John Rubino: 2020 Setting Us Up For the Real Crisis That’s Coming

In case you were reluctant to start preparedness steps before 2020, perhaps the COVID-19 lockdown, civil unrest, wildfires, hurricanes, and anticipated presidential election chaos have convinced you that having a “Plan B” might be good idea. 

According to this widely followed guest, we would do well to heed the lessons that 2020 has been providing, since in his analysis we are still facing the most convulsive crisis yet. 

John Rubino, founder of DollarCollapse.com, returns to Liberty And Finance / Reluctant Preppers to answer viewers’ questions and alert us to the critical risks we face in the time ahead. 

John also reveals the truth about gold’s role in banking that’s starting to leak out, even from official sources.

- Source, Liberty & Finance

The Relationship Between Inflation and Prices

Assuming no change in the average cash balances held by a population, over time there must be an inverse relationship between the expansion in the quantity of money in circulation and the diminution of its purchasing power. 

This is unarguable in logic and to argue otherwise is to subscribe to a version of monetary perpetual motion. By the same token, while the effects on individual prices also have to allow for changes in the factors specific to them, the effects of monetary debasement on the general level of prices should be clear. 

Now it is time to introduce a second factor; changes in the average cash balances held by a population.

Changes in cash balances are an expression of relative preferences between money and goods. If a population as a whole is satisfied with the stability of money as the medium of exchange, it will be happy to retain balances surplus to its immediate needs. We see this even with inflating currencies, such as the Japanese yen, where irrespective of the level of interest rates monetary expansion merely accumulates as bank deposits. It is unusual for a population to go to the extremes evident in Japan, but equally, a population which realises its currency is declining in purchasing power has every reason to dispose of it in favour of goods, maintaining lower balances in consequence.

The complete rejection of a currency as the medium of exchange renders it utterly valueless and is the common outcome to every hyperinflationary collapse. Governments that become ensnared by inflationary financing face the growing certainty of a Venezuelan outcome.

For now, monetary authorities around the world are relying on public ignorance about money and the theory of exchange. Those who trouble themselves to consider how their currency’s purchasing power is actually changing will notice how it is declining more rapidly than official statistics say. This is deliberate. After the introduction of widespread indexation in the early 1980s governments devised methods to reduce the costs incurred. Changes in statistical methodology have achieved that, with consumer price indices now entirely suppressed, so much so that central banks claim to be struggling to get the CPI to rise to its two per cent target.

The evidence from independent analysts in America such as Shadowstats and the Chapwood Index is that real world prices there are rising at closer to a ten per cent rate and have been for the last ten years. With the FMQ having grown at a monthly compounding annualised rate of 9.6% from the Lehman crisis to the end of 2019, the truth about price inflation appears closer to independent analysts’ calculation than the official CPI. Furthermore, there is little evidence of noticeable change in savings rates or cash hoarding over the period, which would have affected the general level of prices.

The first to realise that the purchasing power of a currency is declining and will continue to do so are usually those who own it for reasons other than as a normal medium of exchange. These are foreign holders who have accumulated currencies other than their own government’s fiat money as a result of trade and have chosen to retain it instead of selling it in the foreign exchanges. And there is a second group of foreign holders which has diversified investment portfolios into foreign financial markets.

These groups are primarily sensitive to external economic and financial factors, such as changes in the outlook for trade, financial asset values and their requirements to hold liquidity in their own currencies. It stands to reason that a state that manages to run continuing deficits on the balance of trade and retain an accumulation of foreign ownership of its currency is vulnerable to changes in international sentiment. This is the situation the dollar finds itself in, with US Treasury TIC figures revealing foreigners own financial securities worth approximately $20.6 trillion, and additionally bank deposits and commercial and US Treasury short-term bills totalling $6.15 trillion. In other words, foreign ownership of the dollar is 130% of the CBO’s estimate of current US GDP.

The accumulation of foreign dollar positions was due to a number of factors: the dollar is the international reserve currency, trade expectations were of continual global growth, the perpetuation of US trade deficits, increasing portfolio investment and a rising dollar. Global trade is now contracting, and the dollar has begun to decline. Commercial priorities are changing from global expansion to conserving capital.

