IN-DEPTH: TRANSCRIPTION - UnderTheLens - 06-24-24 - JULY - The US Inflationary Black Hole
SLIDE DECK
TRANSCRIPTION
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Thank you for joining me. I'm Gord Long.
A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.
Always consult a professional financial advisor before making any investment decisions.
SLIDE 3 - COVER
The Federal Reserve’s immediate task is straightforward - cut the funds rate or at least signal cuts WHEN economic data indicate it's necessary.
However, the longer-term impact of this action is complex.
- The resulting surge in liquidity will boost the economy and prices, leading to a larger deficit.
- Renewed Trump tax cuts and increased spending will further contribute to inflation, regardless of the election outcome.
- If Trump wins, his plan to raise tariffs to 10% will add to domestic price increases, effectively taxing US consumers.
These factors point to significant inflationary pressures in 2025, with the Fed having less capacity to counteract these forces than it has had in the past 40 years.
However, the problem is much worse than this.
SLIDE 4 - AGENDA
To show you exactly why that is the case and what few are talking about I want to discuss some hard realities highlighted here.
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Let’s start with the Achilles Heel of a Fiat Currency which we now operate under that began in the early 1970’s – just over 50 short years ago.
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To better understand modern inflation is to first under Fiat Currencies it is measured against.
That is because inflation is the lost purchasing power of that currency.
A Fiat Currency is inherently inflationary, gradually losing its purchasing power over time
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This phenomenon disproportionately benefits a select few at the expense of the broader population.
- Fiat Currencies cause economic instability by perpetuating cycles of boom and bust that disrupt market equilibrium and create societal inequalities.
- Fiat Currencies drive excessive indebtedness within economies and fuel the unchecked expansion of the state, often at the expense of citizens’ and companies’ freedoms.
- Fiat Currency is dishonest money, and engaging with fiat money, daily erodes the morals and values of the people involved in its circulation.
- Fiat Currencies foster “collective corruption,” wherein many people become proverbially ensnared by the structures that fiat currencies establish. This fosters dependency and entrenches its influence.
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- Fiat Currencies act as catalysts for the expansion of the state, making it bigger and more powerful. Companies receive new orders from the state, prompting adjustments in production and employment to meet artificial demand.
- Users of Fiat Currencies keep their life savings in fiat money.
- Users invest, directly or indirectly, in government bonds and bank debentures and maintain time and savings deposits.
- Gradually the users become profoundly reliant on the perpetuation of the fiat money system, consenting to nearly any measure proposed by the state (and the special interest groups taking advantage of it) to keep the fiat money system going.
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Fiat Currencies have a crucial vulnerability which lies in its dependence on the demand for the currency. Essentially, it reflects users' desire to hold the currency, influenced by a multitude of factors.
- Users tend to maintain money balances relative to their income.
- As income rises, so does the desire to hold money.
- The demand for money typically diminishes when interest rates rise.
- This is because holding onto money entails opportunity costs when higher returns could be earned through, say, bank deposits and bonds.
- History demonstrates that the demand for money remains relatively steady when there is a high level of trust in the currency, meaning people are not worried that the purchasing power of their money will decline or be destroyed.
- States and their central banks seek to handle the Fiat currency system in their favor. Their primary strategy involves creating illusions and deceiving the populace to maintain control and influence.
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Let’s now talk about the 2% Inflation Targeting we are continuously told is the goal of most global Fiat Currency regimes.
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Fiat Currency users are often sold the narrative that inflation of 2 percent equates to “stable money”—a claim that is, of course, inherently false. In reality, a 2 percent inflation rate destroys the purchasing power of money by 2 percent every year.
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The mathematical reason for this is because the US Central Bank normally pursues a 6 percent annual growth in money supply to achieve 4 percent growth in nominal GDP, composed on average of 2 percent of real growth and 2 percent of inflation.’
ACTUALLY THE 2% INFLATION IS A HIDDEN GOVERNMENT TAX & THE MEASURE OF THE DEGREE OF FINANCIAL REPRESSION BEING ATTEMPTED.
It is collected through Reduced Purchasing Power and the Time Value of Money Usage. That is the government spends it first at a higher Purchasing Power before Users finally spending it through Velocity of Money at lower levels of Purchasing Power.
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Is there a Tipping Point that comes with the Achilles Heel of Fiat Currencies and the use of 2% Inflation targeting we should be watching for?
