On Gold, A Cracked Dam, And The Fed's Small Thumb

 We have replaced fundamental growth with the illusion of growth brought on by constantly increasing the monetary supply, aka, inflation. But like any good Ponzi scheme, even this one has a limit and investors briefly approached it in 2008.  When it looked like our global banking system was going to collapse, investors started dumping everything in site, essentially a de facto rejection of dollar based assets.  Alas, this terrible 'fiat' system is finally coming to its' inevitable end.  

Real growth vs. the illusion of growth
Understand the below video Understanding Fiat and you will understand what I mean when I say that the United States of America (and the rest of the world for that matter) has not fundamentally grown much at all over the last 40 years. 

We have instead replaced fundamental growth with the illusion of growth brought on by constantly increasing the monetary supply, aka, inflation.

Usually, when a good or service is dramatically increased, it's price will fall.  Too many cars manufactured?  Prices will fall.  Too many new houses?  Prices will fall.  You get the idea.  Good ol' laws of supply and demand. 

But laws, especially economic ones, can be broken or at least bent for extended periods of time.  Too many dollars produced?  Rates should rise.  But that didn't happen.  Quite the opposite.

Despite the dramatic increase in the amount of dollars circulating since 1971, interest rates in the US have fallen.  Exactly the opposite of what the laws of supply and demand tell us should have happened.  How was this possible?

It's good to be king
The dollar is the world's reserve currency.  This means that the rest of the world buys and pays for things in dollars rather than their own local currencies.  This situation, brought to us by the winning of World War II and dominating the Bretton Woods Conference, created a convenient and almost constant demand for dollars. 

This constant demand for dollars has somewhat offset the constant creation of new ones.  Not entirely, of course, we have experienced periods of great inflation like 1973-1980, for example.  But the point is, our inflation has generally been much lower than anyone would have expected because the rest of the world has continually lined up to buy more dollars.

This has led to one of the greatest periods of sustained asset price appreciation in human history.  The period of time from 1980 to today is often-times referred to as the 30-year bull market for bonds which is another way of saying that rates have been falling for about 30 years now.

With rates falling for 30 years, every asset which is priced off of interest rates, which is basically everything, has gone up in price.  Bond math 101 says that as rates fall, asset prices rise.  Rates rise, asset prices fall.  Easy peezy.

But like any good Ponzi scheme, even this one has a limit and investors briefly approached it in 2008.  When it looked like our global banking system was going to collapse, investors started dumping everything in site, essentially a de facto rejection of dollar based assets. 

Houston, we have a problem.

The dam has cracked and the Fed has a small thumb
And what happened when the world stopped demanding as many dollars in 2008, aka deflation?  Why Benny Bernanke and the Inkjets at the Fed picked up the ball and started buying US credit (dollars) using... wait for it, wait for it... dollars they created out of thin air.  Lovely.

But the world is slowly waking up from it's 40-year slumber.  The money printing is starting to create inflation which is ravaging countries all over the world.  Interest rates are starting to rise and as mentioned above, asset prices are starting to fall.  With the owners of these assets sometimes having borrowed heavily to buy them on the assumption that they will always go up in price, even a small drop in price spells death.

Fiat currency, legal tender laws, fractional reserve banking and reserve currency status are a legal license for those that control the currency to steal from those that do not.

Alas, this terrible system is finally coming to its' inevitable end.  And good riddance at that.

The death of fiat money will be the best thing to happen to human freedom and liberty in over 100 years. 

However, you must realize that the deflation associated with the collapse of the dollar-based fiat monetary system will wipe out decades worth of false asset price growth in a very short time.  Think days or months.

Gravity is a real bitch
Bonds, stocks (particularly banks and leveraged companies), commercial real estate, residential real estate, auto prices, factories, etc., will be obliterated.  All of this is priced off of the "risk free rate" - the Fed manipulated Treasury rate - and all of these assets will collapse in price once the dollar is finally rejected as the world's currency, rates start to rise and the global monetary system enters the Great Reset, aka the Death of the 30 year bond bubble.

How far could these assets fall?  No one knows but think about this, in 2008 stocks fell over 50% from current levels while the existing corrupt system survived.  Where would it have fallen without the Fed pumping trillions into the banks that they could then pump right back into the market?

Real estate has fallen over 30% nationally with the government continuing to print, buy and lend to anyone with a pulse to prop the market up.  Where would housing price in the absence of taxpayer funded FNMA/GNMA/FHLMC easy credit, mortgage tax deductions and new home buyer credits?  I'm not sure but I certainly think we are going to find out in the near future.

How low can you go?
When the dollar loses its' primacy, it's not a stretch at all to imagine stocks falling much, much farther than their 2009 lows.  Any stock with too much leverage could suddenly find itself bid-less.  Think S&P 500 between below 500. 

Think commercial and residential real estate falling another 50-75%.  Imagine the vast majority of real estate transactions being done for cash, no mortgage financing.  What is the cash price for real estate today?  Who knows, but certainly a far cry from today's.

Was your grandfather lazy?  Mine wasn't.

Bonds will be wiped out.  Institutional investors could avoid bonds altogether for years as rates continue to leak higher.  The PIMCO's of the world are scrambling to put equity units together to catch their panicked clients exiting bonds.  

Think these downside scenarios are crazy?  Think about this: the fiat money binge dates back officially to 1971 when Tricky Dick removed the final vestiges of the gold standard.  In 1971, the S&P was at about 110, today it's around 1,400 or growth of well over 10x.  The median US real estate price in 1971 was about $26,000. Today that same number is about $155,000 or growth over 5x.

Now ask yourself this, as a country are we really 5-10x more productive than our grandparents?  Because productivity - doing things faster, smarter, cheaper and better - is the only way to generate real, fundamental growth.  Otherwise we're just creating credit and pretending like it's growth.

Now perhaps we are a bit more productive than our grandparents - computers, the Internet, global communications, more efficient vehicles, etc... - but 5-10x???  No chance.  I had the privilege of knowing my grandfather quite well and believe me, I am definitely not 5-10x more productive than he was (truthfully, it's probably the reverse).

What is the silver (or perhaps golden) lining you ask?

Countries will still trade with one another simply because the survival of their people (the seat of power for any government, even the Chinese) depends on it.  With the dollar being trashed and every other fiat currency with it, which is all of them, countries will turn to trade with the one currency that cannot be debased and has thousands of years of history backing its primacy. 

Gold.  Gold, bitchez.
Gold will be the surviving currency that will rise dramatically in value until a new global currency regime can be established and agreed upon.  Most likely years.  Bretton Woods was a relatively quick process, but remember, the US won the war so we made the rules with very little debate.  Things certainly won't work that way next time.

So while the coming deflation via rising rates will ravage the value of dollar-based assets (the aforementioned bonds, stocks, commercial real estate, residential real estate, auto prices, factories, etc...) gold will at a minimum hold your purchasing power and could very will rise many times from current levels. 

Then, in the heat of the deflation, when everyone you know is selling everything they own to simply stay afloat, you buy.  Sell your gold and buy.  With both hands.  Aggressively.  Greedily.  And if a bank will extend you credit based on your gold holdings, take it and buy with leverage.  You will be creating generational wealth.

Good luck and think long and hard about what you own and what's happening around us.