Will the New Year Bring Economic and Social Pain?

Yes, this week was an inflationary week as you can see from the key market metrics on your left. Also, after taking a breather last week, my IDW hit another new high this week at 173.87. Yes, it has been a good year for gold. But that doesn’t bring your editor much joy because I am very fearful that 2021 may bring about levels of economic and social pain the likes of which only my grandparents experienced during the last Depression. Only this one may very well be the worst kind of depression, namely, a hyperinflationary depression. Let me explain.

The U.S. economy has been

set on a pathological path, thanks to Keynesian economics decades ago. Keynesian economics is not all that different from communist economics in the sense that it believes that a few technocrats with impressive degrees from elite universities are more knowledgeable than the collective wisdom of millions of common folks making economic decisions in their own best interests. This is a big lie, but it is one that Americans who have shunned free market economics, freedom, and liberty have allowed the elite to run our country. In the process they have built a system in which they have gotten filthy rich at the expense of hundreds of millions of Americans who have accepted a “bowel of porridge” to ensure their safety in exchange for future freedom and future prosperity. In other words, they have given up everything in the future for a little pleasure and comfort for the present time. But what is increasingly clear is that the party even for the elites at the Fed and throughout the U.S. Government will soon be coming to an end with the destruction of the dollar.

When Nixon removed gold from the money of all nations around the world on August 15, 1971, the U.S. started down a very pathological economic path. In place of gold was the U.S. military that enforced oil producers to demand payment in U.S. dollars, which enabled the U.S. to control the global monetary system. But that control enabled the U.S. politicians to abuse their power, because without gold backing, the U.S. Government could spend endless amounts of money to buy votes and fund political campaigns for the sake of getting rich and consolidating political power. The U.S. Government spent recklessly to expand its global empire and to the extent that foreigners wouldn’t buy Treasuries, the Fed created as many trillions of dollars out of thin air as the politicians desired. But each dollar is manufactured with debt and so, like an alcoholic who drinks himself to death, America’s elite have abused their good fortunes to the point where the U.S. dollar is now in the process of self-destruction. If any of you reading this care to understand a bit more about how the U.S. petrodollar global currency system has built-in its own self-destruction, you might like to read Lyn Alden’s extensive explanation, titled, The Fraying of the Petrodollar System, https://www.lynalden.com/fraying-petrodollar-system/.

The chart above left, titled, U.S. Government Expenditures (red line) and Receipts (black line) demonstrates why the current market crisis is not at all like that of the 2008-09 financial crisis. Note the dramatic exponential rise in government expenditures compared to the revenues going into the U.S. Treasury. Government expenditures are like a runaway freight train. You would have to be of very low intelligence to think America and its currency can survive for long under these conditions. If the intelligence of foreigners was sufficiently low to allow them to self-destruct by buying U.S. Treasuries, perhaps the game could go on a little longer. But in fact, foreigners are not insufficiently intelligent to self-destruct by buying U.S. Treasuries with their negative real interest rates, so the task of funding the parasitic thieves in the Washington swamp falls on the Federal Reserve to print trillions upon trillions of dollars to keep up with the exponential growth of Washington red ink.

And that is exactly what is happening, as you can see from the chart above on your right that shows the very recent explosion of M-1. Alasdair Macleod’s article of December 17, 2020, from which the chart above was published, pointed out that during the two weeks ending on that date, M-1 grew at 14%—or at an annualized rate of over 367%. As Alasdair pointed out, what has happened is that because of the dreadful economy, banks are not lending but keeping their reserves in liquid form (M-1) and so there has also been a considerable reduction of the less liquid M-2 money supply number. Fearful that the masses will catch on to this sham, the Fed has chosen to obscure this hyperinflationary growth of the money supply. In his most recent ShadowStats newsletter, independent economist John Williams reported the following:

“Obfuscation: With a Record Amount of Cash Fleeing from Money Supply M2, Seeking the Relatively Greater Safety and Liquidity of M1, the Federal Reserve Simply Redefined the Bulk of the Flight Assets in M2 as Already Being in M1. The statistical overhaul included more-limited coverage of the Money Supply numbers and a return to just monthly, not weekly, reporting for the headline, seasonally adjusted series. ShadowStats reviews the overhaul and shows what the new Money Supply patterns look like, with the new reporting formally effective in February 2021, retroactive to May 2020. The big story is that the Fed’s definitional changes will mask the increasing flight of people’s money to needed liquidity and safety, from Money Supply M2 to M1, by moving the bulk of M2 into M1. Announced December 17th, the day following the December FOMC Press Conference, it is effective in February 2021, with retroactive reporting to May 2020.”

