Hello again, and I hope you’re sitting down…
As promised, I’m going to explain what I’m simply referring to as The Great Inflation, because it’s going to affect you, and it’s going to happen faster than people think, albeit in an insidious way.
Of course, what you’re going to read now is only my opinion. I may be wrong, but the evidence isn’t pointing that way, and I’m not alone in this inconvenient thesis. In any case, keep an open mind and don’t let your mind be swayed by how you’d LIKE things to be, but how things ARE. I say this because a significant number of comments we get from readers are, while positive, suggesting that they’re living according to how they would LIKE the world to be, not how it IS.
I’ve written at length in these newsletters about fantasy and reality and I’ll come back to it another time, because this seems to be a disease that is spreading, and it’s a disease that’s dangerous for your wealth, because reality is where money is made, not fantasy (and my base assumption is that you’re here because you want wealth, success, freedom, health, and all that good stuff). And what I’ll explain here today is as much as OPPORTUNITY as an impending crisis.
I hope you don’t mind, but I see you as a friend that I speak to every week. A TRUE friend tells you the truth, however uncomfortable that truth is. Most ‘friends’ tell you what you want to hear. If that’s the kind of friend you want, listen to the mainstream media. They tell you what you want to hear because they need to sell ad space and please their sponsors. I have no obligation to anyone other than YOU when I write these letters.
So please let me set the stage for the government-induced drama that’s about to play out…
Long-time readers will know I’m not a big fan of The Federal Reserve. For years now we’ve been trying to alert you about their legalized counterfeiting program they risibly refer to as “Quantitative Easing”. The whole world swallowed this nonsense without a single raised eyebrow. And don’t think I’m singling them out, because most Western governments are at it: the UK, Europe, Japan. Norway stands out to me as the only country that seems to be able to balance a checkbook. There is nothing “Federal” about The Federal Reserve. It’s a private organization that was formed by bankers on Jekyll Island in 1913. It is charged with making a profit. And it doesn’t have any “Reserves”, that’s just a play on words to instill confidence.
As we’ve witnessed economic crisis after economic crisis (induced by greed and corruption by The Fed’s buddies on Wall Street), the masses cheer as the good ol’ Fed comes to the rescue and puts the bounce back into the market’s step.
This is why speaking this way with many people is so unpopular- because The Fed are perceived to be the heroes who make the monster under the bed go away.
But there’s a price to pay for this protection…
If you read the classic H.G. Wells novel, “The Time Machine”, or watched the film adaptation, you’ll recall that the inventor of the time machine races into the future to experience what appears to be a utopian existence on Earth. In this utopia, nothing bad ever seems to happen to a race of pretty humans called “Eloi”. Food is provided in this paradise as if by magic. They live in blissful ignorance, and the libraries have turned to dust because nobody needs to know anything anymore.
But there’s a secret price for the Eloi to pay, as it turns out. A race of grim monsters called “Morlocks” live underground and provide the good life for the Eloi, but the Elois are all ultimately doomed as the Morlocks take them for sacrifice in payment for what the Morlocks provide.
Consider The Fed as the Morlocks, and your good self as a humble Eloi. Good fiction authors are always trying to warn society about injustices they see all around, albeit in a metaphorical way…
As you don’t want to end up like those happy but ignorant Eloi then, let’s have a little history…
After the Second World War, a system similar to a Gold Standard and sometimes described as a “gold exchange standard” was established by the Bretton Woods Agreement. Under this system, many countries fixed their exchange rates relative to the U.S. dollar, and the dollar became the world’s reserve currency. This effectively meant that anyone could exchange their dollars for physical gold.
As the US struggled in the 60s with a bad balance of payments, mostly because of The Vietnam War, foreign countries such as France took America up on this promise and started cashing in their depreciating dollars for gold.
And in response to this, Nixon slammed the door in 1971 and ended the Gold Standard (known as The Nixon Shock). Since then, our government has been on what is called a ‘fiat’ currency, that is, a currency that is only worth as much as the promise of a politician, it’s not linked to anything of intrinsic value.
In 1996, Nobel-prize winning American economist Paul Krugman summarized the post-Nixon Shock era as follows (emphasis mine):
“The current world monetary system assigns no special role to gold; indeed, the Federal Reserve is not obliged to tie the dollar to anything. It can print as much or as little money as it deems appropriate. There are powerful advantages to such an unconstrained system. Above all, the Fed is free to respond to actual or threatened recessions by pumping in money. To take only one example, that flexibility is the reason the stock market crash of 1987—which started out every bit as frightening as that of 1929—did not cause a slump in the real economy. While a freely floating national money has advantages, however, it also has risks. For one thing, it can create uncertainties for international traders and investors. Over the past five years, the dollar has been worth as much as 120 yen and as little as 80. The costs of this volatility are hard to measure (partly because sophisticated financial markets allow businesses to hedge much of that risk), but they must be significant. Furthermore, a system that leaves monetary managers free to do good also leaves them free to be irresponsible—and, in some countries, they have been quick to take the opportunity.”
