. We call ourselves the richest country in the world because we only look at our assets. Nobody bothers much in terms of looking at what we owe on all those assets. When a business goes ‘net worth negative’ for any length of time, bankruptcy is generally in its future. However, thanks to irresponsible lending by banks, even the most upside-down candidates can STILL get loans. Again, it’s like the run-up to 2008 all over again.

What does your balance sheet look like?

If you’re on the positive side of the net worth spectrum, you can really apply inflationary expectations. Consider moving up necessary purchases (emphasis on necessary). The frivolous spending has gone on too long and our guess is that it will go on until people simply can’t do it anymore. The banking system will encourage this, by the way. The banking system is NOT your friend.

If you’re on the negative side, gather all your liabilities and find out what the interest rates are for each loan, line of credit, etc. Most people also know that interest rates have gone up tremendously over the past few years. This, after more than a decade of artificially low rates – to induce borrowing and spending across the board. Once you’ve got your liabilities and interest rates (everyone should do this), calculate how much each loan is costing you per year and attack with a vengeance your most expensive loans. They might not be the ones with the highest interest rate – keep that in mind. An 8% mortgage of $400,000 is costing you a lot more in interest than a 29.99% credit card with a $4,000 balance for example. And you’re not going to want to hear this, but you need a budget. Badly.

Safe Havens

Precious metals are an extremely popular safe haven and have been for millennia. Granted, the best time to get in was 25 years ago. The dollar has lost the majority of its purchasing power in those 25 years and this is reflected in the ‘price’ of metals. Remember, the metal hasn’t changed. Gold is still gold. An ounce is still an ounce. .9999 quality is still .9999 fine gold. It’s your dollars that have changed.

That said, we highly advice physical metal in your direct possession. Futures contracts, ETFs, etc. are not physical gold. While a futures contract can be ‘redeemed’ in a manner of speaking, ETFs do not generally have a redemption feature. Or if they do, there are ridiculous minimums. If you’re interested in purchasing physical precious metals, contact us through the blog and we’ll be happy to provide our recommendations, however, we’re not doing it here. As far as how much metal, well that’s up to the individual and their level of comfort. Bullion or numismatics? If you don’t know what these terms mean, contact us. We don’t buy or sell metals, but we can give you an overview. Depending on the feedback we may do a an addendum piece that goes into the differences between bullion and numismatic metals.

Another safe haven is something we already talked about. Basically, a safe haven is a place to store your currency. Storing it in things you’ll need down the road anyway is a safe haven. However, storing it in things you don’t really need is just plain consumption and that’s what got us into this mess to begin with. We don’t know everyone’s circumstances obviously, but we gave one example – a roof. Others would be a vehicle, essential work (emphasis on essential) around your property that you’ve been putting off, etc.

The bottom line is you don’t want to spend all your currency. There’s a philosophy going on there too – it won’t be worth anything later, might as well blow it now. We don’t know exactly how OR WHEN this whole thing is going to shake out. The 5 years is based on modeling, nothing more. The world has gotten a lot more volatile. It might be 3 years; it might be 10. In the meantime, your currency is going to continue losing purchasing power, so the longer you wait, the less you’ll get from it.

Signals and Signposts

In terms of looking at policies that might accelerate this cycle, the easiest one to spot is minimum wage increases. The feds haven’t been interested, but many states have already drastically increased their minimum wages. This is a short-term benefit for those workers. As the extra money pours into the system, it drives up prices for everything and after a year or so the knock-on effects of the minimum wage increase are exhausted. This is why it has to be raised regularly. This is easy for the average person to keep an eye. Think about why McDonalds and other fast food chains are replacing workers with ordering kiosks. They’re trying to cut their labor costs. And look at the price of a ‘value meal’ even with all this replacement going on. We’re not just picking on fast food here; it’s retail in general.

A second thing is your state and the federal budget situation, particularly the federal. While states borrow money too, the feds are by far the biggest offender (in terms of regularity and magnitude). Keep an eye on the national debt. See how long it takes to hit $36T and so forth. If you see the time to rack up an additional trillion compressing (which it is), know that your dollars are losing value even faster. There are a lot of moving parts between the national debt and your wallet, but we’re trying to give some simple things the average person can look at and get an idea of what is going on.

The easiest thing to do, however, is keep your store receipts when you purchase necessities. Especially the items you buy regularly. Everyone knows their grocery bills have gone way up. This is where a budget comes in really handy. You need to see where your money is going. Online subscriptions appear to be the latest black hole. Every app has extra ‘features’ which you pay for monthly. People are spending hundreds of dollars a month on this stuff and don’t even realize it, mostly because they’re not signing up for everything at once. Paying electronically makes it psychologically ‘easier’ to let go of your money too.

