Even if you aren’t quite certain what is causing it, you probably feel an uneasiness about current events… a sense that things are not quite right. There are ominous clouds on the horizon. But nobody knows for certain when the storm will come.
While each of these clouds portends trouble, we’ve experienced them before, and none of them alone, could ruin the economy or destroy your financial future. Save for one elephant in the powder room, which has the potential to amplify the rest of these developments, far beyond what most expect.
That elephant in the room is a move away from the dollar by the BRICS nations (Brazil, Russia, India, China, and South Africa).
Part of their move away from the dollar, includes an alternative to the SWIFT system for international payments settlements. Russia and China, have been working on this alternative for several years, and have already tested it successfully as far back as 2020.
“Russia, Russia, Russia!”
Since the imposition of sanctions by the United States, along with most of the EU, and several other countries, in retaliation for her invasion of Ukraine, Russia no longer has access to SWIFT. As a result, President Putin has accelerated the timeline for dollar divestiture.
Among all unintended consequences of the sanctions, there are two developments I believe will prove to be historic. First, was the March 23, 2022 announcement by President Putin that “unfriendly countries” must use rubles to buy his country’s gas (oil may be included later). The resultant increase in demand for rubles, caused a rebound in the relative value of the ruble.
Another result of the sanctions, was the March 28, 2022 announcement by Russia’s central bank that it would purchase gold from Russian banks at a fixed price of 5,000 rubles per gram of gold until June 30, 2022, when it would reevaluate the exchange rate.
At the time of this announcement, 5,000 rubles was equal to about $48 USD, well below the international spot price for gold (6,514 rubles, or about $63 USD/gram) . The reason for the move was to provide a backstop, or “floor” for the Russian banks and mining companies, who no longer have access to the LBMA or the COMEX.
This does not mean the ruble is backed by gold now. It simply means that the Russian government, and the central bank took steps to make sure that gold producers were not forced to shut down as a result of being denied access to sell their gold on the international markets as a result of sanctions.
The combined effect of these two developments, strengthened the ruble. Additionally, The offer of a guaranteed minimum price for gold, may well be a first step down the yellow brick road that leads to a gold backed ruble. Particularly given Russia’s history of gold accumulation.
Today, 29 Jul 2022, it only takes about 3,600 rubles to buy one gram of gold. This represents a 45% increase in the value of the ruble (measured in gold) since late March.
When the US led sanctions were imposed on Russia in February, the ruble decreased sharply against the dollar. But since then, it has regained all the value it lost, plus another 20% or so. This means that the sanctions have not hurt the ruble. A strong ruble provides a solid foundation upon which the Russian economy can recover from sanctions, and the ruble is stronger than ever. But why?
The Barbarous Relic
which must not be named
Although they discourage the use of gold as money by their subjects, behind the scenes governments and central banks hoard gold and oil. We often hear about the US Strategic petroleum reserve. But what is rarely spoken of, is the government’s gold stocks. The reason why it is not a subject that gets covered in the corporate news is because too much attention on gold, may cause the masses to get curious about it. Too many questions by too many people, might bring down the fiat system.
For 15 years or more, Russia has been steadily buying gold, so it was no surprise when President Putin hinted during his fourth inaugural address in 2018 that Russia was seeking to break from the US dollar in order to bolster Russia’s economic sovereignty.
China too, has been accumulating gold for some time. Since 2000 china has mined over 6,800 tons of gold. In 2007, China passed South Africa as the largest gold producer in the world. Over half of Chinese gold is produced by state owned companies. It is important to note that export of gold is against the law in China.
What does this mean for us?
The US dollar has been the primary global reserve currency since the end of WW2. This status has allowed the US to live beyond her means for decades. Particularly since the dollar was completely decoupled from gold in 1971, and the Petrodollar system was introduced. As a result:
- 50% of international loans and global debt securities are made in US Dollars.
- 50% of international trade invoices are issued in US dollars.
- 40% of international payments are made in US dollars.
- 61% of official foreign exchange reserves are held in US dollars.
- Around 60% of the US dollars in circulation, exist outside the United States.
When the US dollar is no longer the primary global reserve currency, the majority of those dollars living overseas, will come back home. This will more than double the available currency here at home, and cause inflation to spike sharply.
The Rule of 72 and your retirement fund
Conditions matter more than events
Imagine you’re watching a pirate movie with your kids, in which there is a scene with a group of eight or ten men in a pitch black room filled with gunpowder and dynamite.
Does it matter who strikes the match?
