Common Cents & Inflation on October 4, 2019

Last week, I discussed how the Federal Reserve is at risk of losing control of its monetary policy due to forces beyond its direct control, arguably. There is just too much debt and too few players with the wherewithal to finance it at the level(s) central bankers desire or mandate. In previous newsletters, I have written how negative interest rates are ironic, as they discourage risk taking rather than encourage it. This morning, in response, someone asked me: “with what you have been saying, how does it end well?”

This answer is pretty straightforward: “it won’t, for someone, but it doesn’t have to be us.”

My favorite card game is Hearts, and you are going to have to bear with me here. If within the realm of possibility, I try to ‘shoot the moon’ with every hand. The best way of doing this is to be void at least one suit. Normally, I would prefer to start without any Clubs, but, if that isn’t possible, I pass cards which have the least chance of winning a trick. Seriously, I plan on a ‘moon shot’ every time my initial cards give me even the smallest of chances. If I can’t, I plan on inflicting as much pain as is possible to the other players.

Obviously, I run the risk of getting clobbered on any given hand, and I sometimes do. However, it seems I normally end up with, say, 20 or more points (which is a bad thing) when I am NOT trying to shoot the moon…when I have decided to play it safe, but just can’t get rid of the lead or get the lead, one.

Regardless, I know someone will end up with the Queen of Spades every hand. Period and end of discussion. There are NO two ways about it. So, if you were to ask me on the second throw “how does it end well,” I will answer with: “it won’t, for someone, but it doesn’t have to be me.”

The same could be said of the passing scene.

While I won’t be able to tell, raise your hand if you think the current situation will end well for all involved? That Europe and Japan will get back to a normalized interest rate environment, from negative to even slightly positive, without any ill effects? That the US, let alone the rest of the world, will pay back all it has borrowed in full AND permanently erase its accumulated IOUs? Now, answer that with this one condition: without a massive devaluation in the US currency?

Indeed, we live in a curious time. The powers that be, read the central governments of the wealthiest countries, have borrowed dizzying sums of money…with no apparent means to repay…and it has never been cheaper for them to, get this, borrow more. The US banking system has never been more flush with liquidity and the overnight repo market still requires additional manna from the Federal Reserve. The money supply, as defined by M2, has never been larger and inflation appears to be under control. Despite running massive deficits and having an intrinsically worthless currency, the US somehow manages to have the most liquid, transparent financial system and its dollar is the world’s primary reserve monetary unit.

Did the clock just strike 13? Did I just fall through the looking glass?

To be sure, I reread that last paragraph. IF I didn’t know it to be true, I wouldn’t believe it. What’s more, despite the lunacy and despite it not ending well for someone, I am not particularly worried or upset about the future. Let me restate that to say I am not losing sleep about the world’s economic future. It is going to be awesome.

But…but…what about all that negative stuff?

That? Oh, if and when the time comes for you, here are some pieces of advice: 1) invest in securities and sectors for which there is inelastic demand; 2) don’t sit on your cash hoping to ride things out, as it will become increasingly worthless; 3) don’t buy the long bond until interest rates show signs of stabilizing ‘out there;’ 4) it might be a good idea to have a few gold or silver coins in a safe or safe-deposit box, and; 5) other tangible assets will be a good idea, things like commodities, real estate, etc.

While this might be counterintuitive, the world’s economic problems moving forward will be due to ‘too much cash’ in the system, as opposed to not enough. At some point, some bright bulb will decide the most effective way to spur folks into action is to devalue currencies. If quantitative easing won’t do the trick, the printing press might.

Oh, don’t get me wrong. I don’t think the Bureau of Engraving & Printing is going to churn out the stuff like the financial wizards in the Weimar Republic or Zimbabwe did. Good grief, no. However, there are two ways to get rid of debt when you have no feasible way of paying it back: 1) simply default, which doesn’t always work out so well, or; 2) inflate, but only enough to make the present value of future cash flows manageable. If you can pull of #2, whew, you would be one of the first, if not THE first, to do so.

However, that is probably where we are going from here, inflation (perhaps serious), at some point. But when? That, my friends, is the $64,000 Question, and I have an answer

Yesterday, a co-worker and I were talking about climate change, and what the US could do which would be as effective as a volcanic eruption, like the one in 1815 by Mount Tambora in present-day Indonesia. Then, we talked about the Yellowstone super volcano, and the veritable hell that would unleash. Fortunately, or unfortunately as the case may be, we agreed geologists would likely have ample warning, as someone would certainly notice that much pressure building under the Earth’s crust. At least, we both hoped so.

Here it is…when to move into gold, silver, real estate, utilities, tobacco, booze, energy, and lipstick. Drum roll please. When the US Secretary of the Treasury announces the US is going to call its debt and ‘throw it out on the yield curve’ with 50 and 100-year bonds, that’s when. THAT will be our Mount Tambora or Yellowstone super volcano. After that, they will call the printing presses into action, and we can only hope they turn them off in time.

So, why doesn’t that bother me? Why doesn’t that keep me up at night? Come on, look at all the cool stuff I just bought. Booze? Gold? Silver? Lipstick? Well, maybe not the lipstick. Still, throw in a deck of playing cards, which should have been on the list, and we can play a round of Hearts. Be forewarned, I am going to shoot the moon, and there is nothing you can do about it.


Have a great weekend.


John Norris