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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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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Great Depression II – It Can’t Happen to Us, Can It? – Republished from May 2008 – with Addendum

3 CommentsBailouts, Banking, Bond Market, Debt Ceiling, Geoeconomics, Government Statistics, Interest Rates, Monetary Policy, The Completely Absurd, , , , , ,

Webster’s defines complacency as “1.satisfaction or contentment 2. smug self-satisfaction” There is probably not a better word to describe the current state of perception with regard to economic and financial malady. I had an interesting conversation the other night about exactly this topic and the individual I was speaking with had an overriding belief that we cannot suffer economically simply because the current generation is not prepared to deal with it. While I certainly agree with the latter assertion, the former continues to baffle me. I am certainly not prepared to deal with a lengthy hospital stay as the result of a horrific car crash, but that alone doesn’t cloak me in immunity from having an accident. The reasoning is so broken and flawed, yet it is often all we get in terms of a perception of what is going on.

This disconnect begets a discussion of why exactly it is that society has chosen to believe itself to be immune from bad things. It is odd in itself that when you talk to individuals, they seem to be acutely aware of many of the challenges facing us, but when you put all the individuals together and create a society, we act as though the party will indeed last forever. We are certainly dealing with a situation in which the intelligence of the whole is by far less than the sum of all its parts. Here’s a little bit of déjà vu for you, compliments of Wikipedia:

“In the 1920s, Americans consumers and businesses relied on cheap credit, the former to purchase consumer goods such as automobiles and furniture and the later for capital investment to increase production. This fueled strong short-term growth but created consumer and commercial debt. People and businesses who were deeply in debt when price deflation occurred or demand for their product decreased often risked default. Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as construction work and factory orders plunged.”

Sound familiar anyone? See any price deflation going on? The Wilshire 5000 has only lost about 2.5 TRILLION dollars in value in the last two months or so. What about the loss in home equity? Another trillion or two? Who knows, but I think you get the point. We are seeing almost to the final utterance the same play we saw unfold in 1929. Were those folks any more prepared for the Great Depression than we are today? I’d argue that while they were perhaps a bit better equipped to provide for their own sustenance, that American society in the 1920’s was as complacent as we are today. When the realization of history’s coup de grace hits, we will be caught as unaware as our ancestors were back in 1929.

Here are some other examples of what Alan Greenspan likes to call ‘irrational exuberance’ in the 1920’s:

“We will not have any more crashes in our time.”

John Maynard Keynes in 1927 (The authenticity of this one is a little suspect) DOW ~ 175

“There will be no interruption of our permanent prosperity.”

Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928 – DOW ~ 200

“There may be a recession in stock prices, but not anything in the nature of a crash.” – Irving Fisher, leading U.S. economist, New York Times, Sept. 5, 1929 – DOW ~ 375

“All safe deposit boxes in banks or financial institutions have been sealed… and may only be opened in the presence of an agent of the I.R.S.” – President F.D. Roosevelt, 1933 – DOW ~ 65

Tuesday morning we received news that according to the Institute of Supply Management, the service portion of our economy underwent a significant contraction during the month of December. This is alarming given the fact that December is normally one of the busiest times of the year. Even still, a trip past the local mall provides a busy scene. People are streaming in and out, carrying boxes and bags of imported trinkets to their imported cars. They will then use imported gasoline to drive to their home, the mortgage of which is likely to be owned by a foreign investor. Yet the average American citizen sees nothing wrong with this picture. Or could it be that they don’t even see the picture at all? The media has certainly been playing the role of absentee informant in recent years, choosing to focus on such insipid topics as Britney Spears’ latest rehab stint rather than the important business at hand.

Here now, are some quotes from this generation’s 1929..in 2007 and 2008:

“It is encouraging that inflation expectations appear to be contained,” Fed Chairman Ben S. Bernanke – Testimony to Congress – March 28 th , 2007 – DOW ~ 12,500, Headline CPI-U ~ 2.8% Y/Y

“As I think you know, I believe very strongly that a strong dollar is in our nation’s interest, and I’m a big believer in currencies being set in a competitive, open marketplace,” – Henry Paulson – Secretary of the Treasury – USDX ~ 81.50

““We are making history. What has passed the Congress in record time is a gift to the middle class and those who aspire to it in our country.” House Speaker Nancy Pelosi on the $168 Billion tax ‘rebate’ while the middle class is spending their Wal-Mart Christmas gift cards on food and other necessities.