With the global economic outlook deteriorating rapidly, the dollar is notably over-owned by foreigners, which is not counterbalanced by American ownership of foreign currencies. Most of US foreign financial interests are denominated in dollars with exposure to foreign currencies remarkably small at $714bn at end-June.[ii]

China has already declared a policy of reducing her dollar investments in US Treasury bonds and is selling her dollars to buy commodities. Few realise it, but China is doing what ordinary people do when they begin to abandon a currency — dumping it for tangible goods which will cost more in future due to the dollar’s declining purchasing power. And as the dollar’s purchasing power declines measured in commodities more nations are likely to follow China’s lead.

When you see a chart of the expansion of money supply, as illustrated in Figure 2 below and combine that with a falling dollar in the foreign exchanges, it is only a matter of time before increasing members of the domestic population begin to follow the foreigners’ lead.

Compared with the past, there is a generation of millennials which through their understanding of cryptocurrencies has learned about the debasement of fiat currencies by their governments. It remains to be seen whether this knowledge will bring forward the general public’s understanding of monetary affairs for an earlier abandonment of money for goods.

- Source, James Turks Gold Money

Why Quantitative Easing is Inflationary

On 23 March the Federal Open Markets Committee (FOMC) announced unlimited QE for both US Treasury stock and agency debt as well as however much liquidity commercial banks need.[i] While judging the expansion of the budget deficit to be inflationary, it is only inflationary to the extent that it is not financed by savers, either increasing the proportion of their savings relative to immediate spending, or to the extent they divert their savings from other investment media. In the latter case, citizens have been committing their savings more to equity markets than bond markets. The returns for discretionary portfolios managed on the public’s behalf have also found better returns in equities than in government and corporate bonds, though when assessing increasing investment risk Treasury stock is seen to be a safe haven in bond portfolios. Pension funds and insurance companies also allocate cash flow to US Treasuries and to the extent that this is the case, the issuance of further government debt is non-inflationary.


Furthermore, if a bank does not increase its balance sheet by expanding bank credit, its participation in the Fed’s QE programme is not inflationary either. For this to be the case, it would have to sell existing stock, call in loans or subscribe on behalf of clients.

By seeing them through a Nelsonian blind eye these factors give some encouragement to the Fed in funding the Treasury through QE, particularly since the statistics reflect a jump in savings, as the following chart from the St Louis Fed illustrates.

More correctly, the chart reflects the fall in spending when people locked down, as well as the $1,200 stimulus checks distributed to households at end-April, which marked the peak in the chart. Since then, there has been some downward adjustment, partly because some spending has returned, and the backlog of essential spending, such as property maintenance, is being addressed.

The evidence is not yet strong enough to claim this statistical shift in savings habits is permanent. Furthermore, being calculated as the percentage of personal disposable income that is not spent and given the high levels of personal debt throughout the population, much of these so-called savings will have disappeared into credit card and debt repayments. It is more likely that with rising unemployment and roughly 80% of the American salaried population living paycheque to paycheque, that far from there being a higher savings rate, personal finances have deteriorated so much that money is being withdrawn from savings on a net basis, to acquire life’s essentials. In fact, the savings rate is one of those unmeasurable economic concepts, and the reality is that Joe Average is worse off in today’s contracting economy and is drawing down on savings in order to subsist.

The non-inflationary element of QE then boils down roughly to increases in insurance company and pension fund investments in Treasury stock and the increase in bank holdings and reserves at the Fed not funded through the expansion of bank credit. 

But this creates another factor: the extent to which existing bond investments are sold in order to subscribe for Treasury stock inevitably undermines corporate bond markets and their ability to satisfy their funding requirements. 

And it is for this reason the Fed has appointed BlackRock to spearhead its purchases of corporate debt to ensure liquidity is available for those markets and to put a cap on risk premiums. Therefore, where banks do not expand credit to buy new Treasury stock, the Fed steps in to compensate with additional monetary inflation.

