A Geopolitical Game Changer! “Outside Money” Is Starting to Trump “Inside Money”

In my “Week in Review” column, I like to use the above noted markets as broad indicators to characterize the week just ended as either a “risk-on” or “risk-off” week. For the week ending April 8, I noted that with the S&P down by 1.27% and the T-Bond down by 5.71% we could term it a “risk-off week.” Certainly from the perspective of “inside money” (i.e., money created by central banks), the week ending April 8 was a “risk-off” week. But that same week was surely not a “risk-off” for “outside money” (i.e., commodity money) because commodities measured by the Rogers Raw Material Fund gained 1.72%, gold was up 1.29%, and silver rose by 0.53%. The table above shows that same trend was intact during the first 3½ months of 2022. The T-Bond is down 16.84% and the S&P down 6.71% while the Rogers Fund gained 33.64%, silver 11.48%, and gold 8.45%.

Once upon a time at least globally speaking, there was no “inside” or “outside” money. Throughout modern history, there was “money” universally defined as gold! That changed on August 15, 1971, when President Nixon caused the U.S. to default under the post-World War II Bretton Woods agreement that fixed the price of gold to US$35 per ounce. But now Russia and China, two countries that have an abundance of “outside money” in the form of life-sustaining food, energy, and vital metals (including gold, which can buy anything), are joining forces to overthrow the monetary dominance of “inside money,” the leading producer of which is the U.S.  A date that will live in infamy is March 25, 2022, when Russia fixed the price of gold at 155,500 rubles per troy ounce of gold and required “unfriendly” nations who purchase Russia’s natural gas to pay for it in either gold or rubles.

Yes, I know the mainstream media in America have ignored this move, either out of ignorance or for reasons of propaganda. But realizing that the U.S. and the West are extremely vulnerable from an economic point of view, Russia and China apparently have recognized that now is the time to make their move toward overthrowing the U.S. dollar as the world’s reserve currency. With a foolish move toward green energy at a time when there are no technologies that will allow that transition to take place without launching the West back into the Dark Ages, what are the European countries that rely on Russian energy going to do? Will they choose to freeze to death rather than buy gold or rubles with which to buy life-saving energy as well as other essential food and commodities? So while the U.S. remains fixated on military “solutions” in Ukraine as it continues manufacturing and selling weapons to the world even as it and its NATO partners go broke, Russia—which is much more a free market capitalist country than America—is thriving economically. Its debt/GDP is less than 25%, compared to the U.S. debt/GDP of over 125%. It has a 17% flat tax and very limited regulatory hurdles. Contrast that with America’s very high tax rate and draconian hurdles aimed at stopping production of metals and energy.

The March 25, 2022, news by Russia in demanding payment for its energy products in rubles is in my view a major game changer because it poses the biggest threat yet to the existing “inside money” hegemony of the U.S.  Whether we are moving toward a return to gold as money I’m not sure. But Putin is certainly using the same tactics used by Nixon and Kissinger in the early 1970s to catapult the dollar into the world’s reserve currency. After Nixon removed gold from monetary backing, the only way the dollar came to be the world’s reserve currency was to use America’s military to enforce an agreement between the U.S. and OPEC to demand payment for oil in U.S. dollars. Now Putin is doing the same and America is crying “foul.”

Anti-Capitalist Keynes & the American Decline 

Because western intellectuals have been indoctrinated with a false economic religion named Keynesianism, our policymakers have deluded themselves into believing that perpetual growth in national debt and trade deficits relative to GDP will result in no economic harm, at least as long as we have a sufficient strong military that can force the world to accept our currency that the Fed creates out of thin air.  Such has been the American policy ever since Nixon defaulted on America’s obligation to back the dollar with gold on August 15, 1971. The agreement between Nixon and OPEC soon led to the dollar being used for nearly all international trade. It seemed the Fed could produce endless dollars from computer keystrokes which could then be granted as credit to Americans that they spent to buy cheap Chinese goods. And we used this “easy money” also to fund military aggression around the world, which has not gone unnoticed by Russia and China. The bottom line is that this “inside money” allowed Americans to consume far more than we produced. Not only did politicians of both parties use that easy money to fund vote-buying giveaway programs, but also, America piled up debt to foreign nations. China, for example, right now holds ~1 trillion U.S. dollars.

But now we are about to be taught a very hard lesson by adversarial nations led by Russia and China. I firmly believe we are about to suffer a depression that may well make that of the 1930s seem tame by comparison. Hopefully, for the good of our children and grandchildren, we will understand that it was living beyond our means that led to our economic depression, so that we can implement policies that allow America to become prosperous again by allowing the free markets to allocate scarce resources and a return to a balance between production and consumption.  

Now the Fed is in a real bind. The last time our Federal Reserve Bank faced economic and market reality was in 1980 when Chairman Paul Volcker recognized that Keynesian indoctrinated economists at the Fed were “smoking” some mind-altering substance that led to a Fed monetary policy of allowing interest rates to fall way below double-digit inflation. Fed chairmen prior to Volcker, like G. William Miller and Arthur Burns, were pandering to politicians to curry favor with the powerful elite, not unlike our current Chairman Jerome Powell who called inflation “transitory,” to ensure President Biden would give him another term. Had Powell honestly acknowledged that inflation was a huge and growing problem, the current Fed might not be so far behind the inflationary curve as it is now. But if he had stood up to the truth, he knew President Biden would find someone else to accommodate his big spending plans. 

