Money Under Fire

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Today we welcome a cohort of new readers visiting PeakProsperity.com for the first time. This article is to give them our best grounding in the massive wealth transfer underway.

Our hope is that our longtime readers will likely benefit from a revisitation of the fundamentals, as well.

One serious predicament we face is that the current leaders in the halls of monetary and political power do not appear to understand the dimensions of our situation. The mind-boggling part about it is that the situation is easy to understand.

Our collective predicament is simply this: Nothing can grow forever.

Sooner or later, everything must cease growing, or it will exhaust its environs and thereby destroy itself.  The Fed is busy doing everything in its considerable power to get credit (that is, debt) growing again so that we can get back to what it considers to be "normal."

But the problem is – or the predicament, I should more accurately say – is that the recent past was not normal.  You've probably all seen this next chart.  It shows total debt in the U.S. as a percent of GDP:


(Source)

Somewhere right around 1980, things really changed, and debt began climbing far faster than GDP. And that, right there, is the long and the short of why any attempt to continue the behavior that got us to this point is certain to fail.

It is simply not possible to grow your debts faster than your income forever. However, that's been the practice since 1980, and every current politician and Federal Reserve official developed their opinions about 'how the world works' during the 33-year period between 1980 and 2013.

Put bluntly, they want to get us back on that same track, and as soon as possible. The reason?  Because every major power center, be that in D.C. or on Wall Street, tuned their thinking, systems, and sense of entitlement during that period. And, frankly, a huge number of financial firms and political careers will melt away if/when that credit expansion finally stops.

And stop it will; that's just a mathematical certainty. It's now extremely doubtful that the Fed or D.C. will willingly cease the current Herculean efforts towards reviving this flawed practice of borrowing too much, too fast. So we have to expect that it will be some form of financial accident that finally breaks the stranglehold of failed thinking that infects current leadership.

The Math

As a thought experiment, let's explore the math a little bit to see where it leads us. After all, I did just say that a poor end to all of this is a "mathematical certainty," so let's test that theory a bit. I think you'll find this both interesting and useful.

To begin, Total Credit Market Debt (TCMD) is a measure of all the various forms of debt in the U.S. That includes corporate, state, federal, and household borrowing.  So student loans are in there, as are auto loans, mortgages, and municipal and federal debt. It's pretty much everything debt-related.

What it does not include, though, are any unfunded obligations, entitlements, or other types of liabilities. So the Social Security shortfalls are not in there, nor are the underfunded pensions at the state or corporate levels. TCMD is just debt, plain and simple.

As you can see in this next chart, since 1970, TCMD has been growing exponentially and almost perfectly, too. (The R2 is over 0.99, for you science types):

I've pointed out the tiny little wiggle that happened in 2008-2009, which apparently nearly brought down the entire global financial system. That little deviation was practically too much all on its own. 

Now debts are climbing again at a quite nice pace. That's mainly due to the Fed monetizing U.S. federal debt just to keep things patched together.

As an aside, based on this chart, we'd expect the Fed to not end their QE efforts until and unless households and corporations once more engage in robust borrowing. The system apparently 'needs' this chart to keep growing exponentially, or it risks collapse.

Okay, one could ask: Why can't credit just keep growing? 

Here's where things get a little wonky. But if you'll bear with me, you'll see why I'm nearly 100% certain that the future will not resemble the past.

Let's start in 1980, when credit growth really took off. This period also happens to be the happy time that the Fed is trying to (desperately) recreate.

Between 1980 and 2013, total credit grew by an astonishing 8% per year, compounded. I say 'astonishing' because anything growing by 8% per year will fully double every 9 years.

So let's run the math experiment as ask what will happen if the Fed is successful and total credit grows for the next 30 years at exactly the same rate it did over the prior 30. That's all. Nothing fancy, simply the same rate of growth that everybody got accustomed to while they were figuring out 'how the world works.'

What happens to the current $57 trillion in TCMD as it advances by 8% per year for 30 years?  It mushrooms into a silly number: $573 trillion. That is, an 8% growth paradigm gives us a tenfold increase in total credit in just thirty years:  

For perspective, the GDP of the entire globe was just $85 trillion in 2012. Even if we advance global GDP by some hefty number, like 4% per year for the next 30 years, under an 8% growth regime, U.S. credit would be twice as large as global GDP in 2043 (!)