It has been necessary to go into the mechanisms behind funding government deficits in some detail to establish the inflationary consequences of QE, and to refute claims by monetary authorities and others that QE is either not or only partly inflationary, and so is consistent with the Fed’s mandate. No, with the exception of insurance and pension fund subscriptions, the Fed’s QE is almost pure monetary inflation.

- Source, James Turk's Goldmoney

The Emerging Evidence of Hyperinflation

No doubt, the reluctance to reduce, or at least contain budget deficits is ruled out by the presidential election in November. But whoever wins, it seems unlikely that government spending will be reined in or tax revenue increased. 

For the universal truth of unbacked state currencies is that so long as they can be issued to cover budget deficits they will be issued. 

And as an inflated currency ends up buying less, the pace of its issuance all else being equal will accelerate to compensate. It is one of the driving forces behind hyperinflation of the quantity of money.


Since the Lehman crisis in August 2008, the pace of monetary inflation has accelerated above its long-term average, and the effect is illustrated in Figure 1 below.

Figure 1 includes the latest calculation of the fiat money quantity, to 1 August 2020. FMQ is the sum of Austrian money supply and bank reserves held at the Fed — in other words fiat dollars both in circulation and not in public circulation. 

Because commercial banks are free to deploy their reserves within the regulatory framework, either as a basis for expanding bank credit or to be withdrawn from the Fed and put into direct circulation, whether in circulation or not bank reserves at the Fed should be regarded as part of the fiat money total.

It can be seen that the rate of FMQ’s growth was fairly constant over a long period of time — 5.86% annualized compounded monthly to be exact — until the Lehman crisis when the rate of growth then took off. Since Leman failed in 2008 FMQ’s total has grown nearly 300%.

Since last March growth in the FMQ has been unprecedented, becoming almost vertical on the chart, triggered by the Fed’s response to the coronavirus. 

And now a second wave of it has hit Europe and the early stages of a resurgence appears to be hitting the land of the dollar as well. With lingering hopes of a V-shaped recovery being banished, a further substantial increase in FMQ is all but certain.

Already, FMQ exceeds GDP. If we take the last time things were normal, say, in 2005 when the US economy had recovered from the dot-com crash and before bank credit expansion and mortgage lending become overblown, we see that in a functioning relationship FMQ should be between 35%—40% of GDP. 

But with the US economy now crashing and FMQ accelerating, FMQ is likely to be in excess of 125% of GDP in the coming months.

What is the source of all that extra money? It is raised through quantitative easing by the central bank in a system that bends rules that are intended to stop the Fed from just printing money and handing it to the government. Yet it achieves just that. 

The US Treasury issues bonds by auction in the normal fashion. The major banks through their prime brokers bid for them in the knowledge that the Fed sets the yield for different maturities through its market operations. 

The Fed buys Treasury bonds up to the previously announced monthly QE limit, only now there is no limit, giving the primary brokers a guaranteed turn and crediting the selling banks’ reserve accounts with the proceeds.

This arm’s length arrangement absolves the Fed of the sin of direct money-printing but evades the rules by indirect money-printing. The Treasury gets extra funding through this roundabout arrangement. Participating banks generally expand their bank credit to absorb the new issue, which they then sell to the Fed, which in turn credits the banks’ reserve accounts. 

The Treasury gets the proceeds of the bonds to cover the deficit in government spending, and the banks get expanded reserves. The Fed’s balance sheet sees an increase in its liabilities to commercial banks and an increase in its assets of Treasury bonds. The Fed also funds agency debt in this manner, mostly representing mortgage finance.

Under President Trump, the Treasury’s current deficit initially expanded as a planned supply-side stimulus to the US economy to the tune of just over a trillion dollars before covid-19 created additional financial chaos. Businesses experienced severe dislocation and have suffered a widespread collapse. Consequently, and together with the direct injection of money into each household, the Congressional Budget Office revised its trillion-dollar deficit for the financial year just ended as the following screenshot from its website indicates:



Note how half the government’s income arose from revenues and half is covered by sales of government debt to the public (i.e. the commercial banks), which at the end of fiscal 2020 (ended yesterday) is estimated to total $20.3 trillion. 

