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.
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.
In 2008, the central bankers of the world revealed the true danger of Keynesian economic theory by staging the biggest bailout to date. There was a short flurry of complaints about the banking system being able to leverage the economy instead of just themselves and their filth-ridden balance sheets.
Fast forward 12 years. You guessed it – another massive bailout. The warnings issued after the crisis of 2008 went unheeded, banks leveraged to even greater levels than 2008 and brought the rest of the world with them. Now, not only has runaway Keynesianism enabled the banks to leverage themselves and the financial economy, now they’ve been permitted to leverage the entire world’s economy as well.
Central banks are gambling the next hundred years of economic history that they can print their way out of this mess. Instead of unwinding their malfeasance, they’re doubling down.
Many of you read our piece on ‘modern monetary theory’ last summer. That is now in play as well. This summer we’ll analyze the next move in an epic economic game of chicken. And there isn’t a person on Earth who will be left unaffected. Coming Soon…
The world started 2020 on the most shaky of terms, economically speaking. The world was already in the early stages of a contraction in aggregate demand. The covers of magazines had articles of various corporate analysts and CEOs talking about a serious recession as early as late 2018. We stress this was a global contraction, not limited to one or even a few countries. As was the case in 2008 some would fare better than others for myriad reasons. The last few months of 2019 and the beginning of 2020 saw the resignation of CEOs from several prominent companies such as Disney.
Being perpetual cynics, we wondered if they knew something the rest didn’t. The prospect of a recession was largely downplayed in the US/UK/EU mainstream press, which was no surprise. They’ve been derelict in their duty for decades now. The average American/Brit/European had no idea what was coming. Even the central banking community was bathed in complacency. They’d achieved Ben Bernanke’s ‘Goldilocks Economy‘ even if only in their own minds.
We pointed to one event as a harbinger of an upcoming crisis as early as 2016 – the appointment of Neel Kashkari to the position of President of the Minneapolis ‘Fed’. Huh? Neel Kashkari was tapped by Henry ‘Hank’ Paulson back in 2008 to head up the TARP fund created by Congress in November of that year as part of the massive Wall Street bailout brought on by a spate of bankruptcies, insolvencies, and general financial mayhem.
Why Kashkari in 2016? The last we’d heard, he was living in the mountains of California planting potatoes or some such. The TARP mess stank on every level and it was apparent that once his work was done, Kashkari was off for a long, long early retirement. So his appointment to such a position registered an 8 out of 10 on the weird-stuff-o-meter.
Moving into 2020 the United States economy was balancing on the triple supports of consumerism, financial sector activity, and government excess. The FY 2019-20 Federal deficit was going to be one for the ages long before the term ‘Corona’ was known as anything other than part of the Sun.
Geopolitical tensions were high with the sanctioned assassination of a prominent Iranian general within the first few days of 2020 and the failed ongoing ouster of Venezuelan President Nicolas Maduro at the forefront. Add to that an ongoing trade war / war of words / saber-rattling between Washington and Beijing as well as a good deal of ill-rhetoric between Washington and Moscow. That’s just a small sampling.
With nearly all of the first world nations running persistent current account deficits and the rest of the economic superstructure living heavily on debt and financial speculation, it was only a matter of time. Would it be a pin that popped the ‘everything bubble’ or would it simply just slowly deflate (not to be confused with monetary deflation)?
So pervasive was and is the presence of debt in the circumstance of nations, states, trading blocs, provinces, municipalities, companies, and individuals that the trillions of dollars racked up by the US alone was not even viewed askance by economists OUTSIDE what would be considered the mainstream of the scientific economics community. Keynesianism was like a high-quality dime store pinata. Now matter how hard it was hit, it just kept spitting out candy.
We mentioned in My Two Cents on several occasions that this whole ‘system’, if you will, would go until it didn’t. It was a confidence game, just like the multitude of fiat currency regimes that backed it in the various corners of global commerce. As long as economic actors had ample supply of tokens (currencies), and another economic actor would accept those tokens in exchange for scarce land, labor, capital, and technology, the system worked.
Then the world got sick.
There has been much talk of ‘black swan’ events. The term was coined by a current events/geopolitics author Nassim Taleb. The black swan is something that nobody is looking or planning for. It is not on the radar. Period. There have been some who have been talking about pandemics in general for quite some time now in similar fashion to your authors considering the likelihood of economic fallout from the fact that the organized world has violated every law of economics imaginable. There’s always a reckoning day.
We are not going to discuss the SARS-nCOV-02 situation from a biologic/scientific standpoint as that is outside the scope of our expertise. We’re going to focus on nCV as a triggering event or black swan and the likely economic ramifications.