If that comparison didn't do it for you, then just ask yourself: Why, exactly, would U.S. corporations, households, and government borrow more than $500 trillion over the next 30 years? The total mortgage market is currently $10 trillion, so might the plan include developing an additional 50 more U.S. residential real estate markets?

More seriously, can you think of anything that could support borrowing that much money? I can't.

So perhaps the situation moderates a bit, and instead of growing at 8%, credit market debt grows at just half that rate. So what happens if credit just grows by 4% per year? 

That gets us to $185 trillion, or another $128 trillion higher than today – a more than 3x increase:

Again, What might we borrow (only) $128 trillion for, over the next 30 years? 

When I run these numbers, I am entirely confident that the rate of growth in debt between 1980 and 2013 will not be recreated between 2013 and 2043. With just one caveat: I've been assuming that dollars remain valuable. If dollars were to lose 90% or more of their value (say, perhaps due to our central bank creating too many of them?), then it's entirely possible to achieve any sorts of fantastical numbers one wishes to see.

Think it could never happen?

The Case For Hard Assets

This is the critical takeaway from all of the math above: For the Fed to achieve anything even close to the historical rate of credit growth, the dollar will have to lose a tremendous amount of its purchasing power. I truly believe this is the Fed's grand plan, if we may call it that, and it has nothing to do with what's best for the people of this land. Instead, it's entirely about keeping the financial system primed with sufficient new credit to prevent it from imploding.

That is, the Fed is beholden to a broken system; not anything noble.

GDP growth is very unlikely to support the rate of credit expansion that the Federal Reserve wants (or, more accurately, needs). And what will happen if it indeed doesn't? A lot of painful, awful things – but central among them is a currency crisis.

Amidst the ensuing unpleasantness will be an awakening within today's hyper-financialized markets to the huge imbalance now existing between paper claims and ownership of real things. A massive wealth transfer from those with 'paper wealth' (stocks, bonds, dollars) to those owning tangible assets (the productive value of which can't easily be inflated away) will occur – and quickly, too.

Suggesting the key objective for today's investor is answering: How do I make sure I'm on the right side of that wealth transfer?

An important component of that answer is holding some of your financial wealth in hard assets (they value of which can't be inflated away), the precious metals (e..g, gold and silver) being most easy for investors to easily obtain.

There's a preponderance of data that shows the world's major asset markets are dangerously overvalued. And when these asset bubbles start to burst, the 'save haven' markets -- like gold and silver -- that investment capital will try to flee to are ridiculously small. Investors who do not start moving their capital in advance of crisis will be forced to pay much higher prices for safety -- or may find they can't get into these haven assets at any price:

https://player.vimeo.com/video/172160052

In Part 2: Using Gold to Protect Yourself In Advance of the Greatest Wealth Transfer of Our Lifetime we detail out the specifics of how much of your net worth to consider investing in gold, in what forms to hold it, which price targets are gold and silver most likely to reach, and which eventual indicators to look for that will signal that it's time to sell out of your precious metal investments.

The battle to keep gold's price in check is truly one for the ages. Not because gold deserves such treatment per se, but because the alternative is for the world's central planners to admit that they've poorly managed an ill-designed monetary system of their own creation -- which they'll avoid at any cost.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

This is a companion discussion topic for the original entry at https://peakprosperity.com/money-under-fire/

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On the Glenn Beck program today, I was asked if we'd experience a Weimar hyperinflation here in the US?
I said it's possible, but I'd like to provide a bit more context here.

The Weimar hyperinflation saw the value of a German Mark plummet from 90 to the dollar in June of 1922 to over 4.2 trillion (with a "t") marks to the dollar by November 1923.

Ouch!

The German hyperinflation is the one people talk about because there are so many images (wheelbarrows of cash, woman burning notes in her furnace because that was cheaper than buying wood) but it wasn't the worst in history.

Germany's Weimar hyperinflation clocked out at 3.2 million percent.

Greece between 1943 and 1944 clocked out at 8.55 billion percent!  Now that's far worse than the Weimar experience.

But still not the worst.