The Bottom Line

You need a plan. Now. Not tomorrow. Not next year. Now. Today. If you think you’re going to walk between the raindrops on this thing you’re wrong. Take a full financial inventory. Assets, liabilities, income, spending, all of it. Find out what’s coming in, what’s going out and where it’s going. If you have liquid assets consider using some of the mitigation steps we outlined above. Get yourself some metals. You don’t have to go crazy. There’s no one size fits all strategy for any of this. We’ve been yelling about this for almost 2 decades now and many have taken some of these steps and reported back very positive results – mostly better sleep at night and some peace of mind. Get out of debt if you possibly can. Interest will eat you alive. It is more insidious than inflation. Credit cards at 30%? The banks love you for sure. Get rid of it. Cut up the cards if you have to and pay them down. It was time to get serious decades ago, but there’s still time. So get serious now. This is not a ‘feel good’ article. If reading this has made you angry? Don’t be mad at us. Ask yourself why you’re angry. We will not, under any circumstances, given securities advice and as a reminder, nothing in this article should be taken as such. However, if you have consumer finance type questions or precious metals questions (they’re not securities), feel free to contact us through the blog and we’ll do our best to answer those for you in a timely manner. This column is a labor of love basically. We have jobs and responsibilities, but we’ll try to help as much as we can. One of the benefits of being a small publication is that we can try to tailor our pieces towards what our readers need and answer emails.

EOF – Sutton/Mehl

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A Huge ‘Thank You’ to Investing.com and TalkMarkets!!

Banking, BRICS, Consumer Finance, Currencies, Debt Ceiling, , , ,

Thank you to both sites for posting our most recent article – ‘$35 Trillion, the PetroDollar, and Dying Western Influence’. Due to the volume of questions regarding consumer actions in light of the realities discussed, we’ll be posting a separate column on that tomorrow.

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$35 Trillion, The PetroDollar, and Dying Western Influence

Banking, BRICS, Currencies, Economics, Geoeconomics, Modern Monetary Theory, RIsk Management, , , ,

The ‘news’ is agog the United States’ national debt just crossed yet another ugly milestone. $35 trillion. Long-time readers of this (and many other columns) know this milestone was just a matter of time. And, speaking of time, the situation is now in what we call the compression phase. In 2016, the national debt was just under $20 trillion. In 2020, it was just under $27 trillion. Now, in late July 2024 we’re at $35 trillion. That’s roughly a 75% increase in the debt level in roughly 8 years.

Looking back for comparison, in 2004, the national debt was $7.3 trillion. In 2008, it was just over $10 trillion, and in 2012, it was just over $16 trillion. During that 8-year period, the increase was 119%. While many would celebrate the fact that the percentage growth has actually dropped, we have to look at the sheer magnitude of the increases. The 2004-2012 period saw roughly $9 trillion in new debt whereas the 2016-2024 period has seen a $15 trillion increase. We chose these two periods for good reasons. The first period had the 2008 financial crisis, bailouts, and stimulus borrowing and the 2016-2024 period had the pandemic borrowing. Two major dislocations.

https://www.investopedia.com/us-national-debt-by-year-7499291

This is a near perfect illustration of the diminishing purchasing power of the dollar. The public didn’t notice it much in the first period, for reasons we’ve already written about. However, the spillover in 2020 to the real economy certainly got people’s attention. 1970s ‘inflation’ was back. However, the monetary inflation of the 70s never stopped. It only intensified. Keeping the fresh money in the financial markets and real estate fooled most people. That’s ‘good inflation’. However, when the same thing happens on the other side of people’s balance sheets? Not so good.

But even the above statement is paradoxical. Much like government, the people have been on a debt binge as well. Their assets certainly went up, but so did their liabilities. This would have been abhorred 100 years ago, but we’ve been conditioned to believe that frivolous debt is normal. And perhaps it is now normal since most people do it and that is the definition of normal after all. But that doesn’t make it smart. Now, let’s consider some of the repercussions below.

The Deathknell of the PetroDollar

This wanton accumulation of debt certainly hasn’t gone unnoticed by the rest of the world. Even more so, the power the USGovt wields with regards to the dollar to bend the rest of the world to its will has gone even less unnoticed. Both of these realities have contributed to the rise of organizations like BRICS and the SCO, just to name a few. We find it comical that countries who refuse to play to the rules of the Western ‘rules-based order’ are always labeled as evil and targeted by sanctions regimes using the dollar as a weapon. We’re not naive; we’d be hard-pressed to find a government anywhere that truly acts in the best interests of its people, but, failing to play by the ‘rules-based order’ resulting in economic isolation is beyond hypocritical.