So, before we move on, I want to make the point that predicting a specific event is less important than the fact that all these conditions exist, which makes an event possible. As Michael Yon wrote, “it’s not about sparks, but conditions. Logistics are part of the higher-level matrix that is conditions. Amateurs talk sparks. Professionals talk conditions.”
Currency Regime Change is Dangerous
Almost always accompanied by war
So, when the BRICS nations announce an alternative to the dollar, you had better sit up, and take notice. It is said that black swan events are unpredictable. But one would have to be willfully ignorant to miss the potential for upheaval following such an event.
Keep an eye on this:
It should come as no surprise that these news items did not, and will not, get any coverage in the corporate media. Because it would expose the weakness of the dollar, and the price suppression of gold and silver by the central banks. The price of gold and silver have been suppressed for decades (gold market manipulation: part 1, gold market manipulation: part 2), because a rising gold price exposes government’s ongoing devaluation of debt-based, fiat currency.
The articles about gold market suppression and manipulation (linked above) prove beyond a reasonable doubt that the prices of physical gold and silver have been artificially suppressed for the purpose of hiding the devaluation of the dollar. For supporting evidence, go over to the US Debt Clock, and look at the column on the far right. Find the sections dealing with Dollar to gold and dollar to silver in 1913 and now. Look also at paper to gold, and paper to silver. Where “paper” is referring to shares in an Exchange Traded Fund (ETF).
Speaking of ongoing devaluation…
Nearly 80% of all the US dollars in existence, have been created since January of 2020. This is a recipe for disaster.
The federal reserve and the US government have been colluding to inflate the currency supply for decades. But the new money created since January 2020 is why the inflation numbers are more severe than before.
People have, in general, preferred to hold more cash in the 12 years between 2008-2020. Then, in January 2021, their behavior changed.
In 2007, the personal savings rate in the US was 3.6%. In 2008, driven by the financial crisis, the savings rate jumped to 6.4%. By the end of 2019, it was up to 7.6%, and at the end of 2020, it jumped to 13.7%. People saved more money between 2008 and 2020, according to the data, than in any other year since 2000.
Put another way, people were saving rather than spending. This indicates that apprehension on the part of consumers had been increasing since the 2008 crash. The pandemic exacerbated these concerns about the future, and led to a more drastic reduction in spending across the board. Instead, people have been hoarding cash in checking & savings accounts, and paying down debt (some refer to this as a decline in the velocity of money, and since April 2020 it has been dramatic).
Don’t Get Too Excited
That “invisible hand” includes everyone
In January 2021, the rate of personal savings began to decline sharply. This correlates with the lifting of lockdowns and travel restrictions in many nations that took place in January 2021. Put simply, the people were tired of lockdowns, and wanted to party.
Sadly, too many people are unaware, and incurious about the how or the why of conditions and world events that will have devastating affects on the rest of their life.
“It has always been this way”
Fortunately for the United States, the dollar is the world’s primary reserve currency, and has been so since 1944, longer than the vast majority of us have been alive.
As a result, the US dollar still has the confidence of the world’s financial markets, and looks very strong. Particularly when compared with the weakness of the Euro, the Yen, the Pound Sterling, and most others, which have lost significant value recently.
One of the reasons the Euro has fallen against the dollar is the recent interest rate hikes by the US federal reserve, in contrast with the European Central Bank (ECB) which has kept interest rates well below 1%.
It’s all smoke & mirrors though
The mildly higher interest rates imposed by the federal reserve, placate Wall Street, and encourage the continued delusion that Jerome Powell has the gravitas and the discipline to take the sort of drastic measures that Paul Volker took back in the early 80’s.
This, of course, is impossible, given that the federal government’s debt is more than 30 TIMES what it was when Carter left office. If interest rates go too high, it will crash the US economy. How high is “too high?” That is hard to know. But the federal funds rate is still less than 2.5%, and the S&P 500 has fallen by nearly 15% since the beginning of 2022.
Fed rates are wholesale.
You and I pay retail.
The fantasy that the federal reserve might raise rates high enough to curb inflation, which gives a false sense of security about the wisdom of the central bankers; and, by extension, confidence in the almighty dollar.
This hawkish behavior makes the US bond market more attractive than the other fiat currencies around the world, which are in far worse shape.
“It’s good to be the king!”
The dollar’s position as primary global reserve currency has enabled the United States to export our inflation to the rest of the world.
Remember that 60% of dollars living outside the US? They got there because we traded them for stuff, that was made in other countries, by real people, with real labor.
Exporting our currency for tangible goods, means we get to live high on the hog, and don’t have to face the consequences of inflating the dollar…YET.