That distinction (so far) belongs to Yugoslavia between Oct 1993 and Jan 1995 where prices advanced by a dizzying 5 quadrillion percent.  That's 5 x 10^15, or a 5 followed by 15 zeros.

I cannot even conceive of a number that large so I cannot help you internalize it any better.  

 

 

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>> where prices advanced by a dizzying 5 quadrillion percent
That makes me want to go shopping while my money is still worth something! cheeky

 

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How many times to the moon and back would that be?

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I'm trying to think 'out the box' a little here.  Maybe someone can help me flesh it out a little.  One idea I am exploring is investing in renewable energy generation capacity.  That is, to invest today's money value in an asset which will produce income in the future.  My thinking being that energy is a finite resource and so will retain it's relative purchasing power.
Not heard anyone advocate this approach but there again no one does if it's a really good idea; they keep it quiet for themselves initially.  Anyone out there with any experience (positive or negative) who is willing to share it?

Risks - there are always risks.  1. Fossil fuels undercutting renewable if subsidies are removed or if there is a recession that crashes energy demand.

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Good question there. I'm also wondering what the new administration's policy will be regarding tax credits for homeowners who invest in solar power, since that seems to have spurred demand some.
 

As for whether to get them as a future resource, I'm dubious and uncertain of its value. Given that such a system must be maintained and fixed, especially the batteries, purchasing such a system would greatly depend on the level of collapse we are anticipating. If the financial system and economy collapse, but society remains relatively stable (unlikely, in my mind), then yes it could be leveraged in the future and be a valuable asset. Yet that could also mark you as a target, too, especially from any "feudal authority" that might inevitably arise in your locality, which would seek to claim it for the benefit of the masses and all that. If collapse is more total, drawn out, and violent, then would there be a way to even maintain such a system in ten or fifteen years, or would those resources/components/know-how be lost already in the chaos? In a world of devices without power, would we just shift back into a previous age of technology such that your solar power would essentially go to waste anyway?

 

I'm glad to answer your question with more questions, and thus say nothing approaching a solution. It's an art form, really.

 

In all seriousness, my wife and I are pondering this same question. Is it worth investing in alternate energy sources that would require upkeep if we are worried about collapse? But if we don't invest in such technology, we are part of the overall energy problem and not its (partial) solution.

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Snydeman,
A small solar panel array with inverter could power a washing machine, table saw or an electric drill during sunlight hours (on sunny days).  Small enough to be folded up and taken inside at night to reduce theft.

This kind of system, if stocked with several replacement inverters, might last a generation or more.

Mots and a couple of others described a woodshop set up like this. 

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News story just broke that they are calling in large currency notes. Each note is worth 2 cents US.  The amount of money in question is 6 million dollars. Did I hear this right?  Can't believe a government would take that action for such a small sum.

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This elaborates on Sand Puppy's helpful  comment above…
An electric drill (solid state switched) will run directly off of 200 watts solar (full sun) without ANY inverter if the voltage is high enough (wirepanels in  series, drill will go slower if  less than 100 V).  If it has a mechanical switch, the switch contacts will melt on DC (unless  you use my pulsed DC product).
An IH stove (these are solid  state  switched) will run directly off of 2-3 (or even 4 if larger size) 200 watt panels  (connected in series to sum up to 80-150 volts typically) in full sun without  ANY invertor.  I just connect 120V DC connected panels to my cheap 60$ small  induction stove without any other equipment such as an inverter.
A vacuum  cleaner (and presumably table saw) works better on an inverter because  the mechanical switch will melt its contacts when switching DC  (unless you buy my product which pulses the DC).  however you probably will need at least 4 200-watt panels  in full sunlight.  If you can turn on/off the vacuum cleaner or table saw WITHOUT opening/closing switch contacts (leave on but just plugin/unplug and deal with a very big DC spark when doing so) then you can use on about 4-5 panels full sun WITHOUT an inverter.
The  washing machine is most certainly an  AC motor  and requires much power, so likely will need an expensive (2000W or more rating due to start up impulse) inverter plus many panels maybe at least 1000 watts worth (full sun).  I would use a mechanical washer  if you are worried about power outage (and not long term).  Or get a DC motor type (most likely will be developed since all motors are evolving toward DC and away from AC).