But given that the first half of that fiscal year was pre-lockdown and the annualized rate of the deficit at that time was about a trillion dollars, simplistically the annualized rate of the deficit’s increase since last March is in the region of $4.4 trillion. 

Incidentally, the CBO’s economic projections look too optimistic given recent events, in which case budget projections for this new calendar year will be adjusted for considerably lower revenue figures, and significantly greater outlays at the least.

- Source, James Turk's Gold Money

Gold & Silver Unstoppable: China Dumping USD For Real Stuff Right Now

Respected analyst Alasdair Macleod, head of research at Gold Money, who has gone out on a limb to declare we are ripe for a banking crisis very soon, and a fiat currency failure by the end of the year, returns to Liberty and Finance to report that China is already dumping the Dollar and buying commodities hand over fist to get rid of its dollars before everyone else realizes the USD is accelerating into failure. 

Alasdair further sees the flagship monetary metals will be unstoppable in the face of the inescapable financial corner the Fed has backed into.

- Source, Liberty & Finance

It All Goes Back To Gold and Silver

James Turk: The Existing Monetary Order is Not Going to Survive

Paul Buitink talks to James Turk, founder of GoldMoney, about the current economic crisis.
James thinks it will inevitably lead to a collapse of confidence in fiat money and hence hyperinflation. 

James also believes companies should just be able to go bankrupt. 

He criticizes fiat currencies and calls upon people to return to sound money since corrupt money has corrupted the system. 

The existing monetary order is not going to survive. He believes in buying gold and silver to protect your purchasing power. Gold needs to be in the hands of the people, not the central banks he says. He also likes Bitcoin better than fiat.

- Source, Reinvent Money

Where is All That Gold Being Stored?

WE'RE in the midst of a modern-day gold rush.

The precious metal has reached record high prices in recent days. A survey of 1,000 people by Magnify Money found that one out of six have invested in gold or other precious metals since May, and about half of Americans are seriously thinking about buying gold.

(This after Gallup reported in April that Americans had cooled somewhat on stocks as a long-term investment.)

Whether these people are stocking up on gold because they're worried about a pending apocalypse or simply convinced that it's a fabulous investment, they do have one major issue: storage. Bars and coins are bulky (and let's not get started on jewellery, which can be complicated emotionally).

With anxiety about the economy increasing - which tends to rise any time there's political or world turmoil - the need for storage is growing, too, and options are expanding to meet it.

"Gold and silver bullion storage options have simply grown more in location diversity, pricing - with even some offering short-term collateral loan options," said James Anderson, a research executive at SD Bullion in Toledo, Ohio.

"When I began in this industry pre-2008 financial crisis, there were perhaps 10 to 20 domestic bullion storage depositories. Now, there are hundreds in the US and abroad."

People tend to buy gold when they fear a sustained loss in stocks, bonds, real estate or other traditionally profitable investments, said Adrian Ash, the director of research for BullionVault in West London.

Increasing capacity

So private vault operators have been increasing their capacity as well - but specifically within presumed politically safe locations like Switzerland and Singapore, said James Turk, the founder and director of Goldmoney Inc in Toronto.

Switzerland's banks have always been deemed a safe haven for assets and precious metals, but in recent years many people started to lose faith in banks.

As a result, there has been an increased demand there for safe deposit boxes there that aren't run by banks.

"In late 2019, we even had to build additional boxes, as we had reached 100 per cent of our capacity," said Michael Hardmeier, the CEO of Sincona Trading AG, whose headquarters are in a former bank building in central Zurich.

Swiss vaults tend to be more expensive than those in England, where a new spot opened that was designed for those accustomed to a lavish lifestyle.

The vault is inside a former mansion run by International Bank Vaults (IBV).

A chauffeur driving a Rolls-Royce picks up clients and delivers them to the London mansion, where white-gloved custodians transfer them to their boxes (after a quick fingerprint and iris scan, of course).

Those boxes are stored within a steel-lined vault supposedly impenetrable to anyone attempting to illegally gain access from any angle.

You may have to spend a few of those gold bars to store them: It's advertised as the most expensive safe deposit box in the world, and the company claims it's available only to billionaires, with the smallest box starting at £600 (S$1,017) to rent (this would fit just a few gold bars).

