Today we live in a bifurcated economy: it is boom times for some and bust times for others.
Your personal situation depends largely on how close you fall on the socioeconomic spectrum to the protected elite class, towards which the central banks are directing their money-printing firehoses.
Why should we care about this bifurcation? History.
2,000 years ago, in Plutarch’s time, it was already ‘old wisdom’ that unhealthy wealth imbalances ended badly for society:
Even those near the top of the wealth pyramid don’t aspire to live surrounded by an impoverished underclass, forced to live hiding behind their fortifications and guards, hoping the unrest of the masses doesn’t get any worse.
But sadly, the US is not far off from this fate…this is Los Angeles:
The streets of San Francisco, Seattle, and a growing number of other once-proud American cities look very similar.
I care about our social stability which is why I believe in having a strong and vibrant middle class – something the US Federal Reserve is working to destroy with every intervention. It has been a shameless champion of the entrenched ultra-rich and powerful; at the expense of everyone else. Because of this, I’ve been a fierce critic of the Fed and its policies.
Money vs Real Wealth
I happen to know a good deal about our current system of money; how it is created, how it functions, its benefits and its darker aspects. I find it critical to remember that it isn’t actually “real”. Rather, it is a concept. Specifically, it’s a social contract. An agreement. Albeit one enforced at the end of a gun – or, as seen here, an eviction sheriff enforcing the local tax codes:
So while money isn’t “real” in itself, we value it because it is a claim on real things.
Having a lot of it currently entitles you to a great deal of privileges and power, which are a direct outcome of the spending of that money.
Money can be converted into houses. And cars. And massages. Also groceries, electricity, cell phone services and prescription drugs. These and ten billion other things are what money allows you to buy — the things you actually need or want.
So money is the means, but it is not the real wealth. ‘Real wealth’ is the things that money enables you to acquire.
The Three Types Of Wealth
Going further, we can break real wealth into two discrete forms. Primary wealth is the wealth of the land and its functioning ecosystems. It is clear air, fresh water, thick ore bodies, and rich soils:
Secondary wealth is a finished form produced from raw materials. It is primary wealth brought to market. It is fresh produce on the grocery shelf, cut lumber (or even a fully-constructed building), and rolled steel in giant coils:
Tertiary wealth, on the other hand, is not actually “real”. But most people mistake it as a comprehensive representation of “wealth”.
Similar to money, tertiary wealth is merely a claim on primary and/or secondary wealth. A share of General Electic a stock-based claim on the company’s means of production.
And debt (and bonds) is a future claim on money. And money, as we know, is a claim on real things.
It’s All About The Amount Of Claims
Why is it relevant to parse these distinctions so carefully?
Because there has to be a balance between the claims and the wealth.
Too many claims and we call that inflation. Each individual claim is reduced and diluted by every additional new claim brought into being. Beyond a certain amount, each claim becomes increasingly worthless.
Deflation is when there’s overproduction, or too much ‘real stuff’ relative to money. Prices fall, which is a perilous condition for a debt-based money system. There needs to be ever more money to pay off both the principal and interest components of past loans, or else defaults start cascading through the system.
Do you get now why we need to be very concerned with the balance between the claims and the real stuff?
History is full of examples when people first forgot and then violently remembered these truths. Through history, the balance has swung recklessly — almost chaotically — between inflation and deflation.
Another such phase transition approaches. These moments are billed as periods of wealth destruction, but they actually aren’t. Instead, they are periods of wealth transfers from the unaware to the observant.
We’re facing this approaching crisis for two main reasons. One, we’re repeating the forgetfulness and hubris of previous societies. And two, the complexities of our current situation are more challenging than ever before.
Man of our actions are driven by the strong human preference to push our current problems into the future. When problems and predicaments are compounding/exponential in nature like those we’re currently facing, every can-kicking deferment only makes the pain much greater when it finally arrives.
And as for the increased complexities, for the first time in our history as a global species, we are waking up to the fact that the world is no longer our infinite treasure basket with an unlimited ability to absorb our waste streams.
Instead, it is finite. And its already groaning under the weight of one unit of global GDP extraction and waste. The central banks are tirelessly seeking to double the size of the economy, and then double it again.
One can easily make the argument that 1x GDP is already ‘too much’ for the planet. Disappearing fishes, soil, insects, birds, amphibians, reptiles and large animals all indicate that ‘too much’ was a while ago.
But even for those who believe we haven’t exceed the Earth’s carrying capacity yet, it’s certainly true that there’s some sort of a limit somewhere. Is it when there’s 1.5 times as much consumption and waste as today? 2 times as much? 3 times?
When is the right time to act as if these limits matter to our future welfare? Not now! is the rally cry of the Federal Reserve and other central banks. Their remit begins and ends with fostering more credit growth as fast as possible. Full stop.
It’s all they care about. And if they have to continue to throw a couple of younger generations and the entire middle-upper, middle, and lower classes under their inequality-bus to achieve more growth in credit markets, then you’d better believe that’s what they’ll do.
The Wealth Transfer
With the near-inevitability of MMT (a.k.a “free money for everybody”) the wealth transfer will kick into a higher and more obvious gear when MMT arrives (as Charles Hugh Smith brilliantly summarized for us recently).
The basic problem is that money is not real wealth. But newly printed money has real purchasing power. What happens when purchasing power is increased but more real wealth is not auto-magically created at the same time?
Easy: the claims on real stuff become diluted. Every unit of money in circulation has a tiny fragment of purchasing power removed from it when a new unit of purchasing power is created ‘out of nothing.’
You might think “what a flawed plan!,” but that’s exactly wrong. That’s precisely the plan. Coin clipping was the ancient Roman practice of diluting the currency by recalling every coin in circulation (or as many as possible), shaving off a tiny bit from each of them, and then reissuing a larger quantity of coins that each weighed a tiny bit less than before.