They’re making history all right. Too bad it will end up being the WRONG kind. How can we ever hope to focus the population on the urgency of our current predicament when our leaders are willing to make it worse by handing our freebies, bailing out those who willingly make poor investment choices and telling us everything can be ‘free’ if we’ll only pull their lever on election day?

Or am I putting the cart in front of the horse? Perhaps a contrarian opinion might be that our leaders are giving the public exactly what it wants. In either case, I am quite certain that our state of unpreparedness will not constitute a free pass from the negative effects of a recession or a retraction of any of the financial excesses we’ve enjoyed over the past few decades.

Addendum – June 2023

Most people today don’t even remember Hank Paulson – or his ridiculous statements regarding the US Dollar. If a strong dollar was truly in our national interest, then we have no national interest left thanks to those fine, unaccountable feathered friends at the not-so-USFed. Poor Hank was like a financial piñata – no matter how many hits he took for this grossly erroneous statement, he kept right on spilling out candy.

15 years later and only the names have changed. The vocabulary-challenged Paulson is long gone, replaced by less than erudite Janet Yellen. Evidently one of the requirements of a Treasury Secretary or a not-so-USFed Chairman is to be able to speak for an hour and say absolutely nothing. Jay Powell is definitely at a disadvantage; he actually tries to explain things.

Economics isn’t rocket science. Or anywhere close. It’s a rather simple topic to understand. It is made complex by institutions who benefit when the population is clueless. When it comes to obfuscation, most policymakers get a AAA – ironically the same grade assigned to those worthless MBS back in the heydays of 2005-2007.

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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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Russia/China Currency Alliance is Now Doing Less than 50% of Business in US Dollars

Currencies, Debt Ceiling, Economics, Geoeconomics, Geopolitics, Interest Rates, Modern Monetary Theory, Trade War, , , , ,

This is something we have been talking about what seems like forever. The move away from the dollar. It was always a matter of when rather than if and unfortunately we’ve reached the point now where the majority of transactions between these two growing economic powers is done away from the $USDollar. This has many, MANY implications for all Americans and anyone else who uses the $USD as their primary means of storing wealth.

This move also explains the embracing of Knapp’s modern monetary theory that was soft-introduced back in 2018. We wrote an extensive paper on MMT and we’re posting this again below for anyone who hasn’t read it. We will be releasing another commissioned paper by Labor Day. We’ll also be re-posting relevant articles that were written between 2006 and the present on precious metals, the dollar standard, bail-ins, and general relevant macroeconomic articles as well.

Please visit the site often to catch updates. You may also ‘subscribe’ to receive a notification when new material is posted. There is no cost for subscribing and we don’t maintain any records. WordPress will keep your email address and any other info you provide – please see our Privacy Policy for more details. There will be more information shortly.

Sutton/Mehl

Here is the paper on modern monetary theory – Read/Download here.

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Washington Town Creates Currency for Local Use

Banking, Currencies, Monetary Policy, , , , ,

Andy’s Notes: The four requirements of any money are intrinsic value, a unit of account, a store of wealth, and a medium of exchange. These new minted ‘bills’ are able to be used locally, but the holders cannot compel any business or individual to accept them as legal tender. The US has legal tender laws that specify what may be used as legal tender. Does this make it a bad idea? Not necessarily. The USDollar doesn’t meet the ‘store of wealth’ requirement because of inflation and it is still accepted everywhere in the US. The Dollar also has little or no intrinsic value. The Tenino bills lack intrinsic value as well, but meet the other three requirements as long as everyone in the cohort is willing to accept them as legal tender and – this is a biggie – the bills are backed in such manner that whoever runs the printing press can’t print themselves a nice pile and go out and buy real goods with them.

