AN UNEXPECTED INHERITANCE
Reading of the Will, By Otto Erdmann, 1886
An Optional Outcome
Imagine that instead of hundred dollar bills, your great-grandfather had put five hundred $20 US gold coins into the box. They would have been worth, at that time, the same $10,000. At today's gold price, they would be worth more than $1,000,000. Just as in 1913, you can still buy a very nice house in a very nice neighborhood with them. You might think that the coins have dramatically risen in value over the last 110 years. They did not. They simply maintained their purchasing power. During the same time period, the paper currency lost 99% of its purchasing power.
Understanding The "Bezzle"
Consider another alternative. You inherit the family business that your great-grandfather started. It has operated for four generations and shows signs of being successful. You spend weeks going through its books to figure out where the company stands financially. It finally dawns on you that the man who has been the trusted book keeper for the last fifty years has been embezzling from the company for decades. While the books show that the business is worth $1,000,000, its actual value is just $10,000. It is easy to identify the culprit. You have him arrested. However, this does you no good because he has long since spent all the money he embezzled.
While it is clear that the book keeper embezzled the business' money, it is less clear who embezzled the value of the one hundred $100 bills - as well as your savings and wages throughout your working life. That thief is your government. It has continuously devalued the currency by printing ever more of it to pay the accumulating deficits between its tax receipts and its spending. In the US it has done this at an ever-faster pace since 1971 when it went off the gold standard. That had acted as a limiter to the issuance of paper dollars. Once that limiter was gone, all fiscal rectitude was lost. The result is that today's dollar is worth just pennies of a 1913 dollar.
Government officials profess that "deficits don't matter," claiming that the US can simply print whatever money is needed to pay its growing expenses because the dollar is the world's "reserve currency." This is the farcically called, "Modern Monetary Theory." Their hope is that if this lie is repeated often enough, the lumpen public will come to believe it. But this claim is preposterous as the near total loss of value of the dollar attests. History abounds with governments that debased their currencies. The results are always the same. Eventually, there is a day of reckoning with a severe financial crisis, the public suffering enormous pain, shortages of essential goods, and growing social disorder. This can allow a despot to come to power promising to protect the people from the growing lawlessness and shortages. The price they pay is predictable: a dramatic loss of their freedoms and their property.
Government embezzlement through currency devaluation works in insidious ways. For example, if the value of the dollar falls by 18% over twenty years and you own stock that appreciates in dollar terms by 18% you have no real profit. Your purchasing power (true wealth) remains the same. Yet you will have to pay tax on that phantom 18% "capital gain." After doing so you will be worse off than before you invested in the stock twenty years ago. There is also the risk that you will find yourself in a higher tax bracket rate, resulting in an even larger financial loss. Below is a chart showing the decline in value of the dollar from just Dec. 2020 to the present. Taxes are never indexed to adjust for this loss in value of the dollar because that would defeat the government's ability to embezzle your wealth.
Jerome Powell has repeatedly said that his goal is to return inflation to 2%. That is, he wants to allow the government to embezzle 2% of your savings and wages every year, for the rest of your life. And he expects you to be OK with that. If you are not, you have some work to do.
In addition to other assets, everyone should own some gold (real gold, in hand, not a derivative form such as mining stocks, gold ETF's or futures contracts) for the reason that is set out in the "Inheritance" story above. Gold is not an "investment." It does not pay a dividend or earn interest. It serves the altogether different purpose of preserving your purchasing power as your government continues to devalue your currency. The "price" of gold has risen from $42 per ounce in the early 1970's to over $2100 per ounce today. But as shown above, its "value" is unchanged. Its price has not risen in a straight line. It can fluctuate greatly, even though over time it has soared. Investors who finally realize that currency debasement is the primary business of government should consider acquiring some gold over time and holding it long term.
US Government's Financial Death Spiral
It is widely reported that the US national debt exceeds $34 trillion. While huge, that is not the full extent of the problem. The government's "unfunded liabilities" include social security, medicare, federal employee benefits, and veteran's benefits. These total an astounding $212 trillion. Your nation's debt may be smaller but is likely just as oppressive and un-payable. What one needs to come to terms with is this: government debt of this magnitude cannot be repaid honestly, and therefore, will not be repaid honestly. Your task is to avoid being hurt by the inevitable default.
