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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Where Do We Go from Here? Economic Analysis for Remainder of FY2020

Bailouts, Consumer Finance, Debt Ceiling, Economics, Modern Monetary Theory, My Two Cents, National Debt, Trade War, , , ,

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.

Treasury Secy. Steve Mnuchin claims all that debt doesn’t give China any leverage on America. We’ll allow you to draw your own conclusions.

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.

Sutton/Mehl

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Chart of the Day – US National Debt by the Year

Bailouts, Debt Ceiling, National Debt, , , , ,

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.

Sutton/Mehl

**Chart compliments of CNS News**

US National Debt

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Liberty Talk Radio – Bailout 2020 Edition

Bailouts, Banking, Economics, Geoeconomics, Interest Rates, Liberty Talk Radio, Monetary Policy, , , ,

Dear Readers, Andy was on Liberty Talk Radio again with Joe Cristiano to discuss the 2020 economic stimulus package recently passed by Congress. We’ve reached a critical inflection point as a country – we now ‘need’ these stimulus programs / bailouts to continue to function in our current monetary and economic system. During the crisis of 2008, there was a chance to change course. With the passing of 12 subsequent years, so has the chance to sufficiently alter course. We’re locked into the petrodollar system until the next currency model emerges.

For convenience and at the request of several readers, we’re adding the audio from the discussion in mp3 format. You may listen below or download it by right-clicking the link. More updates to follow.

Sutton/Mehl

https://www.andysutton.com/blog/wp-content/uploads/2020/03/ltr_03282020.mp3

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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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