Posted July 20, 2021
By Byron King
A World of Inflation and Permanent Distortion
“Inflation is an insidious form of public finance,” said Bill Bonner, founder of Agora Financial. He spoke the other day at the 2021 Symposium on Natural Resource Investing, sponsored by old friend Rick Rule.
Bill’s talk wrapped up three days of online (due to COVID) discussion about subjects we review often here at the Whiskey bar. That is, how government spending, plus bottomless debt, has ruined the classic investment landscape, if not the very money in your pocket.
Sure, we still use fiat currencies – dollars, euros, pounds, yen, yuan, etc. – for everything from day-to-day transactions to running the global economy. And really, who amongst us would not bend over to pick up a $5 bill on the loose, blowing across the parking lot?
But globally, central banks have sown the seeds of a looming monetary catastrophe. It’s bad now, getting worse by the month and there’s no way out using current monetary tools. People with serious money know this.
In an earlier article, I discussed how wealthy people are converting cash to hard assets like silver. That, and much more.
So today, again, we’ll look at other takeaways from the symposium.
Let’s dig in…
“The elite control government,” said friend Bill, matter-of-factly, continuing his talk. “And government controls inflation.”
Bill explained that 1987 was a monetary turning point. Back then, Alan Greenspan was running the Federal Reserve and a sudden, sharp market downturn struck in late October.
Greenspan saw a crash coming but apparently, he didn’t want something like that in his logbook. Not on his watch, eh? Thus did Greenspan use the power of the central bank to intervene. He lowered interest rates and increased money supply. And that set the modern precedent.
Ever since Greenspan’s manipulations, through thick and thin, the Fed has backstopped rising markets. Whenever something bad appeared on the horizon (“bad,” as in it might cost Wall Street money), the Fed lowered interest rates or pumped liquidity out into the economy. It’s how central bankers don’t do central banking anymore.
The problem, though, is that markets have moved up so high that it’s difficult to conceive how they can move higher. All that liquidity, created from the ether and listed on central bank balance sheets, has “borrowed” growth from the future and channeled it into current consumption.
Fed money first takes the express train from Washington to New York, where it stops at the Wall Street Station, there to unload into the coffers of stock and bond traders, bankers and the like. That’s why we’ve seen eye-popping levitations of stock prices and indexes.
The Wall Street money flows outward into other, high-end asset inflation: Fancy real estate; and certainly, Park Avenue apartments and Hamptons estates come to mind. Plus other baubles of the wealthy, like top-shelf artwork, cars, private jets, jewelry and such.
At the same time, there was a slightly different turn of events over the past 18 months, courtesy of COVID. We’ve seen a couple trillion of those new Fed dollars wash out from the Wall Street sluice gates and flow into the overall economy. It was via programs like “Paycheck Protection,” increased unemployment comp, those so-called “stimmy” checks and more.
And now we witness the opening act of inflation, as all that new money chases a COVID-constrained supply of goods. You see it from higher-priced food on store shelves to pricey gasoline at the filling station, and in autos, housing (for regular people, versus the mansion-buyers) and things like lumber and components of home additions.
Which brings us back to Bill’s point that we’re in an inflationary time because of the country’s central bank. Yet per Bill, the Fed can’t tighten because that would involve higher interest rates and less money creation.
“Higher interest rates and tighter money are a catastrophe for the rich,” said Bill. “The whole capital structure of the U.S. would collapse. The government couldn’t finance its operations, let alone service its debt.”
And thus does the monetary ship of state sail on into the night, faster and faster into dark waters where more and more icebergs float.
“Inflation is a tax,” Bill continued. “It’s paid by 90% of the people, the ones on the lower end of the economic scale. And it redistributes wealth to the top 10%.”
Bill’s talk dovetailed with what we learned from friend and colleague Jim Rickards, who discussed what he calls the “four futures of money.”
That is, looking ahead, Jim foresees the current regime of global currencies fading away, to be replaced by some future combination of gold, cryptocurrency, special drawing rights (SDRs) and central bank digital currencies (CBDCs).
Gold is, of course, the 5,000-year-old failsafe. It’s been around across human history and there’s no reason to think it won’t remain as a means to preserve wealth over time.
But “nobody in power talks about gold,” said Jim. “They don’t want to undermine the power of their printing press.” That is, politicians and monetary gurus have a good thing going just now, in which they create money in a computer and spread it around. It beats working for a living.
At the same time, per Jim, “the global economy doesn’t run just on money. It runs on credit.”
Thus any sort of modern economy can’t be based on the quaint idea of trading gold bars for goods. That may have worked 300 years ago, and far longer if you go back in history, but it won’t fly in today’s tightly integrated world.