I guess everyone’s a high roller there, then! And don’t think things like this are restricted to banana republics in Africa- the list of countries in recent history that have played with the inflationary fire and got scolded goes back to Roman times, and include famous examples such as Germany in the 1930s, AND the USA TWICE (the revolutionary war and the civil war), and Argentina very recently.
The middle classes lose the shirt on their backs when this happens because in a Great Inflation wages do not keep up with prices.
The government has made itself clear- not in words on CNN, but with actions in the markets, about what it intends to do…
Uncle Sam is currently staring down the barrel of a rather large shotgun. Through politicians (Republican, Democrat, whatever- they’re all to blame) spending money they don’t have (mostly on ‘free money’ promises to get elected). This debt is coming due within a few years and the interest payments on this debt alone is astronomical. Other governments are all trying to borrow as well so there’s competition out there for government borrowing. The situation is more critical than they will ever tell you.
In short, the government desperately needs money, and fast, or it will risk sovereign bankruptcy. And here are the ONLY options they face to get that money:
1. Tax more.
2. Spend less.
3. Print all the money they need to buy their own debt.
In a democracy, the first two options will not win votes!
So that ONLY leaves option 3. And they have demonstrated their choice of option 3 ever since late 2008. There is no other way out of this mess. This is the path Weimar Germany took in the 1930s.
So the Eloi (read: middle and working classes) are about to pay a dear price. For decades they’ve enjoyed free food on their table from the Morlocks, and there’s no such thing as a free lunch.
The bill for this bountiful lunch has come due, and it will be presented stealthily, and in a way that the government can deny accountability for catastrophic service. The finger will probably be pointed at rich people- all politicians need a scapegoat to deflect blame, like the Jews in 1930s Germany.
I don’t think this is a good situation- I think it’s truly appalling, actually. I sincerely wish this were NOT true. But it is. And I must deal in reality, not how I want things to be, but how they ARE.
Imagine the world as an empty bathtub. This emptiness is what deflation causes, that’s what the world economy naturally has wanted to do for years but the government stopped it. That’s what happened in the Great Depression.
But now imagine that The Fed comes along with a hosepipe, and it’s going to flood that bathtub. Anything tangible is going to float in this sea of printed money. Real estate, stocks, gold, anything that is TRULY tangible. Cash is NOT tangible, and neither are government bonds.
The danger is that everything you think you know about money, and what every investment professional thinks they know about money could betray you in The Great Inflation: cash in the bank is NOT good in this situation. It will be made worthless.
Employee wages are NOT good in this situation. Employers will not be able to pay wages that keep up with inflation.
And any business that does not have pricing power will suffer. If the costs of its raw materials and/or services go up, it has to either raise prices or go under. If it has no pricing power and the cost of its materials has gone up, profit is wiped out (hence they can’t pay higher wages to keep up with inflation and the cycle escalates).
Want to know what asset fares best in The Great Inflation?
No, it’s not gold (though gold will do very well).
There has never been a more crucial time for you to get into business for yourself, especially one that has pricing power. Think Internet. Think anything with high perceived value and/or high profit margins that preferably doesn’t require raw materials. You have to become financially independent ASAP, you must have a safety net.
The good news is that if you own your home, it’s going to go up in value and your mortgage payment will stay the same in line with wages. If you don’t own a home but were thinking about buying, you should strongly consider it.
So mortgage payments will stay the same, but gas prices and food prices? Forget it. Now, why do you think the government excludes food and gas from the inflation figure they quote? Hmmm, I can’t think why…
Your power bill, your cable bill, insurance bill, all up. Property tax probably too.
If you were thinking about changing cars, do so now, and perhaps make it a hybrid.
Again, I wish it wasn’t the likely outcome, but it is. Wages and welfare will stay the same, but expenses will rise, and the squeeze will be on. This can only result in a drop in the standard of living for the average American.
I’m saying this as a friend who cares about you, and who sees a storm in the next few years. You still have time, time to become financially independent, time to get into hard assets.
And when The Great Inflation comes, you’ll thank me, even though it’s disconcerting now. And when that time comes, make sure you know who’s really responsible for the mess, and don’t go blaming the scapegoats the politicians select.
The people were entrusted with the right to vote. They voted for “free money”. And that’s precisely what they’ll get: free money. And it will be free because it will be worthless.
And that’s what the Eloi voted for too.
Until next time,