DC is the future.
Mots  

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Excellent idea, and cost-available. I had only been thinking of big roof-top solar panels, which would be like a billboard sign that says "I have power right here." I wonder, what would everyone prioritize in terms of powered objects in a post-collapse world?

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How many people will seriously look at some "boring" solar panels to provide power to a small washer on sunny days only, versus be amazed by this? (and of course, purchase one!)
I bet that very very very few… Unfortunately there is nothing sexy for most of the folks out there in tinkering with solar panels, DC/AC motors, switches, etc… instead Alexa is like a magnet: HER attractiveness and glamor are unbeatable.

In summer 2015, I installed in my backyard a solar panel (230W), a small charge controller, a small 12V battery (3Ah), a tracking controller and a 18'' linear actuator. After one year, here are the results: 

  • The wind ripped-out the panel twice (My support was not strong enough).

  • The panel got scratched from the back up to the protective glass. Still working. So the loss of two cells is not catastrophic as long as the bus bar is intact.

  • The linear actuator seems to be a loss. Not working anymore. I opened it and all the grease is as solid as wax. I will dismantle it completely to find out exactly what is wrong (motor? screw? gears?).

  • What need to be done is to measure real power output. I already purchased power meter and small inverter, but did not wire them yet.

First conclusion:

  • Better to have a fixed installation. the 25% gain of a sun tracking installation does not offset the cost of maintenance.

 

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I would prioritize my solar needs as - Can I pump water out of the ground for drinking, bathing, and possibly gardening? Solar DC or AC pumps can do this. 
Second, do I have a way to heat water (Solar thermal is close to 5x as efficient as solar PV), so can I heat water and potentially can I use the heated water for space heating. Even if you live in a climate where it gets cold in the winter time, you likely have extra heat generation from solar thermal in the summer. If you can store that heat, in say 10 55 gallon drums that are insulated in a large plywood storage area, then you have several tons of hot (up to 140 degrees or better) water come winter that should last at least a couple of months into the winter. Not to mention, if you build your solar collector properly oriented and at the rigth angle, you can generate heat all winter to help keep this stored hot water warm. You can DIY this stuff as well - Here and Here are just 2 examples. Also, spending money on insulating your house would be wise here. 

Third, can I "cook" my food with solar? Well, a solar oven would do, but so would a DIY solar food dehydrator. I could dry all my zucchini, squash, strawberries, peaches, blueberries, etc. instead of using wood or FFs to heat water for canning. However, in the fall come harvest time, it may be nice to have a nice wood cookstove warming the house while I can my harvest. Video for an incredibly simple dehydrator that can be modified to be 2-3 times as deep to accommodate more trays. 

I don't know that much about motors and DC/AC, but how often do you run a circular saw or a drill press? In the future, probably more often as you fabricate tools instead of purchasing the Chinese kind from the big box store, but a lot of that can be accomplished using a generator. Unless you're welding something, you can flip the generator on for a minute or two, make your cuts, and turn it off. Using it like that should allow a gallon of fuel to last for several weeks probably. I guess that's just the way I look at things. 

Lastly, look for screaming deals on electric vehicles while you can. Having a solar electric array of decent size should allow you to charge a solar vehicle for short travel situations (the 2017 leaf is rated to get 107 miles per charge). Our local University had a deal that I found out about this fall that is now expired, but next fall they will have brand new Nissan Leafs for $14,000 after Federal, State, and University rebates. That's a $32,000 car for about 60% off! This article says you can buy a 2-3 year old Nissan leaf for less than $7,000. 

As a side note, I think a lot depends on where you live. If you live in the country, you can put in a ground mount array and then build a 6 foot wooden fence around it and only the people who installed it would know it's there. Not to mention, they're easier to clean in the winter, you can make sure they are oriented at 180 degrees, and the proper angle for best annual production. If you live in a city or suburb, you may be able to do the ground mount, but it would be more constrained. I love our solar array, but it's on the roof and I don't clean it in winter time so production suffers there. However, I'd rather have less solar and and no broken bones. Also, our angle is dictated by roof angle, and not by ideal angle which at our latitude would be about 45 degrees. 

Those are just my thoughts, hope it helps. 