IBV London managing director Sean Hoey said that, unlike a bank, IBV allows clients to buy gold and to store it - and it will buy back the gold.

Also, many gold owners believe that vaults, unlike banks, are somewhat resilient to an economic meltdown.

"You can use a safe deposit box, but folks worry that if there was an economic meltdown, the banks might close, and your metals would be trapped inside that bank," said Gary Cubeta, a gold dealer in Arizona and the president and founder of Insurance for Final Expense.

Even without an economic meltdown, there's less faith in bank safe deposit boxes, because there aren't federal laws governing these boxes, so if anything is stolen or destroyed, the customer is typically out of luck.

Old-fashioned route

That may be why some are choosing to go the old-fashioned route and are storing their gold at home.

Numerous YouTube videos and bloggers explain how to bury gold bars in everything from mincemeat to the backyard.

But it's wise to consider your home options before simply stuffing your gold under a tree.

Mr Cubeta, who advises gold owners to store their gold within 15 to 20 minutes of their home so they have easy access to it in case of a financial meltdown, said the best thing you can do is to keep half in a home safe while putting the other half in a safe deposit box.

"You need a safe especially designed for precious metals," he said, explaining that most gun safes can't withstand the heat of a fire, while precious metal safes will keep your gold protected for two hours.

Before moving your gold home, you need to contact the insurer that issues your homeowner's policy, because most don't cover large amounts of gold stored at home.

"On average, the standard homeowner's insurance policy covers around US$1,000 for jewellery or valuables, and the average home insurance policy is set up to protect the average household, so the limits will not be sufficient to cover expensive or valuable items," said Lev Barinskiy, the CEO of SmartFinancial, an insurance comparison site.

There are also storage options where you never even see the gold you own. Customers buy a digital token backed by physical gold held in a vault, said Joonas Karppinen, head of trading at InfiniGold.

"A token provides customers with actual ownership of the gold in question - which is essential, especially if your content insurance does not cover your bullion portfolio stored in the house," he said.

That's all good, unless you want to feel its weight in gold. Literally.

- Source, Business Times

The Next Phase of the Great Silver Squeeze

Banking Crisis? Currency Crisis? Silver Short Squeeze on the COMEX? Alasdair Macleod, Head of Research at GoldMoney.com returns to Liberty and Finance / Reluctant Preppers to give us an update! 

His recent analysis foresaw a banking crisis as soon as the end of July 2020, and a currency crisis yet this year. What is the latest from this engaging and respected analyst, so we can be ready for what comes next? ​

- Source, Liberty & Finance

The Price of Gold andSilver is Infinity

Finance and economic expert Alasdair Macleod says, “I think the problems with the currency are going to happen by the end of this year. 

I think the problems of the COMEX are going to happen considerably before that. I think they are going to be tied into a wider banking crisis. A banking crisis is certain. I cannot see how it can be avoided.

If our end point is the purchasing power of the dollar goes to zero, then you can see $1,800 for the price of gold and $19 for the price of silver is chicken crap compared to where it’s going to go. 

So, this is a major, major move that is happening, not because they are buying gold and silver so much, but because people are beginning to realize what is happening to the purchasing power of the dollar, pound, euro and so on and so forth. 

That is the thing to keep in mind.I think the dollar will be destroyed by year end, and the price of gold and silver is infinity.

 I think the banking crisis could start in a month. Look what’s happening to their balance sheets.

I think the collapse is likely to be so rapid that in the absence of any other information, the best thing to do is to hold on to gold and silver as an insurance policy just in case I am right.”

- Source, USA Watchdog

The New Deal is a Bad Old Deal

Boris Johnson recently compared his reconstruction plan with Franklin D Roosevelt’s New Deal. Such is the myth of FDR and his new deal that even libertarian Boris now invokes them. Unless he is just being political, he shows he knows little about the economic situation that led to the depression.