The illusion of dollar strength when measured against other currencies, means that for now, traders, investors, and ordinary Citizens continue to prefer holding cash, and buying securities (stocks & bonds) instead of hard assets.
The reason why the dollar appears to be strong is because most of the world’s currencies are falling in value. The dollar is just falling a little slower relative to others right now.
The massive quantitative easing (money printing) of the last 15-20 years, combined with the disruptions in the global supply chain, have exposed the weakness of our debt-based fiat currency. Real wages have not kept up with inflation since the middle of the 1960’s, and the disparity has grown worse with each passing year.
What’s the deal with “fiat” currency?
If you’ve been wondering why I keep using terms like “fiat currency,” take 26 minutes to watch this brief introduction to the history of money, and the definition of currency, by Mike Maloney of goldsilver.com
The machinations of the federal reserve
The recent rate hikes are the federal reserve’s attempt to fight inflation, and are already causing a reduction in new mortgages being made, which results in a decline in home sales, followed by price reductions in order to entice buyers. Keep an eye out for listings with key phrases like “Motivated seller!” or “Price reduced $9,000!” or “Priced for quick sale!”
The hottest markets were hit first and hardest. California home sales were down 21% in June, while Boise and Phoenix are down even more.
Additionally, the decline in new mortgages, and the resulting price reductions will lead to further anxiety on the part of consumers and businesses. These overvalued markets are beginning to see an increase in available inventory, which will result in more downward pressure on prices.
Lower home prices are a good thing though, right?
In a normal market, price corrections would be a benefit to families seeking to purchase a home. Unfortunately, a reduction in home prices will not benefit as many people as it should:
- The small business network, Alignable released a recent member poll, which found that 35% of small business owners could not pay their rent in full or on time in June (48% of whom had a rent increase), and 45% have already decided to freeze hiring new workers.
- The average price of a used car in the US is over $33,000, and is being financed for 67 months.
- The US economy posted its second quarter of negative growth. Two quarters of negative growth is the accepted indicator of a recession. However, markets are driven by fear and greed (and automated trading algorithms), the additional negative psychological impact of a recession will compound the tangible decline in markets, and economic growth.
- Recession fears have caused hiring freezes across a broad swath of industries, including big tech. If the giants are projecting slowdowns, imagine the turmoil going on in smaller firms.
- I did not expect to see it until the fall harvest of 2022 comes up short, but food banks are already struggling to meet the needs of people who are struggling.
- Increased fuel costs raise the price of goods on the shelf. Labor shortages, particularly in lower paying jobs like farming, food production, and grocery stores, will further disrupt the supply chain, leading to even higher prices.
US food production will be short this fall, and beyond
- The food that will not be produced during the current growing season will be our biggest food supply problem. Fertilizer prices have more than doubled since last year.
- The Western and Southwestern US is experiencing record temperatures, and the worst drought in more than a decade. Ranchers are selling their herds because there isn’t enough grass for them to eat, and fuel costs have driven hay prices much higher than normal. In the near term, this may cause beef prices to go down. But next year, the price increase will be much sharper, because it will take a couple of years to rebuild the herds, IF the ranchers can stay in business at all.
The United States has long been a net exporter of food. We also import more and more each year as well. But that is driven by convenience, and a desire for variety, rather than need. However, the combination of drought, record high temperatures, input costs (fertilizer, fuel, etc), and transportation costs will push food prices much higher, and soon.
Additionally, the wide variety of foods from around the world, to which we have become accustomed, will dry up, as other countries cease exports in order to feed their own populations. Don’t be surprised if, over the next few months, you go down to your local grocery store or world market, and find the selection greatly reduced.
What does all this mean for us?
It’s going to get much worse. The highlights above, are just a few of the many factors that are squeezing the finances of ordinary Americans. This “squeezing” is one of the many conditions I spoke of earlier.
The Chapwood index reports the price changes of the top 500 items on which Americans spend their after-tax dollars in the 50 largest cities (my hometown of Atlanta experienced over 16% inflation during the last half of 2021 and the first half of 2022).
Remember: The “rule of 72” works in reverse as well. Divide 72 by the annual inflation rate to determine how long it will take for your savings or retirement account to halve in value.
But the fed is fighting inflation, right?
Merely nudging interest rates ¾ points higher here and there, will not do anything to reduce inflation. But the debt load is so high that these same incremental increases will wipe out millions of businesses, families, and municipalities whose income has not kept up with inflation, and who are in debt up to their eyeballs.