Today it’s far easier to achieve the same outcome. New electronic digits are spewed out into the world and perhaps 0.1% of the population could even tell you that it’s happening. Perhaps only 0.001% could tell you exactly how.
But the effect is the same as coin clipping. Each new currency digit launched ‘from nothing’ into circulation has immediate purchasing power. By definition, all of the pre-existing currency in circulation loses a ‘unit-share’ as a consequence.
With trillions upon trillions in circulation, nobody really notices. Again, that’s both the point and by design.
For the US, this chart explains what’s coming in grotesque detail:
This is the total debts of the US, which represent future claims on money — which, remember, itself is a future claim on real wealth.
GDP represents, imperfectly, the ‘real stuff’ in this story. As you can plainly see, the claims (red line) are compunding at a far faster pace than GDP (blue line).
It gets even worse — far, far worse — when we include America’s unfunded liabilities into the mix, seen here expressed as a percentage of GDP:
What possible ways are there to resolve that chart with people’s expectations, hopes and dreams?
Well, we could grow GDP really, really fast for a very long time. Like 75 or even 100 more years.
By which point the US economy alone will be 5x larger than the entire global economy currently is. Now remember that already the Earth is screaming “enough!” We can only imagine what happens if the US alone becomes 5x larger than today’s entire world economy…
However, because such tremendous growth requires energy, a LOT of it, and because no suitable replacements for fossil fuels yet exists, and because fossil fuel supplies are set to decline for reasons related to depletion and geology, that kind of 5x growth is just not likely to materialize. It’s not possible; the fuel to power it isn’t there.
It’s not a good bet at all.
So what happens when huge claims slam into physical constraints? The excess claims evaporate. As they have many times throughout history.
This is where the wealth transfer comes in. And you want to be sure to be prepare for it, and on the correct side of it as it happens.
Time Is Running Out
The end of money approaches.
To quote the famous Austrian economist Ludwig Von Mises:
“There is no means of avoiding the final collapse of a boom brought about by credit expansion.
The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
How many people reading this think that given the choice between dealing with unpleasant consequences nowvs. printing up more money (via MMT, more QE, etc.) and facing the music at a later date that there’s even any contest at all?
Of course they’ll opt to print more now. Now is never a good time to face the music. There are delicate issues right here and now to balance. A tough moment in a trade negotiation, an election, disturbing weakness in the IPO market, etc.
Further, there’s nobody of any consequence who has the requisite vision or leadership to stomach such a period of tough decisions. There’s no Paul Volker at the Fed; just a bunch of clueless market-following political animals who are afraid of any and every wiggle downwards in stock prices. They are the market’s lapdogs now; completely unworthy of admiration or respect.
Which is why we predict more printing and borrowing. Enormous new piles of money and credit will be issued, likely at ever-lower rates of interest.
The world economy is performing sluggishly and appears to be sickening further. This is due to too much debt. But no matter, the central banker’s response is automatic: The world needs more credit at even cheaper prices!
And, of course, more central bank interventions to keep everything from falling apart. After all, the central bankers are the heroes in this story, right??
It will be something of a miracle if the next US presidential election doesn’t open the MMT floodgates, which would only accelerate the pace of currency debasement.
The pressure is building. Nobody knows when all of that newly-issued money and credit will have to be ‘trued up’ against the amount of real stuff out there. But it will. It always does.
That moment will be referred to by the press as a period of wealth destruction.
If a deflationary outcome occurs – which we give a 15% chance of happening – 401ks will be shredded, bonds will lose value, defaults will spike, stocks will crater and the dollar will spike as institutions and entire countries scramble to repay their debts from a dwindling pool of money.
If an inflationary outcome does– the remaining 85% probability – money will become worth less and less. But the press will unhelpfully lament the situation as some great mystery, like rain falling from a clear sky. Of course, understanding inflation is not terribly difficult, but it behooves the power structure to pretend as if it were really just too difficult to comprehend. Inflation is always a monetary phenomenon. Too much money chasing too few goods and services.
Either way, the sword will fall. And after the dust settles, there will be clear winners and losers. Those with the proper framework and agility will prosper. They will understand that what actually happened was that wealth was transferred from those who thought they owned it (the claimants), to those who actually did (the possessors).
The only remaining questions are whether the wealth transfer comes about in the form of an inflationary destruction, like in Venezuela today, or as a deflationary bust more in the fashion of Greece recently (which lost its ports, roads, and utilities to foreign banks and creditors as a consequence of running up too much debt it couldn’t repay).
Either way, by deflation or inflation, the prudent financial responses remain the same. Own hard assets. Have multiple income streams. Be able to source a percentage of your own food locally and generate your own energy at home (solar, rocket mass heaters, etc.).
For those with money in the markets, we have an experienced financial advisory firm we recommend that can help you navigate your financial capital through these incredibly uncertain times.
We cannot possibly predict when the current Everything Bubble will finally end, but when it does, you at least will not be fooled. You will have seen it coming and will know its causes. You will be among the educated and alert who will know that the real wealth has merely been transferred.
Further, you will know that the beneficiaries of that wealth transfer will almost certainly be – surprise! – the banks and other financial elites that the Fed has so carefully enabled and protected. The winners have been pre-selected, as have the losers.
The danger in that, of course, is if the financial elites haven’t thought their cunning plan all the way through. They may not like what follows next as an enraged populace finally wakes up to the enormous fraud that has been perpetrated upon it.
We shall see.
More and more people in the US and in other countries are waking up to the ways in which the financial and political elites have gamed and rigged the system in their favor. Angry protestors are increasingly taking to the streets to voice their displeasure.
We predict more of that. A lot more.