What seems rather certain to Austrian economic thinkers who do not drink the Keynesian Kool-Aid is that the U.S. dollar is on a path toward hyperinflation. I plan to talk about these dynamics in my Metals Investor Forum presentation on January 14. Please be sure to sign up for this event here: https://tinyurl.com/ycm8sm3p. I would also suggest you may wish to read Alasdair’s Macleod’s article titled, “Economic and Monetary Outlook for 2021.” It lays out why the Fed has no choice but to blaze a red-hot path of dollar destruction by creating uncountable quantities of money that will render the dollar useless. Alasdair points out that the interest by institutions and major hedge fund managers to buy Bitcoin is suggesting that there is a growing awareness of the dollar’s terminal state. But he notes that most do not have a clue as to why a growing number of nations will soon turn their fiat currencies into gold substitutes. The real turning point was March 22/23 when the Fed finally completely threw in the towel and said it would print as much money as needed. In other words, not even a pretense of any fiscal and monetary rectitude from here on. As the chart on your right shows, since that time, everything under the sun except the U.S. dollar has been rising dramatically. The dollar has since then fallen against most major currencies. as you can see from the table above right.

Regarding Alasdair’s view about a dollar’s destiny for the dust bin of history, here is a simplified sequence of events that he feels (and I agree) are likely to take place in 2021 that bode extremely well for gold, silver, and all manner of commodities:

  1. Foreigners reduce their holdings of dollars more in line with their trade requirements with the S.
  1. The Fed will have to fund virtually all its deficits with QE.
  1. Confidence in the dollar will plummet as not just hedge fund managers and folks educated to the dollar’s demise dump dollars but the masses in America also begin dumping dollars in exchange for tangibles simply out of desperation as they realize they have no other choice, as the dollar is virtually worthless.
  1. With confidence in the dollar collapsing, interest rates will have to rise to restore a smidgen of confidence to the dollar but with rising rates not only will fixed income securities plummet but so will equities.
  1. Some nations will decide to use gold to back their fiat currencies but the S. will refuse to do so because it will unrealistically try to hang on to its dollar hegemony.
  1. The dollar is reduced to ruin and much to its chagrin it will be forced to turn the dollar or some fiat currency to a gold substitute.

Alasdair points out that the U.S. and the CIA will resist this move for as long as possible and it may make life exceedingly difficult for Americans in the process.

But the inevitability of interest rates starting to rise in defiance of the Fed will be the point in time I think when confidence in the Fed’s PhD standard will have to give way eventually to a return to some semblance of a gold standard. And by the way, the chart above right shows that the 10-Year Treasury is already starting to rise. Not only that, but it also has broken through the Golden Cross, which for technical analysts portends an inevitable shift in the direction of interest toward the upside. Imagine the Fed tries to suppress interest rates so the government can fund its trillions of dollars of debt but rates rise in spite of the Fed so it has to start printing more and more money at a faster and faster pace, which in turn leads to still more selling of dollars by foreigners until the dollar becomes completely worthless. Actually, I can recall the days of my youth during the 1970s when the Fed started to lose control of the interest rates. Inflation began to run hot and the Fed was behind the curve because with its attempt to suppress rates real rates were so negative the Fed had to print faster and faster. But then the Europeans told the U.S. that they had better get control of their financial system, at which time Paul Volcker allowed the markets to be restored. Treasury rates were 14% or so and a deep recession followed. But at that time America’s Federal debt was miniscule compared to now and America was still a net creditor nation with an industrial base that could pull us up again. Now there is no turning back. We are on a one-way street toward dollar destruction and it may well take place this year, given the exponential path money growth is on now.

What about the stock market? How will it perform when rates begin to rise and the Fed loses control over them? I think it is clear, as it was in the 1970s, that we will see a major decline in the equity markets at some point along the way. For that reason, I think it will be advisable to keep some cash available to buy up the quality stocks that survive the next major stock market crash.

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.