There has been much talk about Saudi Arabia recently and its sale of oil in dollars. It has been alleged that the Saudis ended this agreement, accompanied by vehement denials of such. Ostensibly, there was never a formal agreement, rather more of a handshake quid pro quo arrangement. However, we don’t believe that Saudi Arabia is the most important player in terms of supporting the PetroDollar anymore, their aspirations to join BRICS notwithstanding. The world has changed – again. As of February 2024, BRICS countries controlled about 42% of global oil production, give or take a point or two depending on the source. This is another point that is vehemently contested depending on who you listen to. BRICS continues to grow and with it, the percentage of oil production. The point of BRICS – to this point anyway – is to allow partners to make trades in local currencies. There has been talk of a basket, an actual BRICS currency, and even a digital BRICS currency. We wrote about this final item in our last update and it’s very concerning, but the whole point of BRICS was to give countries options. Non-dollar options to be specific.

What does the PetroDollar have to do with the national debt then? The PetroDollar effectively allowed the US to create dollars, buy oil with them, then have the sellers of the oil buy USGovt debt with the oil receipts. This resulted in the exportation of monetary inflation. The US could inflate the money supply and have enough stay offshore so as not to create price inflation domestically. As more countries shy away from the dollar, that mechanism is going to continue to be eroded. If we’re going to keep borrowing to spend (without SIGNIFICANTLY increasing domestic production of exportable goods) then we’re going to have price inflation. Check that box. It’s here and it’s not going away. You’ve all noticed it by now. Psychologically, people were ok with the normal 4-5% per year rate that persisted since the 1980s. It wasn’t even noticed; it was background noise. The world has changed yet again, and we hear people (both in the US and UK/Europe in particular) complaining about runaway inflation.

The US did several big things from a policy perspective to mask the effects of monetary inflation. It absolutely destroyed US manufacturing. Not so much on the capital goods side, save steel as one example, but on consumer goods. We essentially financed China’s industrial revolution. Now we’re complaining that they’re overproducing. What exactly did we expect to happen? While many will opine that this is due to incompetence on the part of US policymakers, we know better. These people are not stupid. They knew exactly was going to happen and you’re inclined, you can go read Foreign Policy and other such journals from back then and see exactly what we’re talking about.

The world is changing – again. Now that we’ve stripped our economy of most consumer goods manufacturing (go into WalMart and browse the consumer goods sections and see how much is made here) we’re dependent on others for everyday goods. Perhaps ironically, we’re at all-time diplomatic lows – economically and otherwise – with these same countries. And now we’ve got the price inflation anyway. Chickens always come home to roost.

It’s not just the PetroDollar that is fading it’s the ConsumerDollar as well. These countries don’t want our debt for numerous reasons, one of which is the fact that the value of our currency is inherently unstable. Probably second (or first, depending) is the arbitrary and capricious overuse of sanctions to induce ‘good behavior’. We find it telling that the rest of the world doesn’t try to tell us how to live, but we have no problem doing exactly that to them.

Dying Western Influence

This will not be want the powerbrokers and elite want to hear, but Western, unipolar influence is dying. Partly of its own volition as the monetary cycle ends (see previous reserve currency regime lifespans) and due to the pernicious aggression of policymakers, especially within the USTreasury where sanctions are concerned. Sanctions are not generally understood by the public, so we’ll use an analogy. Think of a kids’ clubhouse. It has many doors, all with locks. Preferred members get keys. Tolerated acquaintances of preferred members are given access as long as ‘accompanied’ by said member. Outcasts are afforded neither of these benefits. SWIFT – the major dollar settlement system used by the West is similar in nature. So long as you follow the ‘rules-based order’ you can use SWIFT and enjoy the benefits. Cross Washington, DC and you get cut off. SWIFT is a dollar-based trade settlement system. Get cut off from SWIFT and the logic goes that you are instantly isolated. That is much less so the case now than in the past.

Many also think BRICS is a new phenomenon. It is not. We’ve mentioned this before, but for the benefit of new readers and/or people just becoming aware of the goings on, the concept of BRICS has been around for more than two decades now. In 2006, a book series focusing on the top ten stories of each year that WERE NOT covered in the mainstream news featured Iran’s intention to create an oil bourse, which would accept Euros for payment of oil. We can see what has transpired since then. We’ll readily allow that we’re focusing almost exclusively on the economic realities because that’s where our expertise lies and that there are many other moving parts behind these moves. What we’re trying to accomplish here is explain to the world one aspect of this complicated mess. Money is power and since money is perhaps this world’s greatest motivator, we feel examining the geoeconomic perspective is crucial.