To keep massive debt from continuing to get worse, governments must first stop increasing it. However, neither the US Congress nor your government officials will voluntarily cut spending in any meaningful way. So, the debt will continue to grow and be rolled over - so long as there are people willing to part with their money to buy government bonds and get repaid in devalued currencies.
When buyers fail to step forward to absorb the surging quantities of government bonds on offer, the Fed will be forced to buy them to keep the plates spinning for a little while longer. Bill Bonner has argued for years that the US government is locked into the Hobson's Choice of having to "Inflate or Die." If it stops inflating, the financial house of cards that is dependent on ever more debt to support ever more spending comes crashing down. If it keeps inflating, the dollar will be reduced to its intrinsic value - zero. In both cases, the economy will grind to a halt. There will be no willingness to produce goods and services and get paid for them with worthless dollars.
US government debt is now rising $10 billion every day, $1 trillion every 3 months. It will reach $37 trillion by year end. The Congressional Budget Office estimates it will reach $60 trillion in ten years. Beware that the CBO has vastly underestimated Congress' penchant to spend money it does not have. Once debt reaches a presently unknown critical level, the die will be cast and the crisis becomes inevitable. This may happen when interest on the debt begins to swallow the lion's share of revenues. Predicting when that tipping point will be reached is impossible due to the vast number of contributors to "public confidence" in the financial system. History shows that confidence can be lost suddenly. John Mauldin refers to this as the "Bang" moment when the economy collapses.
Government Propaganda
If your "investment strategy" is to wait to take action until just before the next financial crisis unfolds, good luck with that. Recall that you failed to see the Dot-Com crisis coming and take protective action, you failed to see the sub-prime mortgage collapse coming and take protective action, and you failed to see the March 2023 banking crisis coming and take protective action. The reason for these failures is that you believed the propaganda (falsehoods and distortions from government officials) and the servile Main Stream Media that dutifully repeated them. Ben Bernanke insisted that the problem of sub-prime mortgages was "contained" - right up to the moment the crisis exploded and the Fed was required to flush trillions of dollars into the banking system. He was either clueless about the developing crisis or he was deceitful about it. Jerome Powell insisted that price inflation was "transitory" until it reached 9% and he was forced to raise rates rapidly and keep them "higher for longer" than anyone expected. He too was either clueless or deceitful.
The stream of propaganda is endless. Powell assures us that "core inflation" is down. What is that? It is a contrived and irrelevant statistic designed to mislead the public about current conditions. It intentionally fails to take into account the cost of food and energy. He justifies using this "metric" saying these prices tend to be "volatile." To which voters should respond: "So what? Every person in the nation incurs these costs on a daily basis. Ignoring them is dishonest." He has another, even more ridiculous measure of the economy called "super core inflation." This ignores food, energy and housing costs. These three items make up the lion's share of most American's monthly expenses. Thus, the statistic is both irrelevant and intentionally misleading. One eventually concludes that reports issued by "official government sources" are distortions designed to mislead the public about the true nature of affairs in order to protect political office holders from criticism. The inevitable result is that voters lose trust in their government.
What we have amounts to a financial doom-loop of ever lower economic growth and ever rising public debts from which there is no escape. The current drift toward relentlessly rising real interest rates and falling real growth means that a financial trainwreck lies directly ahead. In short, there is no way out of the current fiscal calamity unless the Empire is brought home and crony capitalist domination of the agencies of government—and most especially the Fed— is decisively ended.
Biden says, "Not to worry" because he also proposes to raise corporate taxes by several trillion dollars. Of course, that ignores the fact that corporate expenses (labor, materials and taxes) must be passed on to the consumer if the company is to remain in business. When politicians assure voters that corporations will be paying the higher taxes they are treating voters as fools. Consumers end up paying corporate taxes. Higher corporate taxes will ensure rising prices that will continue to eviscerate the lower and middle classes - the very people Biden courts for their votes.
"The US Economy Is Strong"
President Biden and Treasury Secretary Janet Yellen relentlessly insist that all is well, the economy is sound and gaining strength. If this were so, one would expect major employers to be rapidly adding staff to meet the coming demand for goods and services in this "robust" economy. But that is not what is happening. UPS, the delivery giant, is planning on laying off 12,000 employees this year. Citibank, one of the "big five" banks is cutting 20,000 employees. PayPal is to lay off 2,500, and Sony 900 PlayStation employees. Further layoffs have been announced by Google, Amazon, Snap, Zoom, iRobot, and Cisco. PNC Bank will close 222 branch offices. Family Dollar plans to close 1000 stores; Macy's is to close 150. The Daily Reckoning reports the following additional layoffs. Clearly, these companies are not buying what government officials are selling with regard to the health of the economy. Are you?