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The primary concern is the enormous accumulation of debt within the fiat money system, eventually reaching a tipping point of unsustainability.
We will talk more about that later.
At that juncture, people will be confronted with the question: Should the fiat money system collapse under the weight of deflationary pressures, or should the outstanding debt be financed by creating new money?
Unfortunately, history suggests that in a time of “existential crises" people consider expanding the money supply as the lesser of two evils.
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Once initiated, a deliberate inflation policy becomes incredibly challenging to contain, let alone reverse. It has the propensity to spiral out of control, potentially culminating in high inflation or even hyperinflation, thereby precipitating a collapse in the demand for money and eroding the very foundations of the fiat money system.
However, in such a dire scenario, one must reckon with the state’s determination to avert the demise of its fiat money regime at all costs. The state, (as we know it today), can be expected to exhaust all available measures to safeguard the continuity of its monetary system.
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In response to a crisis, the state can be expected to resort to drastic measures,
such as:
- Imposing price and capital controls,
- Nationalizing banks and large corporations, and
- Transforming the economy into a highly regulated command economy.
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| THE 3% INFLATION TARGET
Expect central banks to soon be increasingly talking about 3% Inflation as the New "Neutral Rate". The reason for this is because, as we showed earlier, the US Central Bank normally pursues a 6 percent annual growth in money supply to achieve 4 percent growth in nominal GDP. It is likely now to be composed on average of only 1 percent of real growth and 3 percent of inflation (called Stagflation – also more on that later). |
| Under such circumstances, the state can be expected to assume unprecedented control over production, increasingly dictating what goods will be produced, how much, when and by whom, even regulating who will be allowed to consume how much and when.
In other words, the economies are increasingly forced to shift towards a form of fascism. A bleak outcome indeed! SLIDE 18 Next it is very important you understand the Time Value of the Usage of Money. This is a better way of appreciating what the bankers refer to as the Time Value of Money. SLIDE 19 Banks played a central role in the creation and adoption of the shift from Sound Money (backed by Gold) to Fiat Currencies 50 years ago. Bank mentality in this pre-computer time of adoption of Fiat Currencies was focused on the Time Value of Money. The "Float" was a critical element of banking and the importance of the time value of the money within the float. It was a logical step to adopt the sister of this or the Time Value of the Usage of Money for Government financing. That is the first user of the money (the government) has a higher purchasing power than the downstream users (you and I) as part of the flow and Velocity of Money. This also results in higher term premiums and equity risk premiums as illustrated in the chart shown here. SLIDE 20 Fundamentally, increases in money supply sets in motion an exchange of nothing for something. This diverts real savings from wealth generators to non-wealth generators. Consequently, this weakens the wealth-generation process and in turns the pace of economic activity. Now, when money enters goods markets, it means that we have more money per good - that is the price of goods has risen. Hence, what we have here is the increase in goods prices and a weakening in economic growth. This is what stagflation is all about. The outcome of the monetary pumping is always stagflation. It is not always visible, though. As the pool of real savings comes under pressure, the phenomenon of stagflation becomes more visible. When this occurs the chart shown here happens. The countries debt increasingly starts tracking the premium for credit defaults swaps. SLIDE 21 Unfortunately, there has been a lot more going on behind the scenes which we need to fully appreciate. SLIDE 22 Increasingly since the 1980’s the government has been playing all sorts of statistical reporting games which has effectively hidden the real level of inflation. I have reported on methods such as Hedonics, Imputation, Substitution and Basked Modification and other games many times before. What wasn’t hidden from us was the continued loss of Purchasing Power of what money could buy. This is why I said previously that CPI is the measurement of Inflation while lost Purchasing Power is what inflation is. When Purchasing Power is falling and Economic Growth is weak you have Stagflation. SLIDE 23 The way to effectively visualize what is occurring is to think of Stagflation as a potential Black Hole. It is easy to unwittingly and unsuspectingly get into but extremely if not impossible to get out of once in. The secret is to avoid it with sound economic policies before you reach the “Event Horizon”! Many perceive we are potentially entering such a situation. SLIDE 24 Their reaction is to apply traditional Keynesian thinking to the problem. But here it doesn’t work! What must be done to control Inflation crushes growth. What must be done to foster growth inflames Inflation! It is the proverbial “Catch 22”. The solution therefore is you must catch it early and aggressively. SLIDE 25 The problem today is that the