 

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Till yawl are equipped and ready to live in the century before last, get ready to go hungry.
 

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might be sustainable. Quinn is 690lbs and 13.3 at 20 mos. A ready and willing worker.
 

 

 

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interesting dialogue
Here are some facts that might affect some conclusions:

  1. you cant hide your  solar panels.  My panels are easily visible from space based cameras now and anyone who wants to know anything about me can see my panels and my house and car etc:(resolution is good enough to count the solar panels) https://www.google.co.jp/maps/place/Kamijima,+Ochi+District,+Ehime+Prefecture/@34.2412438,133.2014379,295a,20y,45t/data=!3m1!1e3!4m5!3m4!1s0x3551add73cf786a3:0xc6d28aa666141b4!8m2!3d34.2513282!4d133.193779!6m1!1e1?hl=en
  2. solar panels are extremely cheap and getting cheaper (energy and materials used to manufacture continue to drop, in contradiction to CMs frequent arguments against solar as primary energy and pro-globalism (cant live without government deity saving us with government energy research) teachings.  Solar panels already are the lowest cost part of a system (batteries are highest, and inverters/controllers which seem to burn out every 3 years on average often cost more as well).  That guy who covets your panel can buy 1000 watts of panels for the price of a gun or a few hundred watts foro a years worth of target practice so what's the point.  Just the labor to steal a panel without breaking it (this takes time and carefullness, neither in great supply to a dense and lazy thief) is enough of a deterrent in my opinion.
  3. cheap generic solar panels (like the kind manufactured in generic plants like the generic solar manufacturing turn key plants that my local company is exporting to 3rd world countries) are only about 15-18% efficient but their energy is piped around as needed (like into your floor, or hot water) at virtually 100% efficiency) whereas solar hot water often actually costs more for the equipment and has mechanical moving parts that break and leak and get cold in the winter. Solar thermal cannot be shared with your neighbors or be fed into a grid, unlike the very low cost electricity from solar electric.
    The biggest surprise to me with solar electric is the ability to DIRECTLY connect (without a CONVERTER OR ANYTHING except wires) to a computer charger/printer/cell phone and most battery chargers (that dont rely on old fashioned transformers) as well as Induction Stoves and small motors (electric drill in particular) to solar panels that are series hooked up to a maximum power point voltage of between 80-135 volts.  HP power adapters are already DC and not AC! (only use electricity flowing in one direction!) so you may have to reverse the connection to get the right polarity.  In my experience with my equipment this is entirely safe to the appliance and when i open and inspect such equipment, I find that the appliance has to go to the trouble of initially converting the undesirable AC to DC anyway before it can use it in electronic circuits.  Transistors are not 60 hertz AC devices.    

Here is a prediction: legacy (and existing) solar panels are built from single or multi crystalline forms of silicon because of the need for ruggedness down under the tremendous heat and environmental conditions encountered.  Expect a loss in efficiency of 5% over 10 years or longer.  Expect to harvest electricity over 30 years or more with existing store bought panels.  Because of programmed obsolecence and the insistence of industry that the next product is so much better and should replace the previous for profit, ,I expect that any new and improved panels (over 20 or 25% or better efficiency) will likely be less stable and only last 5 or 10 years in part due to "advanced" but less rugged materials.  This is a main reason why I think that existing cheap panels installed on a house are  a great investment and can return benefits indefinitely.

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First - do the number of zeros matter?  I say no.  A hyperinflation that results in six zeros or 15 zeros after the "1" is essentially no difference at all.  Not to the saver anyway.
Why is that?

The vast bulk of the loss experienced by savers is in the first factor of 10 loss.  Once you add just one zero, you've already been hit for a 90% loss.  Everything that comes next is just degrading the remaining 10%.

The conclusion: any sort of delayed-response could be fatal.  Once you take your $1M down to $100k, getting back to $1M (of actual value) will be incredibly difficult.

Second - Armstrong says that in his study of historical hyperinflation cases, he has only seen it happen when a nation is unable to borrow to fund its operations.  When a nation can no longer borrow, its only possible response is to print.

So for me, my "necessary, but perhaps not sufficient" condition for a coming hyperinflation in the US will be an increasing difficulty in borrowing to fund the operations of government.  We are not there yet.  In fact, we're nowhere close.  Especially with USDX north of 100.