The underlying crisis in the banking system continues to deepen as $5 trillion of commercial real estate debt taken out during the zero-rate era comes due in tranches."It’s not a liquidity problem; it’s a solvency problem,” said Professor Tomasz Piskorski, a banking specialist at Columbia University, and one of the lead authors. “Temporary measures have calmed the market but half of all US banks are running short of deposits with assets worth less than their liabilities, and we are talking about $9 trillion,” he said.“They are bleeding capital and could not survive if something triggers a sudden loss of confidence. It is a very fragile situation and the Federal Reserve is watching it closely”. Property developers must refinance their debts into the most hostile lending market in living memory, while falling rents and soaring insurance costs are eroding their revenue streams. Almost $1.5 trillion comes due by the end of next year. Mr Rechler expects 500 to 1,000 banks to disappear in a wave of consolidation. They have faced a relentless leakage of deposits to money market funds paying higher interest, compounding their property woes.Prof Piskorski’s paper says implicit office values have fallen by 50pc on average from their peak, and 45pc of all office loans are currently in negative equity. The NBER paper said banks have $2.7 trillion of total exposure to commercial property. Almost 70pc is concentrated among small and mid-sized regional lenders. Most have burned through their safety buffers. Moody’s says exposure among regional banks with assets below $250bn is 180pc of their capital. Some loans carry a “legacy” interest rate of 3.97pc. The going rate today is 7.42pc, if you can borrow. Bank boards and regulators have forced lenders to cut exposure. The paper estimates that 300 banks risk “solvency runs”. The trouble may not stop there: contagion could trigger “a widespread run by uninsured depositors, unravelling a fragile equilibrium in the banking system.” The disaster story is in second-tier office blocks, which are selling for discounts of 60pc to 70pc in San Francisco and New York.
It has been observed that credit and interest rate risks always end up in the hands of those who are least competent to deal with it. Time and again that has proven to be banks. In the sub-prime mortgage loan crisis banks were caught holding over-rated securitized mortgage loans that rapidly lost value triggering huge and vastly under-reserved derivative risk obligations. Who knew that home prices could fall if many were abruptly thrown onto the market? Evidently, banks were unaware of the risk.
Banks again proved to be incapable of handling interest rate risk leading to the March 2023 banking crisis. Following credit downgrades by rating agencies, Silicon Valley Bank needed to raise money quickly. That led to a full-blown bank run. SVB depositors withdrew over $40 billion in a single day. The bank would normally have sold some of its US government bonds held as reserves to meet the withdrawal demands. The problem was that it had loaded up on old bonds bearing low interest rates. There were no buyers for those bonds because investors could buy new bonds offering much higher rates. The bank had to offer discounted prices in order to sell their bonds and was suffering capital losses on each sale.
To avoid widespread panic, more bank runs and failures, the Fed was forced to guaranteed all of the SVB's deposits - even those that exceeded the FDIC $250,000 guarantee limit - and it agreed to repurchase government bonds at face value rather than their lower market value. Two other banks rapidly fell: First Republic Bank and Signature Bank. Portions of the latter were sold off to New York Community Bank - whose stock recently fell 46% in a single day when word got that it too was in distress. Banks still hold huge quantities of bonds that have lost value due to interest rate increases. The next chart shows the magnitude of the problem. The blue shows the losses of bonds "available for sale" and the red shows those marked as "hold to maturity" bonds. Categorizing bonds as "hold to maturity" allows banks to not have to mark them down to their lower market value, thus creating the illusion that the bank is sounder that it is.
The Creature From Jekyll Island
In a prior issue we included a chart showing the amount of money the Fed was forced to dump into the banking system in 2008 to keep it from imploding. Here it is again. Some readers were shocked to see that the Fed spent trillions of dollars to bail out foreign banks including Barclays (UK), BNP Paribas (France), Credit Suisse (Switzerland), Deutsche Bank (Germany) and UBS (Switzerland). Their question was why did the Fed (i.e., the US taxpayer) foot the bill to save foreign banks?