It would not be unusual, even for a libertarian politician. FDR is immensely popular with the inflationists who overwhelmingly wrote the economic history of the depression era. In fact, FDR was not the first “something must be done” American president, a policy which started with his predecessor, Herbert Hoover. But the story told is that FDR took over from heartless Hoover who had failed to step in and rescue the economy from a free-market catastrophe, by standing back and letting events take their course instead. Nothing is further from the truth: Hoover was an interventionist to his fingertips. The last of the laissez-faire presidents was Calvin Coolidge, Hoover’s predecessor.

A few years ago, the BBC broadcast a programme extolling the virtues of FDR and his new deal. Stephanie Flanders, at that time the BBC’s economics correspondent, reiterated the myth about Hoover being a non-interventionist and FDR having all the correct reflationary policies. In a piece to camera at the Hoover Dam, no less, she recounted how it was an example of FDR’s new deal stimulus. While it wasn’t completed until 1936, building started in 1931 as a project by the eponymous Hoover, pursuing the same interventionist policies as FDR before FDR’s landslide election. It was never FDR’s project, the clue being in the dam’s name. Research by Flanders and the BBC was either biased, deficient, blind or all three.

The myth that has even drawn in Boris is so powerful it has intelligent people swearing the earth is flat. The FDR fairy-story is fundamental to the modern state’s interventionist stance; the very reason for its existence and its welfare commitments to the electorate. Wishful thinking about FDR’s pioneering role is now the pervasive theology. But the way the world is viewed cannot change the facts, and to quote FDR and his new deal as the template for economic policy is to repeat the errors that led to the longest and deepest depression in American history.

If in a few words one was to sum up why the state fails in its interventionist quest, it would be its inability to understand change. Free markets change all the time. Businesses and whole industries evolve and disappear in a natural process of selection driven by the consumer. The state’s response to a crisis is always aimed at a return to normality; normality being an unchanged state from before the crisis. The state protects yesterday’s jobs and yesterday’s businesses. Worse, by preventing evolutionary change at the heart of a dynamic economy it deprives it of the resources required to evolve. And that’s why the depression lasted into the Second World War.

The back-story to the depression

Before Hoover, US presidents understood a hands-off policy would let the economy rapidly fix itself. The post-war 1920—1921 depression in America was allowed to run its course. It lasted just eighteen months and was the prelude to a period of technological revolution that gave enormous benefits in the quality of life for all Americans. Following President Harding’s death in 1923, Coolidge was elected the new president. While Coolidge enforced a strict laissez-faire policy, he was either unaware of or ignored the monetary policies of Benjamin Strong at the Fed, which, to be fair to Coolidge, was only a decade old. The Fed’s monetary policy was the cause of an inflationary boom which ended in a stockmarket bubble in 1929.

In 1927, Coolidge announced he would not be standing for a second term, and Herbert Hoover was elected President in 1928 nearly a year before the stock market crisis occurred.

Fuelled by a free market approach and the stimulus of unbacked credit, when Hoover took office in March 1929 the economy was, in the epithet of historians, roaring. We can now begin our comparison with the present day. Boris Johnson became Prime Minister after a similar inflation-fuelled period; but the more important correlation is with Republican Donald Trump, whose interventionist policies imitate Hoover’s from his time as Secretary of Commerce in Harding’s administration onwards. Hoover deported immigrants and Trump builds a wall, both reasoning they take American jobs. And like Hoover, Trump uses tariffs to protect farmers and businesses from foreign competition deemed unfair.

The combination of a massive credit expansion in the 1920s and the Smoot-Hawley Tariff Act passed by congress in October 1929 — the month of the Wall Street Crash — serves as a template for the condition of America’s economy today. Apart from some differences in timing, the most significant difference is in the money. Before April 1933 the dollar was freely exchangeable by the public for gold at $20.67 to the ounce; today the dollar is unbacked. Prices were stable, today they rise.

