A Repeat of 2010 in the Works?

Bailouts, Banking, Consumer Finance, Interest Rates, , , , ,

Andy’s Notes: During 2010, the US Consumer paid down a significant amount of debt. It scared the moneychangers quite magnificently. In an fractional reserve, fiat monetary system, ‘growth’ comes at least in part by inflation of the money supply and the subsequent effect on prices. One of the biggest ways monetary inflation occurs is when money is placed on deposit at a bank and nearly all of that money is then lent out by the bank – at interest. Every loan increases the money supply. When loans stop?

The summer data will be very interesting to say the least. Keep in mind that this paydown happened with the federal government handing out cash – again. It could very well be that in 2020, much like 2007, the ‘stimulus’ money went to help repair balance sheets rather than to accumulate more stuff.

Sutton


source: tradingeconomics.com

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Washington Town Creates Currency for Local Use

Banking, Currencies, Monetary Policy, , , , ,

Andy’s Notes: The four requirements of any money are intrinsic value, a unit of account, a store of wealth, and a medium of exchange. These new minted ‘bills’ are able to be used locally, but the holders cannot compel any business or individual to accept them as legal tender. The US has legal tender laws that specify what may be used as legal tender. Does this make it a bad idea? Not necessarily. The USDollar doesn’t meet the ‘store of wealth’ requirement because of inflation and it is still accepted everywhere in the US. The Dollar also has little or no intrinsic value. The Tenino bills lack intrinsic value as well, but meet the other three requirements as long as everyone in the cohort is willing to accept them as legal tender and – this is a biggie – the bills are backed in such manner that whoever runs the printing press can’t print themselves a nice pile and go out and buy real goods with them.

The last sentence above is key to why banking systems fail over time. The temptation for the printers of money to run off currency beyond the backing is too much. This is why the banks of the 1800s failed so often. They’d over-issue silver certificates beyond the silver stored. The people would get wise to it and run the bank demanding silver and the banks would run out and have to close.

Since we no longer have redeemability on US currency, it makes over-issuance a real problem, especially in the digital age. Will the ‘wooden dollar’ experiment work? Time will tell. If nothing else, this is yet another signpost on the trek to the end of the road for the used and abused USPetrodollar.

Sutton/Mehl

TENINO, United States, July 9 (Thomson Reuters Foundation) – Tucked away under lock and key in a former railroad depot turned small-town museum in the U.S. state of Washington, a wooden printing press cranked back to life to mint currency after nearly 90 dormant years.

The end product: $25 wooden bills bearing the town’s name – Tenino – with the words “COVID Relief” superimposed on the image of a bat and the Latin phrase “Habemus autem sub potestate” (We have it under control) printed in cursive.

With the coronavirus pandemic plunging the United States into a recession, decimating small businesses and causing job losses across the country, some local governments are looking for innovative ways to help residents weather the storm.

For Tenino, the answer was the revival of the local currency that had bolstered the town’s economy in 1931 in the wake of the Great Depression.

“It was kind of an epiphany: Why don’t we do that again?” Mayor Wayne Fournier told the Thomson Reuters Foundation. “It only made sense.”

Tenino, a town of less than 2,000 people located about 60 miles (95km) southwest of Seattle, started printing the local banknotes in April, five weeks into Washington state’s lockdown.

Anyone with a documented loss of income as a result of the pandemic is eligible for up to $300 a month of the local currency.

Businesses up and down the town’s quaint Main Street accept the wooden note for everything except alcohol, tobacco, cannabis and lottery tickets.

Tenino’s city government backs the local currency, which merchants can exchange for U.S. dollars at city hall at a 1:1 rate.

Susan Witt, executive director of the Schumacher Center for a New Economics, a Massachusetts-based think tank, said alternative currencies like Tenino’s banknote are better than direct cash payments at boosting local economies.

“The City of Barcelona gave donations (in 2017/18) to sports teams and cultural groups as well as social programs (then) watched these donations go to big box stores,” she said in emailed comments.

“So, it created a local currency so that these ‘discretionary’ funds in its budget would circle back to support locally-owned businesses.”

‘WOVEN INTO OUR DNA’

Mayor Fournier noted that, for long-time Tenino residents, the wooden notes are nothing new.

The tiny town founded around a sandstone quarry achieved national prominence in 1931 when civic leaders printed a wooden local currency to restore consumer confidence after the town’s bank failed during the Great Depression.

“This is woven into the DNA of the community,” Fournier said. “My great aunt Erlene has the family collection all stashed away.”

The mayor brought the idea of resurrecting the town’s legacy project to the city council as a way to provide economic relief to businesses and residents suffering as a result of lockdown measures to slow the spread of COVID-19.

In April councillors approved the proposal to issue up to $10,000 in local scrip.

So far, 13 residents have successfully applied for the funds and some $2,500 worth of wooden bills have been issued, Fournier said, with donations upping the total funds available to $16,000.