The amount of money that has already been borrowed/printed and spent is mind-blowing. It cannot be complicated by the human mind. The US National Debt blew right past $25 trillion. It is hard to fathom this but the growth of the national debt is a mathematical function based on the concept of fractional reserve banking. The debt was headed to where it is now anyway. That is going to be the biggest take-home. Would have it happened this fast without nCV? Probably not, but it was headed past $25T in the next 12 months regardless.
What nCV does is give governments the world over a free pass if you will on the print and spend / borrow and spend fiscal irresponsibility that has been going on for decades now. Europe reached its breaking point because of this foolishness in the past decade. The 2020s will be looked upon in history as the decade when the USDollar finally died.
That’s a bold pronouncement isn’t it? Not really. Who in their right mind is going to continue to lend to any entity that is so fiscally reckless? Ourselves along with many others have laid bare the runaway fiscal policy that has infected the US for so long. Now there is the element of public health involved and the general consensus is that we have to continue these spending policies, bailout entire industries, and even provide income to the populace. Anyone speaking out against any of this is labeled as being against helping people.
What needs to be understood is that this ‘help’ is only temporary. Think of the minimum wage. It is a very applicable analogy. Every increase of the minimum wage only lasts so long then another increase is required to produce the same result. Now, scale that up to the world’s economies and that’s what you’ve got. The ‘system’ needs ever-increasing amounts of stimulus to produce the same effect.
While grossly overused, the analogy of a drug addict is a very good one. Eventually the addict needs a fix just to feel normal. And so goes the global economy. If the stimulus is scaled back, the economy goes into withdrawal. The US economy is around 70% consumption and has been that way for nearly two decades now. This is not just a national or government problem. It transcends all layers of the economy. Even successful companies loaded up on cheap, low interest rate debt to conduct share buybacks, thus pushing stock prices higher.
Where do we go from here?
Even before the new year began, countries and companies outside the US were cutting deals outside the dollar. The dollar’s status as world’s reserve currency was being challenged. Expect that to continue – and accelerate. There won’t be a pronouncement that the dollar is no longer the world’s reserve currency. It likely will not be a headline. It’s been happening incrementally for years now. This latest fiscal quagmire will accelerate the matter. China is testing a digital currency. Russia has thousands of tons of gold. These countries don’t get along with America and Europe on a good day. The Russians already dumped nearly all of their US Government debt, but the Chinese still have a significant amount around $1 trillion.
A global reshuffling of the economic order was already taking place before 2020 started. Europe endured a partial crisis over excess debt and the austerity that followed. And all of that was just a small piece of the problem. Economic history is replete with examples of complacent countries and empires who thought it could never happen to them. Complacency might just be the most dangerous state of mind that man can occupy. We are quite sure the Romans would agree.
Notes: Almost exactly 6 years to go from $5T to $6T. We’ll ignore the jump from $23T to $24T because of the emergency spending. We assert that the spending would have happened anyway, but omit it in the interests of full disclosure. The jump from $22T to $23T took only 8.5 months. The slope of the debt curve is increasing at nearly the square of the annual increase.
Economists love to talk about ‘escape velocity’ in terms of economic recovery. We’re going to inject that term into the debt discussion. By 2024, the Congressional budget office estimates the national debt will be at $36T – another $12 trillion over top of where we are now. So.. $12T in the next four years. In the previous four years, the growth was around $4.5T.
It doesn’t take a mathematician to figure out if we get to $36T by 2024, there is no going back. In all honesty, that ship has likely already sailed. Our planning needs to move into the next phase now. Where do we go from here? We’ll be addressing that, along with some pointers on general risk management in the weeks that follow.
Just one follow-up question – when was the last time you heard anyone talk about the infamous debt ceiling???? Something to think about during all this time we all have for contemplation.
Readers: A huge ‘thank you’ to Joe Cristiano for having me on for his debut! We kept the time down, but did talk about a few angles to this whole financial/economic wash out that haven’t really been covered. A few have been totally ignored. It’s our hope that keeping these shorter will encourage more people to listen in. Thanks again Joe and it’s good to have you back!
Since we were unable to do Liberty Talk Radio again, I’m going to address the questions we received here. The chart below will be a point of reference for most of them.
The chart above shows the Dow Jones Industrial Average from approximately 1905. You’ll have to click to see the chart in detail and I apologize for that – it is hard to get a decent chart with that kind of timeline.
The first ‘peak’ if you can even call it that was the roaring 20s and the bursting of the speculative bubble in late 1929. The Dow would lose more than 75% of its value before the move ended.
The next events are pointed to as well. The main question people have is ‘How was the DJIA near 30,000 to begin with?’ It’s a good question. There are a couple of reasons. First is inflation (growth of the money supply). More money chasing after a relatively fixed set of goods produces higher prices, all else being equal. Let’s proceed through the timeline to get to an answer about Dow 30,000.
