PRINTING OUR TROUBLES AWAY
Can a government simply print more of their currency and distribute that “wealth” to the masses to make everyone rich? We know that is not true. If it where, the people in Germany would have been vastly rich in 1923. Instead, they were destitute(1). The photo below is of kids playing with worthless currency, and beside that is a loaf of bread priced at 4.6 million marks, all from the most famous currency collapse in history.
Even though this memory is very distant, and nearly all of those directly affected are no longer alive, to this day Germans are heavy buyers of gold and silver. If what was done over there (printing) is now being done here, what lessons, if any, can be learned?
During the pandemic, for 18 months governments around the world printed on average $834 million dollars every hour of every day, with no end in sight(2). The U.S. was printing more monthly than it ever had in history(2). Oh, and we are told this inflation is temporary. Or is it?
Let’s say the U.S. cannot stop printing. They are in a bind and believe that printing is the solution. It does seem to be the case considering their reaction has continually been to print for every crisis. If this is the case, they will water down the currency value quickly. Think about what is already happening. Commodities have been gaining value and that reflects inflation. Thinking of this another way, the dollar is losing value to commodities, so stuff gets more expensive. Either way, inflation rises. Higher inflation means investors need to be compensated. A GIC holder will want a higher rate to offset the higher inflation. Extreme debt levels held by people, companies and governments suddenly becomes more expensive to maintain as interest rates go higher. Can the government afford higher interest rates?
Let’s take the other side of this and say the U.S. stops printing. In order to keep interest rates low, they currently print to buy the bonds to keep the bond prices at their highest ever levels (and conversely interest rates at their lowest levels – the effect of overpaying for the bonds). They are printing very large amounts to purchase this debt. As they are an extremely large buyer, abruptly the market would experience a void. With this significant drop in demand for the bonds, the price would also logically drop, and interest rates go up. But that is exactly what no one can afford. Governments included.
There is another alternative. The U.S. stops printing and defaults on their bonds. Pension plans, mutual funds, individual investors and foreign investors all own these bonds. If the government were to default, all the bonds in all these portfolios would become worthless (or worth very little depending on how many pennies per dollar of debt they are willing or able to still pay). I highly doubt this would happen but must admit it is possible. Continuing to print is much more likely. History is full of examples of governments continuing to print, and then when things get worse/inflation rises – print more, and so on.
There are other troubling events taking place in addition to the incessant printing. Since the backing of the dollar was removed August 15, 1971(3), gold and silver were replaced with military might. Use our dollar to sell your oil (or else). A deal was struck with Saudi Arabia and then the rest of the OPEC nations in 1974. This was crucial to creating demand for U.S. dollars. All oil must be sold in U.S. dollars, and the reserves invested into U.S. debt. Then we have your back (militarily speaking)(4). Fast forward to 2021 and Biden suspends arms sales to Saudi Arabia(3). The U.S. just pulled out of Afghanistan around the end of June. Then August 23rd Russia signs a deal with Saudi Arabia in a joint military “cooperation”(3). So much for the nearly 50-year-old deal that the Saudi’s had with the U.S.! Saudi Arabia was always the principal country with the U.S. oil deal. The Russian deal is most likely military for oil and is unlikely to be in U.S. dollars.
Is the demand for U.S. dollars slipping away? Saudi Arabia is the largest OPEC oil producing nation. That would create significantly less demand for the dollar. If Saudi Arabia no longer sells oil in U.S. dollars, that would likely open the flood gates for other OPEC nations to also sell in other currencies. This is a really big deal. If countries buying oil no longer need U.S. dollars, the demand for the dollar will drop, most likely along with the value. This will cause further inflation (maybe big inflation)!
The U.S. has well past 30 trillion in debt(7). The only way this is manageable is with interest rates near zero. If the dollar drops, the value in purchasing power of the bonds drop, even if the bond price were to stay high. The more they print, the weaker the dollar will become (logic) and the higher inflation will go.
When I said manageable, I should correct myself. As of 2019, 75% of the U.S. budget was mandatory spending. This mandatory spending represented 95% of their total revenue. In 2020 for the first time in U.S. history, mandatory spending alone is greater than their total revenue.
Problems where printing is the likely solution are not confined to the U.S. I reported long ago about ghost cities in China(8). China’s largest real estate holding company Evergrande cannot make their payments(9). Evergrande is 5 times the size of Lehman(9)(the U.S. bank that crashed the stock market in 2008). A number of other Chinese developers have now missed or delayed payments(9). Much more to this story.
Regardless of inflation now here, and fundamentals that signal this could get worse, there are things you can do. Being aware of the dangers allows you to protect yourself and even profit from the opportunities they provide.
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2 http://www.jsmineset.com/wp-content/uploads/live/0292cbb0d92f_68F9/image005.jpg printing cartoon
5 http://www.jsmineset.com/wp-content/uploads/live/Jims-Mailbox_5E38/image001.jpg image of inflation
6 https://www.usfunds.com/investor-library/frank-talk-a-ceo-blog-by-frank-holmes/the-enduring-popularity-of-gold/ cartoon.
8 https://www.youtube.com/watch?v=Ie6zd3Rwu4c china’s ghost cities
10 http://www.jsmineset.com/wp-content/uploads/live/fd12f1846b0e_7D3A/image0011.jpg image
10 Posted September 15th, 2021 at 8:56 AM (CST) by Bill Holter & filed under Jim’s Mailbox in https://www.jsmineset.com/ .