distortions, and games we have been playing for a very long time, have let us get much too deep into the Black Hole because our measures have failed to alert us. The political “Kick-the-Can-Down-the-Road” policy approaches have only fostered “tweaking” the warning measures to buy time and make it someone else’s problem! SLIDE 26 Let me be specific. Inflation through the statistical distortions such as Hedonics, Substitution, Imputation and others which I have chronicled have distorted Inflation as measured by the CPI to such a degree that Inflation, Inflation Breakevens and Real Rates are ineffective. SLIDE 27 I most recently laid out how the new world of Inflation Swaps has exploded in an attempt to protect the more sophisticated institutional investors from these mirrors and mirages. SLIDE 28 Economic Growth is also seriously distorted by an obsolete formula that is based on sound money and adopted during the era of the gold standard and fails miserably to adequately describe real growth in an era of massive government debt, transfer payments and debt financed consumption now being nearly 70% of the economy. The creators of the simple formula never imagined an economy like the one we operate in today. SLIDE 29 Our 2017 Thesis paper entitled “The Illusion of Growth” lays out the indisputable reality of the facts in its 111 pages of detailed analysis. SLIDE 30 The central problem and difference with what occurred in the 1970’s is important to understand. We not only have an order of magnitude worse “black hole” problem but our tools are dull and our thinking seriously obsolete. Our politically polarized governance is also a big problem but which I must leave for another day! SLIDE 31 Because of the games we have played we are now below the event horizon and Stagflation is already well underway and entrenched. We are locked in for the ride! SLIDE 32 Besides statistical games we have the problem of what is best labeled “Deflection”. Central bank officials and mainstream economists frequently attribute inflation to various external factors, such as alleged price gouging by greedy businesses or supply disruptions by oil-producing nations, while vehemently rejecting the notion that inflation is a monetary phenomenon resulting from the central banks’ fiat money printing. In fact, central banks are determined to avert a permanent drop in the DEMAND for money at all costs. When the demand for money falls, people tend to exchange their money for alternative assets, such as stocks, real estate, precious metals, etc. SLIDE 33 Consequently, the prices of these goods surge—further exacerbating the decline in the demand for money. In extreme scenarios, this can trigger a widespread flight from money, predicting a collapse of the financial and economic system. To maintain the fiat money system, central banks meticulously adjust the level of inflation to firstly ensure a gradual and ongoing erosion of the value of money, subtle enough to either go unnoticed or be reluctantly accepted. SLIDE 34 Controlled inflationary pressures act as a defense against episodes of goods price deflation, which have the potential to make the fiat money system come crashing down. Central banks aim to prevent situations where inflation spirals out of control, where hyperinflation destroys people’s demand of fiat money entirely. SLIDE 35 So what are the consequences of all this? Economy Stagnation followed by Stagflation leading to an inevitable Debt Crisis forcing a return to the principles of Sound Money. How does that happen? SLIDE 36 Starting from a situation of equality between the current and the expected rate of inflation, the central bank normally decides to boost the rate of economic growth by raising the growth rate of money supply. As a result, a greater supply of money enters the economy and each individual now has more money at his disposal. Because of this increase, every individual believes he has become wealthier. This raises the demand for goods and services, which in turn sets in motion an increase in the production of goods and services. All this, in turn, increases producers’ demand for workers, and subsequently, the unemployment rate falls below the equilibrium rate (the natural rate). SLIDE 37 Once the unemployment rate falls below the equilibrium rate, this starts to exert an upward pressure on price inflation. Consequently, individuals come to realize that monetary policy has loosened. People begin to understand that their previous increase in money purchasing power is dwindling, so they form higher inflation expectations. All this diminishes the overall demand for goods and services. A dwindling in overall demand slows down production of goods and services, which, in turn, pushes the unemployment rate higher. At this point, we are where we were prior to the central bank’s decision to loosen its monetary stance, but with a much higher rate of inflation. SLIDE 38