Inflation and the revocation of the Glass-Steagall Act allowed for the run-up and eventual blowup of the dot-com bubble. The fact that many of the dot -com firms never made a single penny in profits yet sold for hundreds of dollars a share contributed as well. We’d call this part a speculative bubble. Inflation put the money in the system to allow the bubble to reach the level it did.
After the 2002-03 recovery, the central banks (globally) began serious interference in markets, causing distortions and artificially low interest rates (aka cost of capital) that allowed the next bubble – the housing bubble to inflate. Again, more money in the system due to inflation and a lower cost to that money thanks to the central banks and voila! Boom.
If you thought that was dramatic, the federal reserve in the US and other central banks began something known as ‘quantitative easing’ or QE. This is a fancy term for printing money from thin air and injecting it into the financial system and economy. In the business we call it ‘hot money’ because it’s like a hot potato. It moves around very quickly. From 2009-2019, we had multiple opportunities for what is happening right now and each time, the central banks intervened with more hot money and you can see by the shape of the curve after 2009 how the slope increases dramatically.
This general shape of curve is consistent with monetary systems that are built on fractional reserve banking and that feature a unit of currency that isn’t backed by anything tangible. Until 1971, the USDollar was at least partially backed by gold. I didn’t mark the area, but if you look on the chart at where the curve really starts to accelerate upwards, that was right in the 1971 time frame.
There has been some speculation about fractional reserve monetary systems of late. The important thing to note is that this particular type of system allows for inflation (the creation of new money) when debt is incurred. A quick example is in order. I take 100 depreciated American dollars to the bank and deposit it. Joe Cristiano comes along and asks my bank for a loan, they will lend him up to around $90 of my deposit. However, the bank still owes me my $100 initial deposit. At this point, the money supply went from $100 to $190.
One of the often used misconceptions is that, therefore, when loans are repaid, that equals deflation (the destruction of money). It does not. Let’s use our above example. Joe repays his loan to the bank after 30 days. Let’s say they were very charitable and say they charged him 1% total interest for the 30-day loan. So, he would repay $90.90. Now, my initial $100 is still in there so the total is now $190.90. No deflation.
However, when people pay down loans instead of taking out more debt it does dramatically slow the rate of bank-created inflation. This happened during 2010. Governments don’t like this because they’ve invested a great deal of time convincing people that inflation is necessary for growth to occur. If the people won’t borrow, you can sure bet the governments will do it for them and that is exactly what took place in 2010.
A final thought. A few asked if what is going on would have happened if we didn’t have a global biologic event. As you can see by the chart above, we’ve been long overdue. The QE done by the federal reserve is unhealthy for the economy and if our economy was truly healthy, it wouldn’t need constant stimulus or massive federal, state, local, and personal deficits to function. The ‘solution’ for nearly 2 decades has been to print money and blow up bubbles. Put simply, at some point bubbles always burst and this most recent one was looking for its pin.
I will be on either a brief Q&A segment with Joe Cristiano’s Liberty Talk Radio or I’ll be releasing a short podcast this evening. I know many of you are not in the US so my apologies for the short notice. Please email your questions when you can and we’ll go from there.
Topics? While I have medical training, I am not qualified to speak on the issue of COVID-19 beyond the most general of terms. I would like to focus on the global financial markets and the very strong likelihood that another 2008-style event was imminent as early as last summer.
Now, with global markets shredded, economies left in doubt, and the population of a growing number of countries behind closed doors, what needs to happen next? We’ve heard some solutions. Are they the right ones?
We’ll be addressing these issues – and your questions – tonight. Don’t miss it!
“The past month has been one of nearly continuous turmoil in the financial markets”. That might well be the understatement of this still fairly new century. Keep in mind that during the past 20 years, we’ve had 2 significant recessions (according to the Bureau of Economic Analysis), a complete meltdown of the .com mania, the inflation of a real-estate bubble and its subsequent bursting, the halving of US financial indexes, and the bankruptcy of names like Lehman Brothers, and AIG to name a few. Throw in a massive bailout, a fusillade of rescue programs like TARP, TSLF and the resulting blowout of the federal reserve’s balance sheet. This is within the first 10 years. Keep that in mind.
The second ten years have featured D-E-B-T – on all levels. Governments
of the world, states and provinces, local municipalities and parishes,
students, consumers, homeowners. In short? Pretty much everyone. That debt has
driven the economy for the past decade. Globally. Many will think this is just
an American problem. It’s not. Misery loves company, right? Not so fast. In
this brave new world of interlocking economies and financial systems, a failure
on the other side of the world can cause problems in our own back yards.
Entire countries have gone bust and have had to go hat in hand to their representative central bank. Remember Portugal, Ireland, Italy, Greece, and Spain? Don’t forget the tiny island of Cyprus and its king-sized banking crisis, which led to a bank holiday and eventually a bail-in. Wait, we just talked about a bailout. What’s a bail-in? We penned a serious of articles on this topic back in 2013. Read them here. Keep in mind that this is very non-exhaustive and brief summation of some of the more important events.