Also, I do think there might be some intermediate steps involving confiscation.  Once borrowing becomes harder for the government, the pension/retirement money will probably be the likely first target, since there is so much of it out there.

How much are we talking about?  $24 trillion, at last count.  [I had no idea].  Simply requiring all pensions to buy only US treasury bonds with any new contributions might just take care of the problem, at least temporarily anyways.

https://www.ici.org/research/stats/retirement/ret_16_q2

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Back to the topic Chris discussed in the article.  GDP and debt have grown together.  Each require the other and if either one falters it affects the other. The Cornucopean view is that GDP and debt can grow without limit.  That is not my view.  My view is that GDP will follow a symmetrical bell shaped curve at best. I believe in limits to growth.  So the BIG question is what happens to debt at peak GDP and as we descend down the other side. 

The Cornucopeans don't accept this.  For them, the faltering GDP is because there isn't enough debt. Therefore, for them, the answer is to increase debt and that GDP will inevitably follow.  What if they are wrong?  What if GDP is faltering because of more fundamental reasons, for example, due to the peaking of Net energy for fossil fuels? 

If they are wrong and I am correct, I see not other outcome other than inflation, in the true sense of the word, in which the money supply outstrips the resource base.  In layman's terms; too much money chasing not enough resources making everything cost more.

Overlaying this is the major problem that current capital repayments on current debt and liabilities becomes increasingly unsupportable in a declining GDP environment.  Hence we get a double whammy of currency devaluation on top of inflation.

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I'm fortunate enough to have seen some of the crazy side-effects of Yugoslavian inflation first-hand (2 trips there in the 1980's).   In the mid 1960's, Tito's government had devalued the Yugoslav dinar by a factor of 100. Yet, during my first trip there, in 1985, many older people, in produce markets, etc. would still quote prices in old dinars.  So the bunch of spinach labeled "30" dinars would be quoted as "3000" dinars by the farmer.  Very disorienting!  During my next trip there, in the late 1980's inflation was running at around 30% per month.  Since a lot of the stores and such were state owned, the staff didn't really care if you paid for things with a US credit card, and by the time the purchase, quoted in dinars, was converted to dollars on my bill, I'd have saved about 30% thanks to the inflation.  Coins, as money, had long ago become completely worthless, except for specific functions-- the pay phones on the street only accepted those coins, so they were in pretty high demand, as a sort of single-purpose token (a perverse example of the value of "hard" assets under inflation!)

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The ABC in Australia is all adither and agog about eliminating the $100 note in order to well err, umm, to stop Nasty Criminals. (Yeer. That'll do.)
This is my response to them.

Please be aware that the so called "Black Market" is being used as a rationalization to deprive us of our freedoms, just as the "War on Terror" was/is.
 
No. We do not choose to use $100 notes to do cashies. We hold them because we do not trust the Central Banks.
 
Do the words "Cyprus" and "bank bail-ins" mean anything to you?
 
Did you know that that your money in the bank is an unsecured Loan to the bank? As a loan it is the most insecure of all claims on the Bank.
 
Did you know that the Governments of Australia and Canada, among others, were watching the Cyprus episode to see what the results of the Banks confiscation of their customers money was?
 
They were. And they were well satisfied that these confiscations resulted in no major civil unrest and so they they wrote legislation into law to facilitate confiscation.
 
So tell me, O Font of Wisdom, are you still advocating allowing the forced lending of your money to the Banks?
 
My advice is to say whatever you need to in order to keep your job, but Get Your Money Out of the Banks.
 
PS. Did you give your permission to your employer to Loan your wages to the Bank? 
Do not. 
 
They are liable for any money that they do not place in your hot hand. In other words if the employer loans your money to the bank and the bank does not give it to you, your action is against your employer, not against the Banks as you never received the money your employer owes you.
 
Ref.
https://peakprosperity.com/blog/104368/money-under-fire
http://www.abc.net.au/radionational/programs/breakfast/new-taskforce-to-crack-down-on-'black-economy'/8118566
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http://www.agrimoney.com/feature/relief-for-land-owners---price-fall-reminiscent-of-great-depression--479.html