The last sentence above is key to why banking systems fail over time. The temptation for the printers of money to run off currency beyond the backing is too much. This is why the banks of the 1800s failed so often. They’d over-issue silver certificates beyond the silver stored. The people would get wise to it and run the bank demanding silver and the banks would run out and have to close.

Since we no longer have redeemability on US currency, it makes over-issuance a real problem, especially in the digital age. Will the ‘wooden dollar’ experiment work? Time will tell. If nothing else, this is yet another signpost on the trek to the end of the road for the used and abused USPetrodollar.

Sutton/Mehl

TENINO, United States, July 9 (Thomson Reuters Foundation) – Tucked away under lock and key in a former railroad depot turned small-town museum in the U.S. state of Washington, a wooden printing press cranked back to life to mint currency after nearly 90 dormant years.

The end product: $25 wooden bills bearing the town’s name – Tenino – with the words “COVID Relief” superimposed on the image of a bat and the Latin phrase “Habemus autem sub potestate” (We have it under control) printed in cursive.

With the coronavirus pandemic plunging the United States into a recession, decimating small businesses and causing job losses across the country, some local governments are looking for innovative ways to help residents weather the storm.

For Tenino, the answer was the revival of the local currency that had bolstered the town’s economy in 1931 in the wake of the Great Depression.

“It was kind of an epiphany: Why don’t we do that again?” Mayor Wayne Fournier told the Thomson Reuters Foundation. “It only made sense.”

Tenino, a town of less than 2,000 people located about 60 miles (95km) southwest of Seattle, started printing the local banknotes in April, five weeks into Washington state’s lockdown.

Anyone with a documented loss of income as a result of the pandemic is eligible for up to $300 a month of the local currency.

Businesses up and down the town’s quaint Main Street accept the wooden note for everything except alcohol, tobacco, cannabis and lottery tickets.

Tenino’s city government backs the local currency, which merchants can exchange for U.S. dollars at city hall at a 1:1 rate.

Susan Witt, executive director of the Schumacher Center for a New Economics, a Massachusetts-based think tank, said alternative currencies like Tenino’s banknote are better than direct cash payments at boosting local economies.

“The City of Barcelona gave donations (in 2017/18) to sports teams and cultural groups as well as social programs (then) watched these donations go to big box stores,” she said in emailed comments.

“So, it created a local currency so that these ‘discretionary’ funds in its budget would circle back to support locally-owned businesses.”

‘WOVEN INTO OUR DNA’

Mayor Fournier noted that, for long-time Tenino residents, the wooden notes are nothing new.

The tiny town founded around a sandstone quarry achieved national prominence in 1931 when civic leaders printed a wooden local currency to restore consumer confidence after the town’s bank failed during the Great Depression.

“This is woven into the DNA of the community,” Fournier said. “My great aunt Erlene has the family collection all stashed away.”

The mayor brought the idea of resurrecting the town’s legacy project to the city council as a way to provide economic relief to businesses and residents suffering as a result of lockdown measures to slow the spread of COVID-19.

In April councillors approved the proposal to issue up to $10,000 in local scrip.

So far, 13 residents have successfully applied for the funds and some $2,500 worth of wooden bills have been issued, Fournier said, with donations upping the total funds available to $16,000.

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A Gamble for All Time

Bailouts, Banking, Consumer Finance, Economics, Geoeconomics, Modern Monetary Theory, Monetary Policy, National Debt, , , , ,

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…

Sutton/Mehl

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Timeline of Global ‘Reserve Currencies’

Bailouts, Bond Market, Currencies, , , , ,

Notes: This has been posted before, however, it is imperative that people understand that no reserve currency lasts forever and such will be the case with the Dollar. This was going to happen anyway – even before the events of the past several months – although they might well have hastened its demise. What are the signals? Rampant accumulation of external debts, out of control monetary creation (the fed ‘pumping’ liquidity is a good example), and almost no one speaking out about the above.

Sutton/Mehl

The World's Reserve Currencies of the Past Half Millenium

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A Picture Worth a Trillion (and then some) Words?

Consumer Finance, Debt Ceiling, Economics, Government Statistics, Monetary Policy, National Debt, , , , , ,

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).

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