Ever since Paul Volcker bit the bullet, driving interest rates way above the inflation rate, each Fed chairman since him has “wimped out” by “solving” every crisis with massive money printing. That kick-the-can-down-the-road policy has been heralded as a “solution.” But long term, it was no solution at all, as hinted at in the cartoon on your right. With each credit cycle, interest rates fell to lower highs and lower lows. Why? Because as debt grew relative to GDP, the height to which interest rates could rise without triggering another market breakdown fell dramatically from Greenspan to Bernanke to Yellen and now to Jerome Powell. As I pointed out in my last Metals Investor Forum talk in Vancouver in March (which you can view at the JayTaylorMedia YouTube channel) once a country’s Debt to GDP ratio rises above ~60%, any new deficit spending leads to a decreased rate of growth that accelerates downward as the debt/GDP grows. When Debt/GDP rises above 90% it becomes lethal! As of the end 2021, the U.S. debt to GDP rose to 129%! That compares to a debt/GDP figure of 32.6% when Paul Volcker caused my first mortgage rate to be 17.5% in 1981. That means the draconian tight monetary policy that Volcker put in place in 1980 is impossible to do now.

The Davos elite pushed for “free trade,” easy money, and big government spending policies. The elite benefited mightily, as the bankers and members of a government-funded Military Industrial Complex that President Eisenhower warned us about, as well as all manner of other socialist policies are starting to lead to economic poverty as all socialist systems eventually do. But unfortunately for America, it is most certainly not in the self-interest of America’s Military Industrial Complex to end constant foreign wars, as President Trump tried to do. Do you wonder why the FBI and the CIA underwrote the elimination of Trump from office or why Hunter Biden’s laptop was covered up by fifty-some CIA members until after Trump was defeated?  

The picture on your right from former Federal Reserve economist Lacy Hunt shows what is happening to the U.S. economy as a result of America’s surging debt/GDP. It exploded with the 2008 financial crisis and then again with Covid. The blue line shows the long-term potential GDP of the American economy dating all the way back to the end of the Civil War. The black line shows that GDP departed dramatically from its natural growth prospect starting in 2007-08 with perpetual QE and then was taken down still further with massive Covid related debt in 2020. So the Fed is in a real pickle! While some think Powell will hang tough, as Volcker did in 1980, I rather doubt that is possible, not only because of our extremely lethal, high debt/GDP 129% compared to ~ 32% in 1980, but also because: (1) Interest rates are artificially low now so that banks can’t lend profitably and price in risk as they could in 1980; (2) America has a massive trade deficits while in 1980 it still had very manageable trade deficits. Now foreigners own so much of America’s debt that they are likely begin selling it, putting even more upside pressure on interest rates; and (3) America was still a manufacturing power in 1980, whereas now it is dependent on China, which, along with Russia has major economic leverage it can use to overtake the U.S. as the number one economic superpower in the world. In summary Jerome Powell cannot replicate Paul Volker is that it would throw us into a depression far greater than that of the 1930s.

In 1980, the world was not as hostile toward the U.S. as it is now. As David Stockman recently pointed out on my radio show, the current global economy is constructed for peacetime. Now with the war in Ukraine, we have massive supply chain disruptions that are contributing greatly to increased consumer and producer prices. Without an ability to raise interest rates, we now have an inflationary problem that may evolve into hyperinflation that is likely in my view to totally destroy the existing dollar-based system. The only way that can be remedied is through increased domestic production. But now that America’s capital formation is largely destroyed by low interest rates, it’s very hard to build up our manufacturing base any time soon without a change in American psychology from that of a consuming population to that of a saving economy. A return to gold as money would certainly lay the groundwork for that by restoring stable purchasing power.  

If Americans are unaware of our economic vulnerability, the Russians and Chinese most certainly are not! Those who understand how America has been ripping off the world with its post-August 15, 1971, counterfeit dollar may find Russia’s initiative to demand payment for oil and gas from “unfriendly” countries in rubles to be poetic justice. With or without that sentiment, what America and western countries in general are about to learn is that in the long run you can’t live forever beyond your means, even with the most powerful military in the world. When America uses its military might and fraudulent dollar to change regimes and expand its empire, it’s bound to result in some very angry nations. No, I’m not justifying Putin’s war crimes. I seek to explain why there is a war in Ukraine and why, as Eisenhower foresaw, once the Military Industrial Complex gets beyond a critical mass, it would never want wars to end.

Eventually the laws of nature will win out, assuming our Military Industrial Complex can lay down its arms and the world avoids a nuclear holocaust. The West, with its snowflake, over-consuming, non-scientific mindset, lets a pipsqueak like Greta Thunberg dictate to western countries that it must rid itself of life-sustaining energy while our adversaries used hydrocarbons to expand their growth and wealth. 

Then Putin tells the Europeans after NATO deprives Russia of using U.S. dollars and SWIFT to repay its debt, that if Europeans want to avoid freezing to death, they will have to pay for energy with rubles.  Because fraudulent money created out of thin air driving financial markets to the moon can only last so long and because that kind of money cannot replace “outside money” (commodities), nature’s laws are setting the stage for a return to reality within the four dimensions of this time space continuum that we live in. In other words, outside money is in the early stages of replacing inside money. And the only inside money that works as a convenient medium of exchange is gold. As Alasdair Macleod has explained, because of these realities, gold is destined to once again define money so that there will be no inside or outside money. Only one universal kind of money, namely, gold, will exist. And with that, a stable monetary foundation can be reestablished in order to reward savings rather than reward consumption. With real money and free markets, saving and consumption will be back in balance and the way will be paved for a return to prosperity. That will pave the way for the producers of real money—gold and silver.

Many of the companies covered in this letter including those discussed below in this issue are well on their way to discovering major gold and silver deposits. I have never been more optimistic regarding gold and silver exploration companies than now, and some of the most exciting are discussed in this issue.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.