By passing the Smoot-Hawley Act at the top of the credit cycle, Congress ensured a sharp downturn in the economic outlook, persuading bankers to call in their loans. The economy began to contract, and interventionist Hoover went to work. To quote from his memoires;

“…the primary question at once arose as to whether the President and the Federal government should undertake to investigate and remedy the evils… No President before had ever believed that there was a governmental responsibility in such cases. No matter what the urging on previous occasions, Presidents steadfastly had maintained that the Federal government was apart from such eruptions . . . therefore, we had to pioneer a new field.”[i]

Hoover called a series of White House conferences with industry leaders and bankers to persuade them to invest and maintain wages in order to keep consumer spending going. Like the neo-Keynesians of today, Hoover believed consumer spending was vital for the economy, but failed to make the connection with production, which is always first in temporal order, and provides the product for consumption without which it cannot happen. Hoover’s view on maintaining wages is reflected today in minimum wage rates, which innocuous though they may seem render certain activities uneconomic.

As is the case today, the Fed was ready to inflate. According to Murray Rothbard, the Fed

“…was just as ready to try to cure the depression by inflating further. It stepped in immediately to expand credit and bolster shaky financial positions. In an act unprecedented in its history, the Federal Reserve moved in during the week of the crash—the final week of October—and in that brief period added almost $300 million to the reserves of the nation’s banks. During that week, the Federal Reserve doubled its holdings of government securities, adding over $150 million to reserves, and it discounted about $200 million more for member banks.” [ii]

Monetary policy was a doppelganger for the Fed’s policies today. In today’s money, $300 million is about $26bn, using gold as the conversion factor. Today’s stimulus is a thousand times greater in real terms — so far.

In 1932 Roosevelt won a landslide against Hoover, and as was the custom at the time he took office the following March. Only a week before, an assassination attempt on Roosevelt struck the wrong man who died shortly afterwards. Banks were failing. Farmers were in revolt. The numbers of unemployed were increasing alarmingly. Hoover’s reflationary policies had failed, and he was said to be the least popular man in America on inauguration day. Fast-forward eighty-eight years and we see President Trump following in Hoover’s footsteps in this election year; and we can be pretty sure Joe Biden — if he is not asleep at the wheel — will cast himself as the new FDR with his version of the new deal.

Roosevelt then delivered his inaugural address, which included the famous line, “So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself.” His speech was followed by the Hundred Days, the first time a president had set such a schedule.

In Britain, Rishi Sunak, the new Chancellor, is now pursuing his version of a Hundred Days announcing subsidies and new support as the occasion demands, financed by monetary inflation. Admittedly Sunak remains a free marketeer but has yet to prove his measures are temporary. Meanwhile, President Trump is destroying his administration’s finances in an attempt to contain the economic fallout from the coronavirus in his election year.

They say that repeating a failed action in search of a different outcome is a sign of madness. Hoover and Roosevelt were pioneers of today’s failed economic policies and it is their post-war successors who are arguably certifiable. But the problem is deeper than that, with the public voting for the same failed policies, so even an economically literate politician has to deliver solutions in that context. It is what makes history repetitious. Instead of economics, psychological factors drive politics, including the public desire for the state to provide easy solutions to economic and personal difficulties. But the lesson from the Hoover era is that we stand on the precipice of an economic collapse as a result of a combination of excessive credit creation in the years before and the introduction of trade tariffs. And that was before the coronavirus was added to this lethal mix.

The psychology suggests that this time the politicians and the monetary authorities will pursue much the same course as before, even more aggressively. So far, the evidence supports this thesis, and it allows us to anticipate mistakes yet to be made.

- Source, James Turk's Goldmoney

Gold Money: Economic Prospects for the Next Few Months

Before we proceed in our analysis of the price effects of inflation, we must assess the economic outlook,as the backdrop to the likely consequences for the scale of monetary inflation, and then we can have a stab at evaluating the effect on prices.

At this stage of the credit cycle, which began expanding following the aftermath of the Lehman crisis over a decade ago, a sharp contraction of bank credit to non-financials is normal. It is what drives periodic recessions slumps and depressions, and monetary stimulus by central banks is intended to help commercial bankers recover their mojo and resume lending.

The relevant history of central bankers’ attitudes to bank credit goes back to Irving Fisher’s description of how contracting bank credit intensified the 1930s depression by the liquidation of debt, forcing collateral values down and leading to bank runs and the bankruptcy of thousands of banks. Ever since, monetary policy is guided by the fear of a repeat performance. But the Keynesian stimulus at the start of the credit cycle only increases the destabilising nature of bankers’ behaviour, consisting of long periods of growing greed for profitable loan business, interspersed by sudden reversions to fear of loan risk. It results in a cycle of credit expansion and contraction, which in recent cycles have been resolved temporarily by increasingly aggressive expansions of base money along with government actions to support ailing industries.