Which brings us to the present. Yesterday, 3/11/2020, the ENTIRE yield curve for USGovt bills, notes, and bonds was under 1%. That’s not a typo. There is rampant talk of negative interest rates here in the US. This phenomenon is already happening in Germany – the powerhouse of the European Union and several other easily recognizable nations. Moves in the bond market that generally take many months are now taking days. If you’re planning on retiring and living on the interest of your bonds, you might want to rethink that strategy. Many of the people we communicate with regularly have themselves or know quite a few people who have gotten a 20% haircut or more on their equity investments since the beginning of the year.
Much of the more recent activity has been blamed on the emergence
of a new Coronavirus. The fear alone that has been imparted by the mainstream –
and even alternative media is bound to have some kind of impact on the global
economy. Economists are already clamoring for cash payments to citizens as a
means of ‘stimulating’ the economy. In the US we’ve done this twice previously
in the past two decades. Both were credited with averting nasty recessions.
Both went directly on the federal budget deficit here in the US. Debt has
indeed become the answer to all that ails most economies the world over.
The gyrations and volatility in financial markets have been
enough to give even seasoned investors a serious case of whiplash. In the past
10 trading days the Dow Jones Industrials Average here in the US has had its
two biggest down days – EVER – in terms of the number of points lost. Sandwiched
in there are some of the biggest up days – EVER – again, in terms of index
points. Oil crashed over 20% in a single day. Gold has broken out and is once
again around/over the very important $1650 level. Silver is probably the
bargain of the century to this point. Throw into all this a major year in terms
of the political arena. And no, we are not breaking our tradition of focusing
on policy. The policy provides the answers. The names only serve to
muddle the issues.
As we write this evening of the 10th of March in the year 2020, it is quite possible and likely that the economic and financial foundation that we all rest on has begun yet another metamorphosis into something completely different than we’re all used to. Contemplate the concept of negative interest rates alone. Such a ridiculous move would take several hundred years of investing philosophy and modeling and flush them directly down the toilet. Again, this is likely an understatement. The US went from a national debt around $14T during the 2012 campaign season to a level of $23.5 trillion in the early part of 2020. In 1986, America reached the $1 trillion mark. Any stimulus will go right on the tab.
Many people are electing to stay home for fear of
contracting COVID-19 and with all the uncertainty that exists regarding this
virus, we refuse to pass judgement. Since consumers are responsible for nearly
70% of US Gross Domestic Product, even a month’s cessation of vacations,
cruises, flying, going shopping and all the other activities that fall under
consumption, we could easily see a sizable dent popped into Q1 GDP. Or the
money might be spent online, and it might not affect GDP that much at all. The
situation in China can only be guessed. Sadly, national governments have a
growing aversion to the truth even when lives are at stake.
In summation, we cannot and will not make any ‘predictions’
regarding Q1 GDP, consumer spending and the balance of trade. Given that oil
has dropped precipitously, that drop will translate into lower gas prices at
some point and that will lower that portion of consumer spending, which will
negatively affect GDP. This reality makes a strong case that we should be
measure growth in units rather than dollars wherever and whenever it is
practical to do so. The best advice we can give is gather as much information
as possible and try to avoid making decisions based on emotion. Seeing the Dow
Jones Industrials Average lose over 2,000 points in a single trading will
unnerve even the savviest of investors.
Living off the interest from investments, for all purposes,
is not going to be feasible for the foreseeable future. Our economies are
hooked on low interest rates. That is helpful for the borrower, but lethal for
the investor. It forces investors with shorter time horizons into the riskier equity
markets. This situation represents a clear and present danger to the standard
of living for millions of people in America alone.
This is not all gloom and doom, however. Again, like 2008,
we have a chance to endure the economic pain necessary to down regulate our
debt-laden, consumption-oriented economy into something that doesn’t need
trillions of borrowed dollars each year just to keep plodding along at a snail’s
pace. We have an opportunity. Will we avail ourselves of it? If the talking
points coming out of the television and Internet media outlets is any
indicator, we will most likely not take this opportunity, opting instead to
kick the proverbial can down the road ensuring that the pain will only be worse
for the next generation when they are forced to deal with it. We challenge not
only America, but the rest of the world to put down the credit cards and take a
step back. We did it here in the US during 2010. We can do it again. But will
we?
Andy’s Notes: Inflation, the Debt Ceiling, and the Dow Jones mentioned in the same sentence. They all have one thing in common – they’re going up. Asset bubbles are much more palatable by the average person than cost of living bubbles. In other words, when inflation blows up stock indices, the world cheers. When it blows up the cost of things like food, gas, and other necessities, that is not acceptable. (Click the thumbnail below to see the whole image).