Conclusions

The question at the front of most people’s minds is ‘How will this affect me if I hold dollars?’ Or perhaps a business that transacts in dollars. With the dollar standard era ending, even more changes will be taking place. We’re firmly in the MMT track (see our in-depth article on that here). The only difference is our government borrows money from the central bank because the central bank is private, unlike the model proposed by Knapp in 1905. Practically speaking it doesn’t make much difference. The dollar is losing value rapidly now. More and more countries are seeking to divest. There may come a time in the not too distant future where countries and individuals who rely on others accepting dollars may well have to convert to a different currency to settle trades. Price inflation in the US/UK/Europe and elsewhere is likely to accelerate as the transition gains velocity.

And just to be clear – these various military confrontations globally have one thing in common – the dollar standard and the protection thereof – although again there are many other moving parts involved. That’s all we’re going to say about that. Follow the money. Who benefits?

In 2008 Andy wrote an article entitled “Gold – The Opportunity of a Lifetime‘. The dollar ‘price’ of gold is now three times what it was when the article was penned, but the title of the article still holds true. You’ll need to exchange more of your folding money to get gold (silver is also a good choice), however, if current trends continue, you will be able to hold your purchasing power. Or you could take your chances in an overinflated, rigged, and completely disconnected stock market. That said, we would not be surprised one bit if the DOW, for example, hit 60,000 or more before the cycle ends.

In fantasy stories, the dragon is always most dangerous once it has been dealt that lethal blow. The dollar was dealt a lethal blow a long time ago and continues to be fraught with more and more risks as we progress through this inevitable transition.

EOF – Sutton / Mehl

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BRICS Update – September 2023

BRICS, Currencies, Economics, Geoeconomics, Monetary Policy, Uncategorized, , , ,

We wouldn’t go as far as to call the recent BRICS summit a non-event, but the clarity many of us had been hoping for at the end of August has not yet emerged. The main feature of this year’s summit was to add additional countries – 14 members now in total with many more waiting in the wings.

Adding all of these countries at once would have been impractical – and difficult. However, it’s not the actual ‘official’ membership rolls that matter – it’s the spirit of the agreement behind the countries who have already entered – and those who will enter moving forward.

This trading / currency bloc has a largely singular purpose – to remove reliance on a weaponized US Dollar. While it’s true that many in the US and Europe don’t perceive the western financial system as a weapon, much of the rest of the world does. Our perceptions in this instance don’t matter. It is the perceptions of the growing BRICS bloc that matter. A secondary, but related, goal is to move towards multilateralism on a variety of fronts. We’re going to focus on the economic and financial aspects of this.

Simply put, these countries are tired of being told what to do. They’re tired of being told they have no self-determination. They’re tired of being sanctioned when they don’t do as the collective west wants. They’re tired of the colonialist French (just one example) taking natural resources while the people in the countries who provide these resources live in abject poverty. This is perhaps the most important takeaway of the big globalization movement in the 1990s and early 2000s – the goal was NEVER to raise the living standards in these countries, but merely to use whatever levers could be applied to get the resources from these countries for use by the ‘first world’ nations. Again, they’re tired of it. This alone is the primary fuel for the BRICS movement. They have united against a common enemy – the weaponized US Dollar, SWIFT, and the many other structures that have arisen from the USDollar’s hegemony.

Put in this particular light, it would make sense that BRICS would introduce some type of currency. We have always assumed that it would be gold-backed. Why? Another worthless paper currency isn’t going to have much appeal – if any. If there is to be a new currency regime, there must be something unique about it that provides it with the necessary credibility to function. For many years, we economists have felt gold-backing would provide that credibility.

However, the landscape has changed over the past several years and as such, we need to revisit our prior assumptions. Could the mere disdain for the USDollar and it’s financial system be enough to give even an unbacked new currency credibility? A few years ago, we’d have opined in the negative. Now? It seems possible that perhaps a backing isn’t really necessary. At least not at the outset. Countries are already cutting deals to exclude the dollar using national currencies – none of which are backed by gold or any other commodity money. The resource-rich countries might argue there’s an implied backing – extracting natural resources requires tremendous amounts of economic activity. Could that activity in and of itself be enough to provide credibility? Yes – because that’s what’s going on right now. Again, it comes down to perceptions. If these countries view national currencies as less risky than the USDollar system, then that’l how they’re going to behave.