When one understands what the US Federal Reserve System is, it is easier to understand why it does what it does. Were we to ask you "Who owns the Fed?" you might scoff and say, "Well, the US government does!" You would be wrong. There are twelve regional Federal Reserve Banks. Each is owned by its member banks. Let us look at the ownership of the New York Federal Reserve Bank - through which most Fed bank bailouts and monetary policies are operated. Its shareholders include Citibank with 42.8% of the shares and JPMorgan with 29.5%. Morgan Stanley, Goldman Sachs and multiple foreign banks including London based HSBC and Deutsche Bank also own shares. These foreign banks were "counter-parties" to derivative bets made by large US banks. If the foreign banks were unable to make good on their massive derivative obligations, the US banks would have been forced into bankruptcy. So the Fed bailed them all out.
The vaunted Federal Reserve System is really nothing more than a banking cartel that was designed by bankers to allow them to privatize all their profits during good times and bail out themselves out at the taxpayers' expense during bad times. This has happened repeatedly and will happen again when they next fall into crisis. Should you be interested in the sordid but fascinating details of the Fed's creation, we recommend, The Creature from Jekyll Island by Edward Griffin. It tells how the dominant bankers of the day secretly travelled by train, with blacked-out windows, to Jekyll Island where they schemed to create the central bank. It is a very interesting read.
Pam and Russ Martens at Wall Street On Parade, explain what has allowed banking crises to recur so frequently since the turn of the current century:
The repeal of the Glass-Steagall Act in 1999 allowed the giant trading houses on Wall Street to merge with giant, federally-insured, taxpayer backstopped commercial banks, creating the Frakenbanks that blew themselves up in 2008, taking the U.S. economy on the worst ride since the Great Depression of the 1930s. Just one Frankenbank at the time, Citigroup, received $2.5 trillion in secret cumulative loans from the Fed. From the passage of the Glass-Steagall Act in 1933 to its repeal in 1999 under the Wall Street-cozy Bill Clinton administration, there were no major threats to the U.S. banking system that required the need for emergency lending by the Fed under Section 13(3) of the Federal Reserve Act. But just 9 years after the repeal of Glass-Steagall, the Fed went on a wild emergency lending spree and century-old iconic banks on Wall Street blew up.
Ever since the 2007-2010 financial crisis, the Fed has been finding ever more creative ways to funnel trillions of dollars in cheap money into the Wall Street casino banks. In just the past four years, the Fed has created three separate bailout operations: the 2019 repo loan bailouts; the 2020 bailouts in response to the COVID-19 pandemic; and the spring of 2023 Bank Term Funding Program (BTFP) bailouts when the second, third and fourth largest bank failures in U.S. history occurred.
The Martens also report on the vast uninsured deposit risks hiding in the big banks:
As of June 30, JPMorgan Chase Bank, Bank of America, Wells Fargo and Citigroup’s Citibank, just those four banks accounted for $4.185 trillion of uninsured deposits, or 59 percent of all uninsured deposits at all 4,645 federally-insured institutions. That is an irresponsible concentration of risk in the U.S. banking system, tolerated by a dysfunctional regulatory system that has been captured by banks, their lobbyists and the MAGA sycophants that sit on the Senate Banking and House Financial Services Committees in Congress. 59 percent of JPMorgan Chase’s deposits lack FDIC insurance; 51 percent at Wells Fargo; and 49 percent at Bank of America.
If a bank regulator attempts to require higher bank reserves or place limits on derivative and other risky trading practices, the banking industry and its army of highly-paid lobbyists go into a full court press to resist them. Rana Foroohar at the Financial Times, expresses her dismay about the lack of oversight of the banking sector by federal regulators.
Have we learnt anything from the great financial crisis of 2008? Or any number of banking crises that came before or since, right up to the collapse of Silicon Valley Bank and others last year? Sometimes I think not. To me, the core lesson is that too much debt and leverage, combined with too little high-quality capital on hand, always ends in tears. Of course risk has moved into the far less well-regulated non-bank sector post 2008. That’s not an argument for lighter regulation in formal banking, particularly with debt levels in both the public and private sector at near record highs. It’s an argument for more regulation of shadow banking.
The banking system has become ever more interconnected, fragile and undercollateralized. The next banking crisis is waiting in the wings to "surprise" the regulators and justify more staggering bailouts of these incompetently managed banks - all at taxpayer expense.
