2016-0509
Since my last blog, so much has happened in the news that we cannot be far removed from living reality TV as several people have commented to me. But, one item caught my attention, not for what was said, because I am in agreement, but for the fact so many people are now listening.
Donald Trump is suggesting that the US debt to too high and needs restructuring, and personalities like gold bug Peter Schiff have jumped on it as it supports what he has been preaching, right or wrong, for years. Because of Trump’s growing popularity across the nation, this story does have legs with more than just the fear-mongering crowd. Soon, I think, there will be many of the country’s more stable thought-leaders lining up support for what could possibly quickly become all-out currency world war.
Since starting this blog in 2004, I have argued that the world needs a general agreement on currencies, which is the real story behind the debt issue, but central bankers and private bankers have fought to save the status quo. Not much happened until the end of 2007 when, following the collapse of the financial system, the Fed exploded the US money supply, as seen by this chart, ostensibly to save it.
Once the Fed decided that it was so powerful that it could trash the most basic accounting principle – that assets must equal liabilities and equity i.e., capital – with intangibles replacing hard assets — the US Dollar was doomed, saved for a time only by economically unsound low interest rates, benchmark price manipulation and futures market fraud.
Trump simply pointed out that monetary authorities can no longer force debt prices lower because interest rates cannot go up due to the negative economic impact and potential global anarchy that doing so would lead to, as conveyed in this article. So Trump says, trust me I have experience in this field, and with his TV fame, millions of people know it. They see him as the one person in Washington most likely to do what most of them would like to do – screw the banks – as he did in the past.
Bankers and monetary authorities will not take this lightly. Trump is now up against the system, knowing he has the people standing behind him.
Reminds me of that great little 1977 comedy “Fun With Dick and Jane,” starring George Segal and Jane Fonda as the Harpers, an upwardly mobile young couple who found themselves impecunious after they both lost their jobs. As the Harpers descended on the offices of the then-monopolistic “Ma Bell” phone company to rob it, the sullen customers in the line-up waiting to pay their bills suddenly burst into cheers as did the film theater audience.
These things resonate and Trump knows how to play it.
Bottom line: the public has had enough of the shaft and are now going to reverse it. Accordingly, I see a period of pain coming for all of us until the G20 group of government leaders and central bank governors of twenty major economies can resolve today’s major issues, including offshoring and the unacceptable blow to the US economy and run-up of government debt that has resulted, something I think will take several years.
In battening down the hatches, Americans will be forced to examine all aspects of how their wealth is being depleted in real terms. Today’s version of Ma Bell are the banks.
There are too many financial services products and services today that earn, in the words of Warren Buffett this week, “unbelievable fees”, and too few economic returns. There are by many counts some 30,000 mutual funds, 10,000 to 15,000 hedge funds, and 2,000 ETFs. If there are, as believed, some $80 trillion in Assets Under Management (AUM), there are at least, in my view, some $2.5 trillion in fees being earned of which at least half are unwarranted.
Investors are being told by so-called experts that they must diversify to protect their wealth when that is a self-serving lie. Bonds that cannot pay an economic return and funds that track indexes that represent bad companies as well as good, and bad stocks as well as good, are high on my hit list. Bankers will tell you anything – even that “You’re richer than you think” – as long as you buy their products and services that earn them unjustified fees.
The world is sinking in debt. The G20 needs to consider either writing down the debt or growing its assets without inflation. It needs to re-think the system of taxing labor and productive investment, perhaps as espoused by Henry George in the 1800’s.
Where does wealth come from? A commercial bank does not create wealth, just like a government or central banker does not create wealth. These organizations merely distribute it and take fees for providing services of limited value. Yes, capitalists create wealth, but if the cost is your job after their having moved it to another country and the associated profits to a tax haven, is it worth it?
I do know that local entrepreneurs create wealth by making and delivering products and services to people and companies that need them and can afford them. Such companies will flourish – even during periods of economic recession. However, if the money used to pay them is coming from a central banker or government treasury, then that is only inflationary.
It is only a matter of time before the bankers’ interventionist policies, like quantitative easing, run out of credit. That time is when they cannot later revert to quantitative tightening, which Trump and others have pointed out is now, today.
In his classic 1870’s book on banking, “Lombard Street,” Walter Bagehot wrote: “Every banker knows that if he has to prove he is worthy of credit, in fact his credit is gone.”
Trump and others are now saying it’s too late to prove it, the credit is in fact gone, and the creditors of the US must now recognize this fact, and write off much of the debt they hold.
Of course, this situation is a positive for gold and silver prices, which are likely to rally to new highs to well above 1800. The price could even rise to the $5,000 level espoused by people like Rob McEwen before the global debt issue is resolved and G20 currencies are adjusted to reflect economic reality. However, significantly higher gold prices – at least those perhaps 20% above the all-in cost of discovery, production and sales – is simply inflation-based, and not real wealth.
In the meantime, 2016-2018 will likely prove to be a good period for true wealth creators in industry and those few wealth managers who can find alpha in capital markets. Conventional bankers, and many lawyers and accountants as well, will, I believe, discover they are poorer than they think because many of their fee-sucking products and services are likely to fail.
I’m excited about the future because it’s all about revolution in an economic sense. Whether Trump continues on his path to the White House with the success he aspires to or not, I for one am happy that real change is happening on account of his candidacy and a campaign that has awoken the people.
Finally, on Tuesday I have my arm cast replaced by a splint put on the hand, which will be there for another month. But I do expect to have more mobility to be able to blog more. There are so many things I want to say, and I think now is an important time to say them.
/Bill
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