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Timeline of Global ‘Reserve Currencies’

Bailouts, Bond Market, Currencies, , , , ,

Notes: This has been posted before, however, it is imperative that people understand that no reserve currency lasts forever and such will be the case with the Dollar. This was going to happen anyway – even before the events of the past several months – although they might well have hastened its demise. What are the signals? Rampant accumulation of external debts, out of control monetary creation (the fed ‘pumping’ liquidity is a good example), and almost no one speaking out about the above.

Sutton/Mehl

The World's Reserve Currencies of the Past Half Millenium

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Risk Management – Default Risk

Bond Market, Currencies, Economics, Geoeconomics, Interest Rates, Municipal Debt, , , , ,

Investors don’t normally think of themselves as lenders – banks do the lending right? Not always. If you have any kind of bonds or mutual funds, closed-end funds or ETFs that own bonds, you are a lender. Not in the direct sense. You don’t have a contract with the borrower to be repaid, for example – unless you own a government or corporate bond directly.

During the 2008 financial crisis, the word default was a household term. People were defaulting on mortgages, companies were defaulting on their bonds, some companies, like Lehman Brothers, couldn’t get a loan because they were viewed as a high default risk.

There are a couple of points to remember. The first is that return needs to be commensurate with the risk involved. Oftentimes the market might indicate which instruments are perceived as more ‘risky’ – they’ll have higher yields than other comparably rated instruments. Debt is nearly always rated. There are various ratings agencies. Standard & Poors, Moody’s, and Fitch are three of the major agencies. They all have a different nomenclature for their grading, but it’s the same as your report card.

A is the best, B second-best, and so forth. You should see yields increase as you look at lower-rated bonds. There is a fairly significant misconception right now. People seem to think that because the government and/or fed are bailing everything out that there is no longer any default risk. Again, this is not simply an American circumstance, this is more global. So simply shifting bond purchases to overseas companies won’t necessarily help.

The big advantage of holding a bond over a stock is that 1) you’re going to get some type of interest even if it is small. Companies may or may not pay a dividend on their common stock. Generally the preferred shares, which are hybrids and have characteristics of both stocks and bonds also have interest. The second big advantage to owning debt is that you’re a creditor of the company. If there IS a bankruptcy, the bondholders and other creditors are first in line for any distribution of the company’s assets. Stocks are considered equity.

Keep in mind that a default and a bankruptcy are two different events. A default is when the borrow stops paying on a particular loan or multiple loans. While a default is an alarming development, it doesn’t necessarily equal a bankruptcy in which the company either is permitted to re-organize or goes out of business altogether. So if you own bonds from a particular company and that company goes bust, you might get some of your capital back, but almost certainly not all of it. If you’re a shareholder in a company and the company goes broke, it is extremely unlikely to have any return of capital.

When considering the risk of default it is always good to look at a company’s balance sheet and several years worth of income statements at a bare minimum. A SWOT analysis is also helpful. What sorts of events might result in your company not having money to make good on its debts? What is going on right now is certainly going to cause problems. What other types of events could hurt your company? We would encourage people to stay away from the assumption that industries and companies will always be bailed out by governments. After all, investors and creditors in Lehman Brothers, didn’t think the USGovt would leave the company twisting in the wind.

There are some very important lessons to be learned by studying economic and financial history with the goal being to learn from the mistakes of others rather than having to endure the pain of defaults in your own portfolio.

Sutton/Mehl

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The US/EU on the Brink of Bankruptcy – von Greyerz

Bailouts, Currencies, Economics, Geoeconomics, , , , ,

Note: This column, while deemed relevant was written by a third-party author. The views, opinions, and content are attributable to the author, not the Institute for Economic Awareness.

Most people don’t understand the cause of hyperinflation. Many argue that we can’t get hyperinflation since asset prices are now under pressure and there is no demand led inflation as most people currently have very little money. 

What few people understand is that hyperinflation is a currency driven event. It doesn’t arise as a result of prices going up. Instead hyperinflation comes from the value of the currency imploding. In every case of hyperinflation in history, it is the collapse of the currency that is the cause. So what leads to the currency collapsing. Well, exactly what is happening now around the world, namely unlimited money printing and credit creation. Led by the Fed and the ECB, the whole world is now extending trillions in loans, subsidies and guarantees to companies and individuals. Government deficits are now surging as tax revenues collapse and expenditures increase rapidly. So governments will also need to print money to finance their galloping deficits. The inevitable outcome will be bankruptcy although few nations will admit it. 

US DEBT DOUBLES EVERY 8 YEARS

I produced the debt chart below the first time at the end of 2017 when Trump was elected president. I forecast then that US debt would reach $28 trillion by the end of 2021 and double by 2028 to $40 trillion. These kind of debt increases seemed incredible at the time. But very few people study history and learn from the past. 

usa-debt

All we need to do is to go back to 1981 when Reagan became president. Since 1981 US Federal debt has on average doubled every 8 years, without fail. Obama doubled debt during his reign from $10 to $20 trillion. Thus, it was totally in line with history that the US debt would be $40 trillion 8 years later, in 2025. 