Do the BRICS nations have enough gold to back a currency either now or in the future? Absolutely. This is some of the information we were hoping to get out of this year’s summit. What we did see is a prototype of a potential BRICS note. While the providence of the images we’ll show cannot be 100% verified at this time, the rolling out of a new currency is an event that must be chronicled and studied. What we lack at this point is the clarity of the actual mechanics of the currency. Some questions are:

Who will issue the currency?

What (if anything) will back the currency?

Will non-BRICS members be required to obtain the currency in order to trade with BRICS members? This is huge for countries like the US

If the currency eventually used is a ‘hard’ currency (with commodity backing), what will be the peg?

If the bloc decides on national currencies instead, how will exchange rates be determined?

If there IS a BRICS currency, will it trade against other currencies in global FOREX markets?

If the bloc is serious about making this work, then we can answer some of these questions now. We can certainly opine on what ‘should’ be done. However, given the fluid nature of the situation – and the fact that the world is already mired in another regional (proxy) war and several smaller ones, the situation on the ground is likely to change rapidly and the attendant amount of disinformation will certainly be present – as is the case anytime countries are at war.

It is also worth mentioning that the BRICS countries do no agree on many other matters. Some of the countries have trading alliances with NATO nations for example, while others do not. Again, the single point of focus thus far is to (at a minimum) decrease dependence on the USDollar and its hegemonic system. Surely there are some current and aspiring members that would love to see the Dollar disappear from the world stage. Others are simply looking for a stable and reliable alternative.

Instead of ad hominem attacks, the US and the collective west would do well to take a huge step back and look at WHY the BRICS alliance started and why it is growing. From our vantage point, the wounds the Dollar has sustained have been largely self-inflicted, which is consistent with economic and monetary history. We simply don’t learn from history. Or, worse yet, there is enough hubris involved that policymakers think they can do things so much better now than in the past. Again, history indicates otherwise.

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Recent Monetary Actions – 8/4/2023

Banking, Bond Market, Currencies, Economics, Geoeconomics, Government Statistics, Interest Rates, Monetary Policy, , , ,

The past few months have produced some rather notable monetary activity. For myriad reasons, the money pumping of the not-so-USFed during the period of 2009-2019 produced nominally higher price inflation, but not anywhere near the increases in prices that should have occurred. Our operating theory as the 2008 crisis was ending was that the newly unveiled ‘quantitative easing’ nay relentless money printing, would push up both consumer prices and the nominal prices of various asset classes as well. In essence, the ‘fed’ would replace the burst US residential housing market bubble with yet another bubble.

The central bank of the US, followed by other G7 central banks, embarked not just on money printing, but money channeling as well. The blowout preventers, if you will, for this excess were primarily the US Bond Market and the US stock market as well. Bond yields were artificially low during much of this period, thanks to the fed monetizing USGovt debt. Nominal yields were a joke. Real yields were far into the red. The US consumetariat didn’t notice this because, as always, credit was easily obtained. The consumer just dove deeper and deeper in debt. This was not a US-centric phenomenon. The European Union behaved in much the same manner, but the EU blew up a massive residential housing bubble as well, particularly England. Technically, England is no longer in the EU, but for practical purposes, this distinction is negligible.

What many people (investors in particular) forget is that there are always cycles. These cycles can rather easily be altered by extraneous actions of central banks, governments, and even consumers. However, the more distorted or prolonged the boom is, the bust is all the more pronounced. Think of Newton’s Laws and apply them to monetary policy and economics.

With the proverbial spring fully compressed by the massive deficit spending commencing in 2020, the not-so-USFed poured literally trillions in fresh dollars into the USEconomy, monetizing massive amounts of government debt to finance social spending. Since the US consumer, as a whole, has negligible savings, when economies were shutdown, the government became the primary support structure at levels never before seen. The ‘channeling’ of the 2009-19 period went out the window and the fresh dollars were poured directly into the consumer economy. We all know what happened next. Prices head for the stratosphere.

We noticed something curious start at the end of Q1 2023, however. The US M2 monetary aggregate began to contract – for the first time in.. well, forever basically. Was this a one-off month or the beginning of a new trend. We’ve seen a few months’ worth of data now and it would appear that there is something of a trend brewing. Deflation. Not falling prices, but an actual contraction of the money supply. It is interesting to note that during this stretch, US stock indexes, particularly the DJIA have forged towards all-time highs. What gives? Housing prices have taken a hit, which, in ordinary circumstances, would be a good thing – from an affordability perspective at least, but the reason housing prices are cooling is simply because the cost of mortgages has been pushed out of the reach of many by mortgage rates that are still hovering around 7%.

