It’s time to sit back, relax and enjoy a little joe …
Welcome to another rousing edition of Black Coffee, your off-beat weekly round-up of what’s been going on in the world of money and personal finance.
I’ve got another busy weekend ahead of me, so let’s get right to this week’s commentary …
We can control our destiny, but not our fate. Destiny means there are opportunities to turn right or left – but fate is a one-way street.
– Paul Coelho
Paper is a mortgage on wealth that doesn’t exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which isn’t theirs: upon the virtue of the victims. Watch for the day when it becomes marked: ‘ACCOUNT OVERDRAWN.’
– Ayn Rand, Atlas Shrugged
Credits and Debits
Debit: Did you see this? Bond yields jumped last week after another major rate hike from the Fed, flashing a warning of market distress. Last week, the policy-sensitive 2-year Treasury yield climbed to nearly 4.3%, notching a 15-year high, and the benchmark 10-year Treasury hit 3.8% – that’s the highest in 11 years. Unfortunately, higher bond yields are not only bad news for first-time homebuyers, they’re bad news for the stock market and its investors because they create more competition for funds that may otherwise go into the stock market.
Debit: Needless to say, higher rates are also bad news for the US government’s debt servicing costs. As a simplified example, 4% interest on $31 trillion of debt, is a $1.2 trillion hit on expenditures – that’s roughly 30% of tax revenues in a booming economy. And while that’s bad, the debt interest will take an even bigger bite out of those tax revenues during an economic downturn. It’s simple math that’s staring everybody in the face, but both the Fed and the government still refuse to acknowledge this – and the trouble it portends. Or, as market analyst Vince Lanci puts it, “Kicking the can down the road has become hide the pea.”
Credit: Of course, as the inimitable MN Gordon notes us, “centralized credit in the hands of a central bank always leads to money supply inflation. Asset price inflation and consumer price inflation then follow in strange and unpredictable ways. These price distortions are not defects of capitalism. They’re symptoms of a scam currency managed by central planners.” Yep. Although “mismanaged” is probably the more appropriate term here. As for scam currencies, well … they’ve been around for a long, long time:
Credit: Believe it or not, debtors love inflation because it reduces the real value of debt, allowing them to pay off debts using money worth less than when they originally borrowed it. You can bet the biggest debtor of all – the US government – is well aware of this. So it shouldn’t be surprising that Bloomberg pointed out this week that “US debt is shrinking rapidly” when measured against the inflated size of its economy. Oh … and you know who doesn’t love inflation? Savers. That’s because it erodes the purchasing power of their long term savings – in most cases, even when those savings are in the stock market.
Debit: Unfortunately for the citizenry, inflating the debt away results in the government’s gain at the lender’s expense – which means bondholders end up getting far less in real terms than they originally put up. Even worse, when investors, businesses, and households believe inflation is a problem, it often leads to soaring inflation expectations that become a self-fulfilling prophesy; and perversely, it’s a situation the government tacitly condones. Yet it’s frustrating that the mainstream financial media and “Almighty Dollar” fans can’t see this – but I think I found a pictorial explanation that should clear things up:
Credit: The fact that inflationary expectations can lead to a doom loop, is confirmed by professor Ricardo Reis from the London School of Economics. He says that over the last century, currency hyperinflation started only after governments had such large debt piles that they found themselves unable to collect the taxes to pay for them, leading them to purposely resort to inflation – which eventually went out of control. Imagine that.
Credit: By the way, Mr. Gordon also reminds us that politicians “will spew nonsense to deflect responsibility for the mess they’ve created. The depth and duration of the destruction is unknown. Still, we’re fairly certain this is more than your garden-variety downturn. This is the big one we’re all facing: A wrath of biblical proportions.” Indeed. And all indications are that our fateful day of reckoning is fast approaching.
Credit: So … why should anyone believe financial judgment day is fast approaching? Well … maybe because macroeconomist Alasdair Macleod is suggesting that, “Russia is on the verge of declaring the largest monetary gold reserves in the world. And with an estimated 12,000 tons of the yellow metal, the recently announced Moscow gold standard, and plans for a new trade settlement currency to replace the dollar, those reserves will provide support a new gold standard for cross-border trade.” Curiously, some of the most competent macroeconomic experts out there still seem to think the US dollar has little to worry about …
Credit: By the way, Macleod also says that if Russia does indeed announce their updated official gold holdings, the move would probably force China to declare its true gold reserves as well, which are currently estimate to be more than 20,000 tons. Remember, the US supposedly has the largest reserves in the world at 8133 tons – although many people doubt that to be true anymore. Regardless, Macleod warns that, “If this is Putin’s plan, the consequences for Western fiat currencies are likely to be devastating.” Well … I guess that’s one way to put it.