Until a couple of months ago, it seemed totally impossible to reach these high debt levels.  But today it looks like we could exceed those figures by a big margin, especially the 2025 one of $40T. I am not surprised. Because when you make these forecasts you know that there are always unforeseen events that will occur to fulfil them. And the end of the biggest asset and debt bubble in history had to end with an unexpected event.

The bottom part of the graph above shows US tax revenue. It was $0.6T in 1981. Currently it is $3.4T. With the present situation in the US, it is likely that tax revenue will collapse, thus increasing the deficit further. But even at the current level of $3.4T, tax revenue has gone up less than 6X since 1981 whilst debt has gone up 31X. 

As the banking system comes under pressure with debt defaults and imploding asset prices together with the $2Q derivatives going up in smoke, the US will be looking at an economic and social situation which is terrifying.

With falling tax revenues and galloping debt and deficit, the US is clearly on the way to default and bankruptcy.

SO WE ARE LOOKING AT THE FINANCES OF A BANKRUPT STATE. No additional printing of worthless dollars will remedy the situation. All it will lead to is a collapse of the dollar and an implosion of US debt. SO HYPERINFLATION HERE WE GO! 

But the US won’t be alone, since sadly the EU (ED-European Disunion) and many other nations will encounter a similar destiny. A bankrupt world is the inevitable result of the irresponsible actions of central banks and governments in the last 100 years. 

As Voltaire said already back in 1729:

PAPER MONEY EVENTUALLY REACHES ITS INTRINSIC VALUE – ZERO

The table below shows all the major currencies since the Fed was created in 1913. The straight line at 100 is Gold which represents stable purchasing power. In the last 100 years all major currencies have gone down 97-99% against gold. 

ALL MAJOR CURRENCIES HAVE LOST 82-87% THIS CENTURY

If we look at more recent periods, the table below shows the currencies’ decline since 1971 and 2000. Since 1971 they are all down 98-99%, except for the Swiss franc and Yen, thanks to Nixon closing the gold window. 

What few people realise is that since 2000 all the major currencies, except for the Swiss franc, are down 82-87%. This means that in real purchasing power, the currencies in industrialised countries have lost more than 4/5th of their value. So the final leg of the destruction of the current monetary system started 20 years ago. And from 2020 for the next 1-3 years, we will experience the final destruction down to Zero. 

MOST CURRENCIES WILL LOSE 100% IN THE NEXT FEW YEARS

But what we must remember is that final fall to the bottom involves a 100% fall from today in the value of the Dollar, Euro, Yen etc. It was always clear that the current monetary system would end like all the others in history since no currency has ever survived in tact with the exception of gold. And the world’s central banks have now started the process that will lead to the demise of paper money as we know it today. 

The facts and tables in this article are indisputable. The message couldn’t be clearer. 

Still, most people don’t get gold, since less than 0.5% of world financial assets are invested in physical gold.

As I have outlined in many articles, stocks, bonds and property will lose 90-99% in real terms, against gold, in the next few years. Many bonds will lose 100%. And paper money will lose 100%. 

LAST CHANCE TO SAVE YOUR WEALTH

Investors who don’t take immediate action are going to lose most of their investment assets. If you own property without debt, you can at least hold on to it but you will stop looking at it as an investment. But sadly most investors in conventional assets, like stocks and bonds, will be paralysed, hoping that Central Banks and Governments will save them yet one more time. But it won’t happen this time as more worthless debt cannot solve  a debt problem.  So I urge you to take action now. 

Stocks will very soon start the next downleg in the secular downturn that started a few weeks ago. So there is a last little window to get out at what will seem like fantastic prices just a few months from here. 

Gold has now started the acceleration phase and made new highs in most currencies except for in US dollars. The 2011 high of $1,920 will soon be reached on the way to much, much higher levels. 

The three biggest gold refiners in the world in the Swiss canton of Ticino are now operating again but only at 1/4 of normal capacity. So there will be very little physical gold available. Our company can still get hold of gold but the tight supply situation will lead to prices going up rapidly and spreads widening. 

Remember that you are not holding gold for illusory gains in worthless paper money. Instead, physical, and only physical, gold is life insurance against a collapsing world economy and monetary system. 

Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management
Zurich, Switzerland
Phone: +41 44 213 62 45

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A Picture Worth a Trillion (and then some) Words?

Consumer Finance, Debt Ceiling, Economics, Government Statistics, Monetary Policy, National Debt, , , , , ,

Andy’s Notes: Inflation, the Debt Ceiling, and the Dow Jones mentioned in the same sentence. They all have one thing in common – they’re going up. Asset bubbles are much more palatable by the average person than cost of living bubbles. In other words, when inflation blows up stock indices, the world cheers. When it blows up the cost of things like food, gas, and other necessities, that is not acceptable. (Click the thumbnail below to see the whole image).

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