There must be a way to denominate currencies such that they have backing, so people can compare and value one form of currency with another. It’s much like what people did at Bretton Woods in 1944 (Whiskey, July 10), with a gold-backed dollar.
But alas, in August 1971 President Nixon “closed the gold window,” as the saying goes (the 50th anniversary of which is coming up in a few weeks). And ever since, the global economy has been running on the strength, or not, of the U.S. dollar tied to the price of Middle Eastern oil.
Meanwhile, there’s a move away from the very idea of national currencies, courtesy of crypto, of which the biggest name is Bitcoin. “But Bitcoin is anti-credit,” Jim pointed out.
“We’re immersed in a digital ocean,” said Jim, in which over 4,000 distinct cryptos compete for attention and valuation with no semblance of homogeneity. “Nobody is in charge.”
Meanwhile, cryptos in general (certainly Bitcoin) only come into existence through use of large amounts of electricity to run and cool banks of computers. Yet the end result is a code or key, and nothing tactile. “At least when you use energy to mine gold, you have gold,” said Jim.
“With Bitcoin,” Jim continued, “it seems like people are losing sight of what money really is.” That is, Bitcoin fits nicely into a world where literally hundreds of millions of people play video games. In that respect alone, the idea of cryptocurrency runs the risk of turning money into just another game as well.
“Bitcoin won’t displace the dollar,” said Jim, “but along the way it could definitely help destroy the dollar.”
Then Jim addressed SDRs, which have been around for many decades, but which are about to see a major expansion. In essence, developed nations (meaning the U.S.) will create a batch of SDRs with an initial ante of $650 billion and give access to the funds for many underdeveloped countries.
SDRs are not dollars. They’re more of a basket of assets that include dollars. And yes, they will have value. But in a world where other governments like the U.S., China, the European Union and more routinely spend multitrillions of dollars, SDRs won’t become the global reserve. Not anytime soon.
And then there are CBDCs, which are at root national currencies, but far more tied to the central bank origin via electronic tagging.
With CBDCs, it’s not difficult to envision a cashless (and dystopian) world in which everyone banks at the central bank. Traditional banking has been what’s called “disintermediated,” meaning that it’s just gone. There are no more banks, nor are there credit card companies.
Basically, everything runs through your personal account at the Fed, or other central bank of a different nation. And right away, CBDCs present a “single point of failure” issue. Lose your account or access for any reason and you are written off from the system.
So what’s a person to do just now?
Well, we live in a world where major markets are in a state of permanent distortion.
Old friend Adrian Day offered his ideas for how to keep ahead of the fickle markets. He looks for companies that pay strong dividends, and/or things that are out of favor. In general he’s entirely bullish on hard assets like gold, silver and selected commodities.
Adrian mentioned several companies that he has screened for solid balance sheets and cash flow. These include Hutchison Port Holdings Trust (OTCBB: HCTPF), currently yielding over 6% on dividend. Vodafone Group Plc (NASDAQ: VOD), currently yielding 7% on dividend. And GlaxoSmithKline plc (NYSE: GSK), currently yielding over 5.5% on dividend.
Meanwhile, Adrian believes that “gold stocks are the single-best risk-reward play in the market.”
According to Adrian, the major and most intermediate gold miners are “unquestionably better companies today than they were 15 years ago,” yet they sell for a relative song. “They’re not overleveraged anymore, and they’ve paid down debt.” Company management teams are focused on delivering “profitable ounces.”
Meanwhile, copper companies are a strong idea as well. Per Adrian, it’s a combination of declining output from older mines and constrained supply from new locales. “Discoveries are rare,” said Adrian, echoing what we’ve mentioned before here in Whiskey.
And as fate would have it, in Monday’s Wall Street Journal was an article titled “China Fights High Commodity Prices,” detailing an effort by Chinese authorities to keep a lid on copper prices by selling state stockpiles. It’s not working, per the Journal.
And then in a later article, The Wall Street Journal discussed how mining giant BHP is raking in profits on current production, with very modest plans to expand at present. In other words, BHP will not sacrifice its capital and borrowing power to make massive new investments in future output. Instead, it will just keep operating efficiently and generate cash and dividends for the shareholders.
In the end, it’s a dangerous era. We live in a world whose monetary base is far overextended, and which has financial collapse built into it from many angles. At the same time, the world of hard assets remains underappreciated and undervalued, yet critically necessary literally to keep the lights on.
It’s a good time to be buying into gold and silver, plus mining shares that represent wealth in the ground. We’ll discuss it more in other articles.
On that note, I rest my case.
That’s all for now… Thank you for subscribing and reading.
Byron W. King