In addition to making homes less affordable to working families, raising interest rates will require that people move money from already strained food and housing budgets, in order to service their personal debt.
This massive debt, combined continued inflation, is why a reduction in home prices will not benefit as many people as it should.
Government to the Rescue!
“It’s the economy, stupid.”
As we approach the November mid-term elections, with housing and jobs in decline, and the price of food and fuel causing real hardship for families… the political class will come up with spending programs designed to assist those who are most affected (which will inflate the currency supply even more, and make the long term problem worse).
They will also put pressure on the federal reserve to lower interest rates in order to prevent carnage at the voting booth, (or to buy votes, depending on your perspective).
On a much larger scale, the same is true of government at all levels. Debt load is so high that rising interest rates will require spending be diverted from budgeted items, and redirected to debt service.
Inflation has already had that same effect. For several months, we’ve seen stories from all over the country about police departments whose fuel budgets are not enough to last the month. As a result, many of them have had to limit police response, contributing to an increase in crime.
Families, businesses, cities, counties, (and eventually States, and the federal government) are quite literally between a rock and a hard place.
The answer, of course, will be taking on more debt in order to maintain spending levels. Can you imagine the electoral bloodbath that would ensue if social programs were cut? Spend some time on USDebtClock.org to get a more complete picture of the enormity of it all.
The Central Bankers Have it Under Control
“Pay no attention to the man behind the curtain!”
The federal reserve will reverse course… of course. Probably before the November election.
I predict that, after their September meeting, Jerome Powell will announce that the mischief of inflation has been managed, that a severe recession has been averted, and we are once again cautiously optimistic about the future.
Cutting interest rates, and turning the printing presses back on will give the politicians, and the Wall Street money managers hope, mortgage rates will decrease, home prices will increase their upward pace, and Jim Cramer will shout for joy.
But that’s what caused the problem in the first place!
Regardless of what the central bankers call it, a “liquidity injection,” “quantitative easing,” a “reduction in quantitative tightening,” this next round of money printing, could be the straw that ultimately pushes the dollar into a tailspin.
When the increase in the amount of currency in circulation is stored, rather than spent, it has little effect on general price levels.
But, when they sense a shift, people will change their preference for hoarding cash, in favor of exchanging it for goods, and prices will rise. If those goods are in short supply, whether because of supply chain issues, or panic buying, the public will rush to exchange their currency for ANY tangible good, before their currency loses any more value.
That is hyperinflation. No one can say beforehand when that shift will occur, or what trigger will cause it. Again, it’s about conditions that enable events. Lessons investors can learn from the Weimar hyperinflation of 1923 includes a good post-mortem of the conditions and the resulting events.
Gradually, then suddenly
There is an old joke attributed to Mark Twain (and F. Scott Fitzgerald, and Ernest Hemingway, and others), “How did you go bankrupt?” he was asked “Slowly, at first. Then all at once” came the reply.
The same thing happens to nations that experience a currency crisis.
Slowly at first, and then in a rush, people will stop holding cash (whether in a bank, or under the mattress), and begin exchanging that cash for tangible goods before those goods become unaffordable or unobtainable, whether because of supply chain issues, or geopolitics.
Now that the United States have offshored the majority of our manufacturing, expect supply chain issues to be more and more common.
Whatever new programs are implemented to provide relief to those who are hurting, will have little effect. The masses on Main Street who have been hurt the most, will finally begin to understand… the dollars they’ve been trying to save responsibly, have been losing value far more rapidly than the paltry interest the financial institution will ever pay. The astute will finally realize that the entire debt-based, fiat system was purpose built from the beginning to steal their wealth.
A 100% track record of failure
Chile, Argentina, China, Greece, Zimbabwe, and more than 25 other examples from the 20th century, illustrate the fact that fiat currencies always fail.
No one can say for certain when the dollar will collapse, or what event will be the catalyst that sets it all in motion… Only that it will.
My intuition is that when the BRICS nations implement their alternative to the SWIFT system, and begin offering international trade in currencies other than the US dollar, that will spell the end of dollar hegemony, and it will be the beginning of the dollar’s slide into history. But that is just a guess. The money masters are not stupid. No doubt they are working feverishly on a plan to maintain, even increase their control (research Executive Order #14067).
It’s important to acknowledge the British Pound Sterling was the reference currency for most of the world before WW2, and has not crashed. When viewed through this lens, many will argue that even if the dollar ceases to be the global reserve currency, it will still survive. However, we live in interesting times.