It is a sticking-plaster approach which allows the wound to fester out of sight.

Following Lehman’s failure, a similar pattern to the one unfolding today of a rapid increase in bank assets through the newly invented QE was followed by a contraction of bank credit which lasted about fifteen months. But that crisis was about financial assets in the mortgage market, which had knock-on effects in the non-financials. Difficult though it was, its resolution was relatively predictable.

This crisis started in the non-financials and is therefore more damaging to the economy; its severity is likely to lead to a banking crisis far larger than the Lehman failure and possibly greater than anything seen since the 1930s depression.

Commercial bankers are now waking up to this possibility. For them, the immediate danger is associated with this quarter-end just passed, when demand for credit to pay quarterly charges increases significantly. Already, businesses are in arrears as never before, with many shopping malls, office blocks and factories unused and rents unpaid. It is this problem, shared by banks around the world, which due to the severity of current business conditions is likely to tip the banking system over the edge and into an immediate crisis. The extent of the problem is likely to be revealed any time in this month of July.

Excluding the subsequent effects, the Lehman crisis cost the US Government and its agencies over $10 trillion in support and rescue operations. This time, being in the non-financial sector with knock-on effects for the financial economy, this crisis is much deeper than Lehman and will require a far larger bailout cheque for collapsing industries. Part of the problem are the broken supply chains needing bridging finance. And none of this can be done without the Fed funding it all directly or indirectly through quantitative easing. Despite the massive monetary inflation already underway there can be no doubt that aggregate consumer demand and the production of goods to satisfy it will take an enormous hit this year and beyond, and there is little doubt about the state’s will be on the hook for even more monetary financing.

Unemployment of previously productive labour is already rising dramatically, and as bankruptcies increase the rise in the unemployment numbers will continue to do so. Let us therefore assume that compared with last year the production of goods and services and consumer demand for them will decline by at least 25%. Note that we avoid using money-totals, since they are meaningless; it is the exchange of labour being converted into physical products and services that matters.

Into this situation is injected enormous quantities of money, none of which defeats the constraints on true supply of goods, nor for overall demand in a high unemployment economy. Put in a more familiar way, we will have too much money chasing not enough goods. There is only one outcome, other things being equal; the purchasing power of the dollar in terms of consumer goods will be driven significantly lower. But central bank analysis rules this out, associating too much money chasing too few goods with only an expanding, over-stimulated economy.

This explains stagflation, the situation where an economy stagnating in overall demand is accompanied by rising prices. Nor are other things ever equal, the condition for the paragraph above. The early receivers of inflated money will spend it, driving up the prices of the goods and services they acquire before the prices of other goods and services are affected. These early receivers include the Federal Government, which in an election year is doubly unlikely to hold back. Distribution of state money will increasingly be in the form of welfare to the unemployed, skewing spending towards life’s essentials. Inevitably, in an economy with subdued activity not responding quickly enough to produce the volumes of products desired, prices, mainly of essential items, will increase sharply.

Almost certainly, a broad index of prices will not capture this secular effect until too late. The CPI includes a majority of items which are only occasionally bought by individuals. Poor demand for non-essentials where there is now an oversupply puts downward pressure on their prices even in an inflationary environment. It is therefore possible for the CPI to record little or no price inflation as an average when food and energy prices are rising strongly, particularly when statistical methods designed to show little or no increase in price inflation are additionally taken into account.

Consequently, central banks are already being badly misled by the CPI’s statistical method. And when prices for essentials are soaring, they will continue to increase the quantity of money in circulation, distracted by that 2% increase in the CPI target. By the time it creeps up above that rate it will be too late, much monetary water having already flowed under the bridge.

The politicians will likely dismiss rising prices for food and fuel as the result of profiteering — they always do and then contemplate introducing price controls, making this outcome even worse.

- Source, James Turk Goldmoney