Source: David Stockman
    In a moment of unexpected candor, Jerome Powell, Chairman of the US Federal Reserve Bank,  recently said the US "was on an unsustainable fiscal path," that "we are borrowing from future generations," and efforts must be undertaken to address this problem, "the sooner the better." Former Treasury Secretary Robert Rubin told Bloomberg that the US is "in a terrible place." Jamie Dimon, Chairman of JP Morgan said that the US was heading for a fiscal cliff "at 60 mph." 

    Following such dire warnings, Americans would expect Congress to be urgently focusing on this looming disaster. Instead, their elected representatives are fixated on: 1) what should be done about the nation's southern border where millions of immigrants have been perfunctorily waved into the country by the "Border Patrol," and 2) how many more tens of billions of dollars in aid and war materiel to give to Ukraine and Israel. Will those in government ever get serious about the fiscal crisis they created with their decades of unrestrained spending? The answer is, "Not likely." Spending is how they pay back their political supporters with ever more money for "welfare and warfare." What is the consequence of their feckless spending?

    Examine the next chart. You may notice a "trend." Between the years 2000 and the present, the "purchasing power" (value) of the US dollar, as reported by the Federal Reserve Bank of St. Louis, has declined by an astonishing 43%! This huge devaluation of the currency has savaged retirees trying to live on fixed incomes as well as savers and workers whose interest income and "real" wages (net of price inflation) are continuously eroded. This especially hurts the lower and middle classes who are living paycheck-to-paycheck and unable to avoid its effects by investing in real estate, stocks, commodities and other hard assets.

     Source: Federal Reserve Bank of St. Louis (FRED) 

    Some of you may object, thinking that the period we selected for the chart unfairly focuses on a time when the US was dealing with the "Dot-Com" crisis, the "Covid crisis," and recently, the March 2023 banking crisis that forced the Federal Reserve Bank to bail out the US banking industry - once again - and abruptly shutter three mid-sized banks. That is a fair point. So let us pan the camera back and take a look at a much longer time frame. 

    The next chart shows the decline in value of the US dollar from 1913 to the present - a period of over one hundred and ten years. The ongoing "trend" in debasement of the dollar is unmistakable. The dollar today is worth about 3 cents compared to the pre-Fed dollar.  Throughout this time the Fed's primary mission was to "maintain the value of the dollar."

      Source: FRED

    This ongoing devaluation of the US dollar has hurt everyone - but not equally. Some have been able to avoid most of its consequences by investing in stocks, real estate and other assets. The next chart shows in orange the portion of assets owned by the top 1% of the US population. The pink portion at the bottom shows the portion owned by the bottom 50%. History teaches that there are often unpleasant social consequences flowing from such growing wealth disparity. We leave that discussion for another day.

       Source: David Stockman

    As the dollar (and virtually all currencies of the world) have been losing value, the "real" (net after inflation) wages, savings and pension benefits of workers have been dramatically slashed. That would not have happened if currencies served their stated purpose of being a "store of value". The key question is whether currencies will continue their decline in value. If so, everyone will need to save dramatically more money in order to maintain their standard of living both while employed and then in retirement. Is there any reason to believe governments will suddenly become fiscally prudent? We submit that the answer is "No" and the reason is that they have no incentive to do so. Promises of more government spending are what get politicians elected to office. Those already in office want to stay in office and so too have no incentive to upset the applecart by cutting benefits and spending. Should you think that a change in political party will make a difference, you will be disappointed. In the US, the two political parties have become a "Uniparty" when it comes to spending - more is always better. The same is likely true in your country.

    Source: BBC

How Did "Sound as a Dollar" Become A Bad Joke?

    One may wonder how the dollar could have lost so much of its value in the "richest country of the world." Clearly, the nation's factory workers, retail clerks, teachers, delivery drivers and local, state and federal government employees did not debase the dollar. They go to work and barely meet their expenses each month. A sizable percentage of them lack sufficient savings to meet an unexpected $400 expense. If it was not workers, who caused the dollar (or your currency) to collapse? 

    The culprits are always the same. It is those who control the government purse and relentlessly spend money without honestly paying for it by raising taxes. They avoid raising taxes because they know the public would quickly rebel and vote them out of office. So they choose the dishonest way to pay for their extravagances - they "print" (now, digitally create) huge quantities of new currency units and borrow vast sums. Doing so always produces the same outcome: price inflation. That is because inflation, as Milton Friedman wrote, "is always and everywhere a monetary phenomenon" - meaning that the government has enlarged (inflated) the money supply far in excess of any increase in the supply of goods and services. The result is an unlimited number of dollars/pounds/euros chasing a limited supply of goods and services. 