Global upheaval, including conquest, war, famine, hyperinflation, starvation, disease, and pestilence, resulting in 2 Billion dead worldwide is a certainty in the near future.
By the way:
Blackstone is positioning itself to profit from the crash:
CNBC recently interviewed the Chief Investment Strategist at Blackstone, the largest residential and commercial landlord in America. He opined that, while housing is almost as unaffordable as the 2007 high, a crash is unlikely, because lending standards have tightened, there hasn’t been much overbuilding, and homeowners are not refinancing like it’s an ATM. He said “As long as the jobs market remains relatively healthy, I think housing will as well.”
…and therein lies a big IF. The cost of capital is increasing, the job market is faltering, and inflation is reducing the purchasing power of families and businesses whose incomes have not kept up.
Actions speak louder than words though. Blackstone is in the midst of finalizing a new fund. Blackstone Real Estate Partners X will be the largest private-equity fund in history, with an anticipated $30+ Billion for US investments. Separate funds for real estate in Asia and Europe will bring to bear a total of more than $50 Billion for “opportunistic investments” according to the Wall Street Journal, which goes on to say that these funds “could allow the firm to take advantage of a downturn in the public markets.”
Keep your powder dry
Rather than bemoan the fact that private equity firms are buying up real estate in order to rent those houses to people who can no longer afford to purchase their own home, it would be wise to take steps to preserve your own capital, so you can follow their example. Interest rates may rise, inflation may destroy retirement accounts, and equities may crash, but people still have to have a place to live.
The approaching downturn and crash will lead to other social problems. Not the least of which is…
Crime, and lots of it.
The number of illegal immigrants crossing our Southern border is staggering. Worse, is the Biden administration’s practice of ferrying them to locations around the country, where they are being housed.
Too many counties have elected Democrat (and soft Republican) sheriff’s who have pledged to cease cooperating with Immigration and Customs Enforcement. They will no longer be turning over suspected illegals who commit crimes in their counties.
These sheriffs are also not to be counted on for standing against a rapacious federal government in defense of our right to keep and bear arms.
Crime rates are up dramatically around the country, though not surprisingly, blue states skew the averages. Metropolitan Atlanta is “safer than 5% of U.S. cities” according to Neighborhood Scout. This trend will worsen. Particularly as prices for food and fuel continue to rise, and people have a much harder time providing basic needs for their families.
After “going blue” in the last election, the school board in my county eliminated abstinence from their sex education curriculum, and replaced it with the more progressive “comprehensive sex education” curriculum. The example of surrounding counties which have gone down this road is a clear indicator of what is coming. Rampant teen pregnancy, a building program by Planned Parenthood, more single-parent households, and the subsequent, predictable increase in crime.
The most recent gun control bill (HR 1808), seeks to impose draconian bans on hundreds of firearms, and is yet another transparent attempt to disarm the American people. This attempt is just the latest in a decades-long assault on the US Constitution. Disarming Americans is so high on the priority list, that behind the scenes deal making went on all night leading up to the emergency session called before a congressional recess.
Collectivists (both Democrat and Republican) will continue their relentless assault on gun rights. When they finally get the American Citizenry disarmed, the horrors of tyranny will begin. You may think I’m using hyperbole, but the lessons of history tell a different story…and when it happens, it will happen very quickly.
What to Do?
Prepare for the storm, so that you can feed your family:
Get out of the cities and suburbs
Grow your own food
Be ready before trouble comes
The time to act is right now.
Things could go sideways any day now. But once the end begins, we will not have time to prepare. It is far better to be ready now, so you can “hurry up and wait.”
Further, when things begin to happen, we will be more concerned with feeding our families and staying out of the way of danger, than hand wringing over that extra 10% you had to pay in taxes, penalties, or fees for getting out of the system before the dollars you worked so hard to save, lost all their value.
Don’t get distracted by media pundits. Focus instead on your personal sphere. “Think locally, act locally.” Grow food, get to know the others like you: farmers, fixers, growers, makers, and ranchers in your area. Understand that the day is rapidly approaching, when the most important trade deals are the ones you make within your community.
Economics is not about algorithms, formulae, or mathematics, but the actions of ordinary people like you and me. The choices we make based on our circumstances, desires, and plans, add up to form “the invisible hand” that Adam Smith wrote about hundreds of years ago.
This talk by Lynette Zang stresses the importance of addressing the core needs of a family as we go into the days ahead:
- Wealth Preservation
Lynette’s impassioned plea for you to wake up and do something may be off-putting at first, until you understand that she is the sort who cares what happens to others.
I would take her seriously, and take action!