SLIDE 39 Loose monetary policies of the central bank can only temporarily generate economic growth. Over time, however, such policies will cause higher price inflation. Hence there is no long-term trade-off between inflation and unemployment. SLIDE 40 In a market economy, a producer exchanges his product for money and then exchanges the received money for the products of other producers. Alternatively, we can say that an exchange of something for something takes place by means of money. Things are, however, not quite the same once money is generated out of “thin air” because of loose central bank policies. Once that happens, it enables an exchange of nothing for something, a diversion of wealth from wealth generators to the holders of the newly generated money. SLIDE 41 The holder of money out of “thin air” obtains goods without contributing to the pool of consumer goods or to the pool of real savings. This means that real savings are diverted from wealth producers to those money holders. In the process, wealth generators are left with fewer consumer goods at their disposal, which weakens their ability to expand the real economy. An exchange of nothing for something diverts real savings and will take place regardless of whether the increase in money supply is expected or unexpected. This means that contrary to Mr. Phelps and Friedman, even if monetary increases are expected, they will undermine economic growth. SLIDE 42 Increases in money supply create exchanges of nothing for something, diverting real savings from wealth generators to non-wealth generators. Consequently, this weakens the real savings formation process and weakens the economic growth. Also, note that the price of a good is the amount of money paid for the good, so when this money enters a particular market, more money is paid for the good in this market, increasing the prices of goods. We then have a situation whereby increases in money supply undermine the process of wealth generation, thus stifling economic growth. At the same time, we have more money per good, which increases their prices. Hence, we have both the increase in goods prices and a diminishing of economic growth, which we call stagflation. SLIDE 43 Stagflation is the ultimate result of monetary pumping. Therefore, whenever the central bank adopts an easy monetary stance, it also sets stagflation in motion in the months ahead. The fact that over time a strengthening in the monetary growth may not always manifest through a visible stagflation, it does not refute what we have concluded. What matters for the state of an economy is not the manifestation of stagflation, but rather its causes. The severity of stagflation depends on the state of the pool of real savings. If this pool is declining, then a visible decline in economic activity will likely ensue. Moreover, on account of past monetary pumping and the consequent increase in price inflation, we will have a visible stagflation. SLIDE 44 Conversely, if the pool of real savings is still growing, economic activity is likely to follow suit. Given the rising momentum of prices, we will have positive correlation between economic activity and price inflation. Note that the symptoms of stagflation are not visible here because of a growing pool of real savings. We can conclude that if, on account of past monetary pumping, we do not observe the symptoms of stagflation, this raises the likelihood that the pool of real savings is still growing. Conversely, if we can observe the symptoms of stagflation, then most likely the pool of real savings is declining. As the pool of real savings comes under pressure, the phenomenon of stagflation becomes more visible. SLIDE 45 What are the conclusions? SLIDE 46 FIAT CURRENCY DEMAND MUST BE REDUCED To mitigate the damage caused by the fiat money system, or even dismantle it altogether, the first step must be to target its Achilles’ heel, weakening the demand for fiat money. The less fiat money people demand, the smaller the damage inflicted by the fiat money system will be. • First and foremost, it can be accomplished by educating the populace about all the significant harm perpetuated by the continued existence of fiat money and the consequences it has. • This entails, as a first step, highlighting the adverse impacts it has on individuals and their communities, and encouraging people to use fiat money for transactions rather than for savings. • This can be through discouraging investments in government bonds or time or savings deposits in banks, while encouraging investments in tangible assets such as stocks, precious metals, land and property. SLIDE 47 • Further actions can include ceasing the support for governments or politicians who endorse the fiat money system and fail to take actions to dismantle it. • Ultimately, of course, it is crucial to inform people that sound money is indeed possible. This involves advocating for people’s freedom to choose their preferred money, whether it be gold, silver, Bitcoin, or any other alternative. By allowing individuals the autonomy to select their preferred currency, we effectively target the Achilles’ heel of the fiat money system, ultimately benefiting the vast majority of people. SLIDE 48 I encourage you to review our 2023 Thesis Paper entitled: “The Great Stagflation”. In addition you might want to also revisit our 2017 Thesis Paper entitled: “The Illusion of Growth”. Hopefully this will arm you for what clearly lies ahead! |
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As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.
That day is still in the future so take advantage of the opportunities as they currently exist.
Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.
The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.
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I would like take a moment as a reminder
DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.
As negative as these comments often are, there has seldom been a better time for investing. However, it requires careful analysis and not following what have traditionally been the true and tried approaches.
Do your reading and make sure you have a knowledgeable and well informed financial advisor.
So until we talk again, may 2024 turn out to be an outstanding investment year for you and your family?
I sincerely thank you for listening!