    During bouts of inflation, consumers and the media always focus on the rising prices. They never focus on why prices are rising. They are rising due to the declining value of the currency. Each devalued currency unit necessarily buys less and less. Those in government are quick to avoid any responsibility for the situation by blaming "greedy" businesses for raising their prices. This ignores the obvious fact that the devalued currency forces businesses to pay higher wages, higher benefits, higher rents, higher utility costs, and more for their other inputs. Businesses must either pass their increased costs on to the consumer or go out of business. So, be sure to direct your fury at those who cause price inflation: your government officials.

There Is Nothing New In Government Finance 

    Today's global fiscal malfeasance is not a modern phenomenon. History is filled with governments resorting to currency devaluations to meet their ever-rising expenses. The Roman Empire debased its currency (the silver denarius coin) to meet the growing cost of servicing and defending its expanding territories.  It did so by removing more and more of the silver content from the coin and replacing it with base metals. By doing so, it could issue many more coins. Result? The declining value of the debased currency leading to rising prices and an increasingly angry citizenry. The Roman government tried to appease its ever-poorer citizens with the diversions of "bread and circuses." That succeeded for a while - but not for long.

    Today, nations are doing the very same thing. The US dollar used to be backed by gold. That limited the printing of new dollars to the amount of gold held by the government. This "gold standard" kept the political insiders from debasing the currency to their advantage and to the disadvantage of the public. The US $20 gold coin contained approximately one ounce of gold. Today that coin would cost over $2000 to mint, revealing that the dollar, priced in gold, has lost 99% of its value. President Nixon was forced to take the US off the gold standard in 1971. Astute foreign dollar holders were increasingly turning in the US dollars obtained through trade to the US Treasury for gold. The Treasury's gold holdings quickly fell from 20,000 tons to just over 8,000 tons. The US was at risk of completely losing its gold reserves. Desperate times call for desperate measures.

    Since going off the gold standard, the US has been able to print money with abandon for over fifty years to pay for perpetual "welfare and warfare." Welfare buys off the aggrieved voters and political donors, while warfare diverts the peoples' attention away from their growing immiseration to the "evil empire of the day" that is always said to threaten their way of life - despite the fact that no country exists that is equipped to invade the US from the Atlantic, Pacific, north or south. 

The Death of Empires

    Some empires end through conquest but many more collapse due to the cost of unrestrained growth of the government. Those in power want to remain in power, enlarge their power over the people, and gain control over more of the people's wealth and production. The US Founding Fathers had suffered under the authoritarian rule of Britain's King George III and taxes assessed against them by a distant and unresponsive Parliament. After the American revolution, they worked feverishly to create a "limited form of government" that would remain under the thumb of the people, rather than the people being under the thumb of the government. 

    It was a grand idea that was spelled out in the US Constitution. But as years passed, political leaders have done what political leaders always do. They coalesced ever-more power unto themselves and consumed ever-more wealth of the nation. Today, the US government consumes a staggering 23% of GDP. That is a far cry from the government that was envisioned to ensure the rights of the states, deliver the mail and support inter-state commerce. 

    Imagine their horror were they to visit today and witness the president trying to rule by "Executive Orders," a massively bloated government directly employing nearly three million people and indirectly employing millions more, some 400 bureaus and departments trying to micro-manage the people's daily affairs, 140 military bases around the world, millions of rules and regulations, and unelected administrative agencies that declare what ambiguous laws passed by Congress mean, and enforce their interpretations in their administrative tribunals overseen by administratively appointed judges, all with limited rights to appeal to the courts for relief. And instead of avoiding "foreign entanglements" as urged by George Washington at his farewell address, the US has been involved in near-continuous military adventures around the world, the vast majority of which have never been approved by Congress, as required by the Constitution.

US Government Debt 

    The cost of this leviathan government is only partially paid for with tax revenues. In fiscal year 2023 the US government took in $4.4 trillion in revenues but spent $6.13 trillion. Deficits are projected to grow as the Congressional Budget Office reveals in the following chart. Note that annual deficits will be $2 trillion a year in six years. Today's national debt of $34 trillion will soar another $25.5 trillion to nearly $60 trillion in ten years. Annual interest payments on that debt at 4% would be $2.4 trillion. That would consume more than 50% of current tax revenues. Bear in mind that the CBO has consistently underestimated Congress' penchant for spending and the deficits that result from that spending.


        Source: David Stockman

    As stated above, the money to pay these deficits has come by way of creating new dollars out of thin air and borrowing ever-more through Treasury bond sales. The annual interest cost on the outstanding bonds is ever growing and there are $8 trillion of maturing government bonds that must be repaid or rolled over in 2024 - with a declining number of investors interested in buying them. To attract buyers the Treasury will have to keep interest rates high - but that leads to surging interest costs - and ever bigger deficits. 

    If you are interested in reading how people struggled with failing currencies in the past, we recommend, "When Money Dies - The Nightmare of Deficit Spending, Devaluation and Hyperinflation In Weimar Germany" by Adam Fergusson. He describes the suffering in Austria, Hungary and Germany following World War I. 

[In Hungary] between 1913 and the end of 1921, the currency in circulation increased by 64 times. An average number of domestic articles purchased in 1914 for 100 corona now cost 8,260.