Our thesis – for now at least – is that the not-so-USFed is once again channeling money, but not in the same way it was during the 2009-19 period. It appears – and we admit it is very early to say for sure – that the consumer economy has, in the aggregate, been cut off from new money. The financial economy has not. However, the net effect is the contraction of the US M2 aggregate.

Interestingly enough, the last data pointed to a reversal, which complicates the situation a bit. The reversal could end up being a one-off event, or it could be a true reversal in the trend. Further study on prior deflationary periods is in order. In any case, the top to bottom action in the aggregate as shown above does explain the slowing of the rate of price inflation. Remember, inflation is a monetary event that manifests itself in prices. While the mainstream financial press claims otherwise in their headlines, the whole of their reporting proves they know the truth and choose to obfuscate, which is typical.

Since monetary data has a significant lag associated with it, we will not be able to ascertain until likely the end of 2023 or Q1 2024 if this is definitely the case or not. There should be anecdotal indications between now and then and we will certainly keep the readers of this blog appropriately informed.

Sutton/Mehl

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Bail-Ins and the Direct Registration System

Bailouts, Banking, Currencies, Geoeconomics, Monetary Policy, RIsk Management, ,

Originally published in October 2015

My Two Cents – Bail-Ins and the DRS

Andy Sutton, MBA

As recently as a few weeks ago, the European Union directed its member nations to draft their own independent legislation for dealing with the resolution of a failed G-SIFI (Globally Significant Financial Institution). At the same time, we have all sorts of seams opening in the currency, bond, and commodity markets. The Swiss Franc is now un-pegged from the Euro, there have been wild swings in the bond markets in Europe due to the aforementioned action, and oil is in an absolute free-fall. There are many geopolitical (and likely criminal) maneuverings behind all of these phenomena, however the chaos in the financial world thus far has been remarkable in that there hasn’t been much given everything going on.

There has been news of some smaller brokerages biting the dust thanks to these swings, but yet nobody ‘big’ has gone down – yet. Are they that good? That insulated? That lucky? That’s for people of a higher pay grade to answer, but the bottom line is that the environment is absolutely RIPE for another Cyprus or MFGlobal. Will it happen this time around? Couldn’t tell you. Maybe it’ll be next time. Or maybe it’ll happen this time, but not impact the US. Since everyone already thinks America is bulletproof I am guessing most will go with the latter of the two possibilities.

I’ve been talking an awful lot again about the bail-in, but a reader pointed out that he still doesn’t understand exactly what it is, and, more importantly, how an institution gets into the position where it needs (or wants) one. He’s a smart one, this reader, so I figure if he’s got questions then so do a whole bunch of other folks and that’s perfectly all right. That’s why I do this. So this week I’m going to focus on some of the anatomy and try to give everyone a sense of the sorts of things that put a bank/broker or just a broker into a position where they’d seek to invoke the bail-in.

On the positive side, although not for those folks impacted, we have a live example of how the bail-in works, right here in America to use as a template. I don’t wish to further malign Mr. Corzine’s already shredded reputation, but as his penchant for fast travel suggests, he could probably outrun any criticism we might toss his way.

Anatomy of the Bail-In – The Mechanism

Let’s talk about a brokerage first since this is where MFGlobal was situated. Brokerages generally have two components – the brokerage side and the dealer side. Formally, they are referred to as broker-dealers by the regulators because of this. So there are two sides. One side you see when you walk in and talk to your broker and sit in his posh office and the other side, which you never see – and usually neither does the broker. It is this unseen side you need to worry about in this instance. Your hundred thousand dollar brokerage account isn’t very noteworthy in the grand scheme of things other than that the broker-dealer might use shares that you hold in your portfolio to lend out to other parties so they can short a particular stock. Hmm, that is kind of going against your best interests isn’t it?

Your broker calls you with a ‘hot tip’ or a ‘sure winner’ and you go with it, then they’re enabling short-sellers out the back door. Nice huh? And they all do it, but I digress.

The brokerage side deals with clients such as yourself, maybe some pension funds, trust funds, perhaps an institutional client or two depending on what they’re into and so forth. It is pretty benign. On the other side of the operation there is the dealer side and they can be into all kinds of stuff, which, thanks to the USFederal court system, can get you into a pile of trouble. To keep it overly simple, think of the dealer side of the broker-dealer arrangement as a giant client. The dealer operation has accounts, holds positions, buys and sells positions, and makes a market in all of the above. They might do this with regards to stocks and bonds as well as options and other derivatives. The dealer side can borrow money to do all of the above as well, usually from commercial banks. When they borrow money to engage in transactions it is called leverage.