The Fed is thought by most people to be a sober organization working hard to protect the banking system and American economy. How much faith should we have in its operations? We can first, ask how well has it managed its own affairs? Alex J. Pollock at Mises reports,
As of February 28 the Fed has paid-in capital of $36 billion and miniscule retained earnings of $7 billion, for total of $43 billion. Starting capital of $43 billion minus Losses of $154 billion = current capital of negative $111 billion. You will not find this negative capital, which is the real capital, reported on the Federal Reserve balance sheet, however. The Fed insists on the accounting charade of booking its massive losses as an asset, a so-called “deferred asset.” In short, the Fed publishes, not to put too fine a point on it, a phony capital number. And the Fed does not mark its investments or its capital to market. As of February 28, 2024 of these individual Federal Reserve Banks, as well as the total Federal Reserve, eight of the twelve FRBs are technically insolvent, with losses of more than 100% of their capital and thus liabilities greater than their assets. Two other FRBs have lost 98% and 85% of their capital and are steadily approaching technical insolvency.
Having faith in the Federal Reserve Bank to save your bacon during the next financial crisis might not be the best of ideas.
Crises At The State Level
A central bank digital currency is coming for you - ready or not. In the US, the first step in this process was the Fed's implementation of "Fed Now" a money transfer system designed to replace the privately operated SWIFT system. The latter system was designed and operated by banks and other private intermediaries, to facilitate the secure wire transfer of money around the world. When the central bank digital currency is fully implemented, instead of having cash on deposit at your bank or in your investment account, your money will be held in a digital account with the Fed. The pretext for this astounding usurpation of the private banking system is that it will be more secure and faster than the existing system. That sounds like good news - until you consider the consequences.
As of now, your personal banking transactions are known only to you and your bank. If a government agent wants to have access to your bank records, he has to go before a judge and demonstrate "probable cause" - that is, show a reasonable basis to believe that you have committed or are about to commit a crime. After making such a showing, a judge may allow the agent some defined access to your bank records. The same is true with your credit card transactions. Should the government want access to your personal information, it has to get permission from a judge after making the required showing of probable cause.
With a government run digital currency and the issuance of debit cards and/or a phone app, every one of your transactions will be recorded on a government owned and managed digital ledger. It would not have to get approval from a judge to see what you have been buying, where you have been shopping, where you have been traveling, who you have supported for political office, what newspaper you read, and everything else you do with your money. Central bank digital currencies will facilitate the establishment of a "social credit score" as exists in communist China. You can be "scored" on your spending habits and granted or denied privileges based on that score. Some people will shrug their shoulders and say, "I have nothing to hide." But Fed Coin will be just as intrusive and violative of your right to privacy as the "tele-screens" in George Orwell's book 1984. They were two-way television screens that allowed government agents to watch and hear everything you did and said. It was "Big Brother" watching your every move. So too will be a government controlled digital currency. At the outset, there will be promises of "limited access" to your information. History proves that such limits are quickly circumvented and then simply ignored.
Digital currencies will also allow your government to abruptly freeze your account. Canada, the "Democracy to the North" froze the bank accounts of truckers who were conducting a work stoppage after being ordered to get Covid vaccinations. Not only were truckers' accounts frozen, so too were the accounts of anyone who financially supported them. Lesson: If you support the wrong cause you will become an "enemy of the people" to be dealt with harshly. The Fed would also be able to assess fines or impose "negative interest" on your account should you, for instance, not be spending your money fast enough to "help support the economy." During times of real or contrived crises, the Fed can ration your purchases of goods. No more meat for you. You have had your quota for the month. Should you ignore the government's pressure to buy an EV, you could be limited or prohibited from purchasing gasoline. There is no end to the number of ways a government can restrict your freedom when it controls your money.
You may think you will be able to circumvent these controls by keeping large sums of cash on hand. At some point, you will have a limited time to turn in your cash after which it will be declared worthless. You will be prohibited from using it to purchase goods and services and vendors will be prohibited from accepting it, under draconian criminal penalties. Alternatively, you might believe you will be able to circumvent Fed Coin by using other digital currencies such as Bitcoin. Sorry, they too will be deemed illegal and banned on the pretext that they are used by "criminals and terrorists." Your government's goal is to lock you into a monetary system that it controls absolutely. At that point it will finally dawn on you that you exist to serve your government's needs rather than it existing to serve yours.
When might a digital currency be imposed on us? It will likely come during the next financial crisis when banks are forced to close their doors for a period and people will find it impossible to access their money. They will then gladly start using the government's digital currency.
If you would like to receive new issues by email, please go to our website and click the "Subscribe" button: WorldViewInvesting.com We will not share your email with anyone.
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