Credit: For those of you wondering how this will unfold from here on out, macro analyst Bill Holter says to watch for the bursting of the housing-, stock- and bond-market bubbles, which will unleash a deflationary event that sees a massive collapse in asset prices. Holter says that, in turn, will lead to the implosion of the credit market as debt holders stop making payments on the resulting stock market margin calls, home mortgages and other loans. And that collapse in the credit market will then, in turn, destroy the fiat currencies because the credit (debt) backing them will be washed away.
Credit: Financial analyst Dave Kranzler is aware of what’s going on too. In fact, he notes that, “The credit markets are (already) melting down as evidenced by the devastation in the various fiat currencies. The dollar soared – like it is now – in the summer of 2008, just before the financial system implosion.” As for the timing, you’ll know our current debt-based monetary system is taking its final breaths when you see a deflationary price collapse in stocks, bonds and real estate, with simultaneous price explosions for the things you need like food, energy and shelter – which will undoubtedly leave most people feeling like this …
Debit: Frankly, we may not have too long to wait, because after watching its bond market blow up this week, the Bank of England became the first central bank to panic and restart the printing presses under the guise of QE. This prompted Zero Hedge to conclude that the BoE’s “pivot means central banks can’t take any more pain. It’s the beginning of the end for the fiat system which now faces a terminal dilemma: fight inflation and suffer a market collapse and economic depression, or push to stabilize social order with higher asset prices, hyperinflation be damned.” As for the rest of us, the only question is: Have we prepared for either outcome?
By the Numbers
The typical American family currently spends 82% of its after-tax income – that’s $5111 per month – based on the average US household income. Here are the biggest monthly expenditures:
$784 Sales taxes & property taxes
$734 Utilities & other household costs
$66 Alcohol and/or tobacco
Last Week’s Poll Results
How much of your income goes to the rent or mortgage (including taxes & insurance)?
- 10% or less (41%)
- 11% to 20% (29%)
- 21% to 30% (16%)
- More than 40% (8%)
- 31% to 40% (6%)
More than 1800 Len Penzo dot Com readers responded to last week’s question and it turns out that 1 in 7 say they spend more than 30% of their income on shelter. Compare that to the average US household that spends 15% of their income on rent or the mortgage.
If you have a question you’d like me to ask the readers here, send it to me at Len@LenPenzo.com and be sure to put “Question of the Week” in the subject line.
The Question of the Week
Note: There is a poll embedded within this post, please visit the site to participate in this post's poll.
Useless News: The Phone Call
Several men were in a gym locker room when a cell phone on a bench rang and a man put the phone on speaker and began to talk:
WOMAN: Hi, Honey; it’s me. Are you at the club?
WOMAN: I’m at the mall now and found this beautiful leather coat. It’s only $2000. Is it OK if I buy it?
MAN: Sure, go ahead if you like it that much.
WOMAN: I also stopped by the BMW dealership and saw the new models. I saw one I really liked.
MAN: How much?
MAN: OK, but for that price I want it with all the options.
WOMAN: Great! Oh, and one more thing. The house we wanted last year is back on the market. They’re still asking $990,000 for it.
MAN: Well, then go ahead and make an offer for $900,000. They’ll probably take it, but if not I’m willing to go the extra $90,000 this time if that’s what you really want.
WOMAN: OK. I’ll see you later! I love you so much!
MAN: I love you, too. Bye.
And with that, the man hung up. Meanwhile, the other guys in the locker room were staring at him in astonishment.
The man who was speaking then turned around and asked, “Do any of you guys know whose phone this is?”
More Useless News
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Letters, I Get Letters
Every week I feature the most interesting question or comment — assuming I get one, that is. And folks who are lucky enough to have the only question in the mailbag get their letter highlighted here whether it’s interesting or not! You can reach out to me at: Len@LenPenzo.com
After reading my post on college degrees that are a waste of money, Mike Collins had this to say:
You have to admit, getting a degree in Ghostbusting would be pretty bad-ass.
Yeah. Too bad the business outlook for those grads is dead and buried.
If you enjoyed this edition of Black Coffee and found it to be informative, please forward it to your friends and family. Thank you!
I’m Len Penzo and I approved this message.
Photo Credit: public domain
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