Anatomy of the Bail-In – A Scaled-Down, Working Example

Let’s say the dealer has a million dollars in assets – cash and positions. If they make 10% in a quarter, they’ve added another $100,000. Ok, easy enough, but they want to make more than that. So let’s say they go out and borrow another $500,000 at 5% per annum and invest the whole enchilada for a quarter and make the same 10%. So now instead of $100,000 in earnings, they have $150,000 – a 50% increase. Their interest expense for the quarter is $6,250 so their gross profit on the loan is $43,750. They give the $500,000 back plus the $6,250 in interest and everyone is happy. Their assets have swelled to $1,143.750. So where they’d made 10% originally, using leverage, they turned that gain into a 14.375% gain. Not too shabby. Plus, remember they make a few bucks lending out the shares you bought on that hot tip so someone else can place a bet that your hot tip stock will go down. Again, this is overly simplistic, but you get the idea here. The borrowed money is cheap – in fact, 5% is probably on the very high side of what they pay in interest, but is a round number.

Let’s say now that things don’t work out. The invested $1.5 million goes down by 10% in a quarter. They lose $150,000 plus the $6,250 in interest and suddenly, when they give back the loan and the interest; they’re left with $843,750. This creates an obvious problem when all of their assets are already deployed. There’s red ink to the tune of $156,250. Generally, what will happen is another loan will be obtained or some assets sold off or maybe a little of both and the loss will be absorbed.

Anatomy of the Bail-In – Reality

Now the illustrative example above uses a very tame leverage ratio. There was 50 cents of debt for every dollar of assets – or a ratio of .50:1. Understand that leverage ratios of 25:1 and even as high as 40:1 have not been uncommon. That means for the million dollars in the example above, there might be as much as $40 million in leverage (debt). So let’s use the 25:1 ratio and assume the same 10% loss. Suddenly the loss is 2.5X (a $2.5 million loss against a million in assets) the amount of the dealer’s assets rather than being .15X (a $150K loss against a million in assets) as in my example, not to mention the interest. Oops. Now the firm needs cash. They have a creditor to pay off. Well, how about those folks on the brokerage side? Well, gee whiz, they have $3 million in assets. Let’s just snag the $2.5 mil from there and use that to pay off the creditor. But that’s stealing and is illegal, right?

Wrong. Not anymore. That is precisely what happened in the case of MFGlobal, Sentinel Group, and Peregrine Financial – all to varying extents. The dealer side made bad bets and when it came time to pay off those bets, they went to their clients, raided the accounts, and then the injustices in the black robes gave it jurisprudence’s stamp of approval and the bail-in was on. Now we’ve got precedent and case law supporting overt theft. Instead of impeaching the judges, imprisoning them along with the principals of the firms who pulled the stunts to begin with, the establishment comes up with a new set of nomenclature (G-SIFI, bail-in, etc.) and begins the process of normalizing the idea of stealing something that doesn’t belong to them.

And perhaps the most ironic of all? The not-so-USFed, that shining knight on the white horse, buyer of last resort, standout of the handout to the big banks? It is in hock too and its leverage ratio is absolutely stunning. 77:1 at last count. Yes you read that right –  77:1. It was at 22:1 when the financial crisis started ripping through middle classes throughout the globe in 2008 and when you hear all these morons on television talking about how healthy US (and global for that matter) banks are, remember that someone is eating all these garbage mortgages, derivatives and other nuclear financial waste. It’s the central banks. Wait a second though; the central bank regulates the underlings, right? Maybe on the surface, but this is another bright and shining tidbit that illustrates who owns who. The not-so-USFed simply does what it is told.

A great question right now would be this: If everything is getting so much better then why are they still leveraging up at the ‘fed? Shouldn’t they be unwinding? They say they’re unwinding. But they’re not unwinding, they’re continuing to eat more and more garbage generated by their owners. Now this could go on quite a while, but not forever and it won’t end in a pretty fashion when it does end.

Anatomy of the Bail-In – Implications for ‘Depositors’

So that’s the broker-dealer version of the bail-in. The bank side isn’t much different in concept. Thanks to the repeal of the Glass-Steagall Act, which separated broker-dealer operations and the savings/loan operations of commercial banks, the same thing can happen to you if you have deposits in a commercial bank. The mechanism is precisely the same. The broker-dealer side conjures up some idiotic bet based on some computer program written by someone who thinks that the global financial system is nothing more than his or her personal playpen. In typical fashion, they win enough times to get cocky and of course as this happens, the greed kicks in and the bets get bigger. Eventually there’s a loser and by this time they’ve pumped for the goalposts and hiked the leverage ratio up to about 40:1 or even higher.