Whereas in 1914 it required 80 hours of work to buy a suit of clothes and in 1919 141 hours, by July 1922 381 hours were needed.   

The korona reached 6,000 to the [British] pound on July 17 1922 [and] went to 7,000 a week later. New wage demands arrived at once. Between August and September the note circulation rose by [another] 25 per cent and the korona dropped to 11,000 to the pound....The Finance Ministry explained that the latest banknote increases should not cause any depreciation because they merely reflected the increase in the country's wealth....

       Keynesian economists like Alan Greenspan, former chairman of the Fed, always argue that increasing the money supply will result in a growing economy and greater wealth. It is true that many Hungarians, Austrians and Germans became millionaires during their currency crises. Unfortunately, that was insufficient to keep their families fed and clothed as the number of their currency units was totally irrelevant. It was their purchasing power that mattered.

Personal Debt

    The NY Fed just reported there is $17.5 trillion of US personal debt that includes $1.13 trillion of credit card debt. Credit card delinquencies more than doubled from 2022 to 2023. This chart shows the rapidly growing credit card debt (red line) as people strapped for cash load up their credit cards to meet daily expenses.


The next chart shows the limit of available credit that, if maxed out, would hugely increase the risk of payment defaults and a bank crisis. It is a certainty that as card delinquencies rise, banks will rapidly lower credit limits, putting many consumers in a very difficult position.


The Next Debt Crisis 

   When will the next debt crisis arrive? We have no crystal ball - nor does anyone. It could be six weeks, six months, or six years. One important thing history reveals is that such crises typically arrive abruptly to the astonishment of those at the Fed and in government, investors and the general public. Recall for example, the Great Depression with the sudden closure of thousands of banks, the Lehman Bros. blow up, the sub-prime mortgage crisis, and the March 2023 banking crisis. All appeared suddenly. Of course, there were some who saw the handwriting on the wall and positioned themselves to avoid the chaos. But the vast majority of people were taken by surprise and suffered badly. If you agree with Jerome Powell, Robert Rubin, and Jamie Dimon that US and local government, corporate or personal debt are at dangerous levels, you need to have a plan in place now to protect yourself. Remember that your government failed to anticipate or prevent these crises and addressed them all by printing vast sums of new money. 

    Powell, Rubin, and Dimon are not alone in fearing the brewing crisis. John Hussman of Hussman Funds recently wrote,

 Based on dozens of measures that include valuations, internals, overextension syndromes, and numerous technical, fundamental, and cyclical gauges we’ve developed over time, we estimate that current market conditions now ‘cluster’ among the worst 0.1% instances in history—more similar to major market peaks and dissimilar to major market lows than 99.9% of all post-war periods

A person well worth listening to about how things now stand is legendary economist, Lacy Hunt. Here is a link to an excellent interview where he discusses the many risks facing the economy. It is about 50 minutes but you can easily listen to it at a faster speed by clicking on the * symbol and setting the speed to 1.5.  For those who take great pride in the fact that the US dollar is the "world's reserve currency" and assume that fact is etched in stone, we provide the following history for their consideration.

Optimism Versus Pessimism    

    Some readers have expressed their view that we focus on the negative - that we are "pessimists" - seeing the glass as half empty instead of half full. There is truth to that. Here is why. Assume we are all on the world's biggest cruise ship sailing across the Pacific on a beautiful sunny day. Assume further that someone rushes up from the lower decks shouting that the ship is rapidly taking on water and at risk of sinking. Would you scoff, thinking that person to be a "pessimist?" Or would you gather your family and stand by the lifeboats in case it is true? You could be an "optimist" and take your family back to your cabin for a nap, assuming the crew will staunch the flooding while you rest. 

    We believe the "SS America" has a massive leak (huge, un-payable debtthat no one is addressing and that will lead to a crisis and major losses for most people. When that crisis might arrive we do not know. But it is evident that no one in authority is taking any action to address it. If your plan is to hope your elected officials will be able to save the day in the nick of time, good luck with that. 

   Is it "pessimistic" to buy life insurance and insure your home and auto? Or is doing so essential risk management? Could you recover if the family bread winner died or your uninsured, mortgaged home burned down? For the same reasons, you need a risk management plan for your investment portfolio. If your investment advisor tells you that your 60/40 stock/bond ratio is an effective "insurance/risk management plan," think back to how well that worked in 2008. Consider also your age and the time it might take to recover from a large loss. This chart reminds us that it has taken decades to recover from prior financial crises. If your portfolio suffered an unexpected 40-50% loss how well would you sleep during a twenty-year recovery period? 

               Source: BMG Group

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Important Message: The foregoing is not a recommendation to purchase or sell any security or asset, or to employ any particular investment strategy.  Only you, in consultation with your trusted investment advisor, can select the strategy that meets your unique circumstances, investment objectives and risk tolerance.  © All rights reserved 2024