When it all crumbles and everyone starts scrambling, bear in mind that the law has now made your bank deposits available to do a bail-in and make good on that bad bet. And since you’re now an unsecured creditor rather than a depositor, you a) have no FDIC protection, and b) have no recourse. If you were a secured creditor, you might have a chance to recoup something, albeit not anywhere near what you’d lost, but at least a token. What happens next is your unsecured credit (think bondholders) is converted to equity and you become a stockholder in a failed bank. Congratulations.  You woke up on a Friday morning having $25,000 in bank deposits and literally by the time the bank opens Monday you have x shares in a busted bank. And yes it can happen that fast. Anyone who doesn’t think it can, should remember Lehman in 2008. While it wasn’t a bail-in at that point, look at the velocity with which that outfit hit the mat, never to get up. Look at Cyprus. Friday afternoon there are tremors and by Monday morning, the banks are locked up like Fort Knox and the ATMs are out of money.

The US has already crafted its resolution mechanisms along with most of the G20. The EU has just ordered its member nations to the do the same. In my opinion, anyone who stores more than a trivial amount of cash in a commercial bank should be sentenced to spend the next month in Massachusetts figuring out how many of Tom Brady’s precious pigskins were improperly inflated.

The biggest problem with the above is that even if you understand the mechanism and what a firm might have to be engaged in to get themselves in trouble, it is very difficult to find out exactly what the dealer side of a broker-dealer firm is up to. They’re obviously secretive, claiming proprietary interests. Most will tell you their capital ratio though and that is a start. Your best bet if you insist on being in paper or even have decided that you’re willing to risk a small position in paper is to spread it out amongst several firms or, better yet, use the Direct Registration System so that your assets are held in your name at the issuer’s transfer agent rather than being held in street name at your broker. I realize the whole system is intertwined and something big enough to topple firm A might take firm B with it as well. However, that is an inherent risk for those who wish to engage in this activity.

Regarding the Direct Registration System, many companies stopped issuing paper certificates years ago, citing cost (funny, the shareholder usually was on the hook for that), but even if a firm doesn’t offer an actual certificate you can still have your shares held in your name at the issuer’s transfer agent. There is a popular misconception out there that you can’t do it unless the issuer will provide a paper certificate. All broker-dealers have a means by which you can DRS your positions. Many are reluctant to assist though because, frankly, not having your shares in street name in their ‘house’ costs them money. If DRS is something you are interested in and your broker is uncooperative, then find someone who will cooperate. The good news is that there are firms who are not obstructive in this regard.

Also an inherent risk is that even if you start to smell a rat that you won’t be able to extricate your assets in time. Much in the way banks are making people wait inordinate periods of time to get cash (if the paper itself is a con job then think about ‘electronic paper’ or digitized currency), firms can take up to 10 working days or more to effect transfers. In our fast-paced financial climate where the world can literally change in a weekend, 10 days might as well be 10 years. Also, those pesky daily limits on your ATM card, put in place for your own ‘security’ as you were told when you asked about it, could be lethal as was the case in Cyprus.
My goal here isn’t to make things sound hopeless; that is not the intent, but rather to present you with the risks involved when you engage in these very basic financial activities. Most people don’t even consider these risks because until recently they either didn’t exist as in the case of the bail-in or weren’t relevant as in the case of banks being so stingy with their cash withdrawal policies. This is one of those times when you simply MUST advocate for yourself because these other folks are firmly invested in your continued ignorance, apathy, and ultimately inaction.

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Banking Crisis Update – April 5th, 2023

1 CommentBailouts, Banking, Currencies, Economics, Monetary Policy, RIsk Management, Uncategorized

Andy Sutton / Graham Mehl

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.

Stay well,

Andy / Graham

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A Quick Check-In, the Farce of GDP Reporting and a New Monetary Regime

Banking, Consumer Finance, Currencies, Debt Ceiling, Economics, Geoeconomics, Government Statistics, Modern Monetary Theory, Monetary Policy, National Debt

Hello friends,

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.

Best,

Andy & Graham

Click to access MMT.pdf

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What Exactly is Neel Kashkari Trying to Accomplish? – My Two Cents

Bailouts, Banking, Consumer Finance, Currencies, Interest Rates, Modern Monetary Theory, My Two Cents, Trade War, , , , , ,

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.

US CPI-U

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

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Andy Continues Discussion of the Dollar’s Fate on Liberty Talk Radio

Banking, Consumer Finance, Currencies, Economics, Geopolitics, Monetary Policy, Trade War, , , , , ,

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!

Sutton

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