During the hyperinflation of 1921-23 in Germany, prices of food in a restaurant could rise several thousand papiermarks (paper marks) in a single day. People who sold a product early in the day and bought breakfast with the proceeds ate better than those who sold early and waited till the end of the day to buy.
That’s a historical fact, of course, but it’s also an illustrative point. People who receive an inflating currency first enjoy more purchasing power than those who get it later. And in America, those who get newly created dollars first are big banks and big businesses. The rest of us line up for dinner and are charged more for the meal than the privileged few who ate earlier.
The Fed tries to keep inflation at two percent because the wealth transfer from the middle and lower classes to the upper class is hard for most people to detect at that rate. When the rate starts to get into the double digits, as it is now (though current reporting criteria yield a much lower number), people start to notice.
The masses seem disinclined to the study of economics, of course, so most will never truly understand what’s going on. But they do see that things are getting much more expensive and life is getting much harder for them while many wealthy people just keep getting richer.
That process can go on for a long time, but it tends to stop at some point, and it’s seldom pretty. Recall that the French Revolution was a very bloody episode in the rich-versus-poor saga. And recall also that Robespierre was introduced to the business end of his beloved guillotine toward the end of the French Revolution. It was appropriately said of the period that, “revolutions eat their children.” Obviously from observing that same period, they eat a great many other people, too.
Our purpose is not to be morbid. No human knows where this will all lead, and some wealth inequality disputes have ended more peacefully—especially in the West. Still, it’s clear that the government and the Fed are playing with matches in the magazine (which gives a whole new meaning to the phrase “crack-up boom”). If we escape catastrophe, it likely won’t be because of sage leadership at the top.
The point is that it helps to know who the players are, what they’re doing, what the likely consequences will be, and what strategies are likely to be most productive and protective of both wealth and safety in the weeks and years ahead. That’s what the below communications are dedicated to. They’re offered at no cost, but they’re rich in value.
Key Takeaways:
- When confidence is everything
- Xi’s hand of friendship is a knuckle breaker
- Some people are too easily pleased
- CPI or CP-lie?
The McAlvany Weekly Commentary: “The Fed’s mark-to-market losses as of June stood at over a trillion dollars.” Achieving that dubious distinction “took several hundred PhDs. So your man or woman of average intelligence is only capable of losing an average amount of money. It’s the extraordinary mind that can lose an extraordinary amount of money.” David and Kevin go on to explain that the Fed can’t go bankrupt, but can experience a crisis of confidence. And given that the “everything bubble” we’re currently in the latter stages of is also called a “confidence bubble,” one would think that that fact occupies much of the Fed leadership’s thinking. The hosts also discuss the Treasury’s recent bond auctions and the lack of buyers at the long end, how economist Joseph Schumpeter’s concept of creative destruction explains the current rash of bankruptcies among zombie companies, and how high interest rates have affected corporate raiders.
Credit Bubble Bulletin: Doug focuses this week on China—in particular on Xi Jinping’s visit with President Biden in San Francisco—citing or quoting several articles regarding the events there. It’s clear that Xi was at his conciliatory and charming best, but Doug provides extensive evidence of Xi’s tendency to expose some serious canine teeth whenever he smiles. “It seems obvious that Beijing has decided to play nice only because the nice guy act is today a necessary expedient for the tough guy to be in the most advantageous position to later impose his will. Wolf Warrior in Panda’s Clothing.” Doug then turns to the market, noting that, “A lot has gone right…of late” before moving on to news of inflation and related developments.
Hard Asset Insights: Morgan begins his letter this week with the outsized market response to a miniscule (.1%) improvement in CPI. Stocks boomed, though even the small improvement resulted from suspect developments. Clearly the markets are high on hopium, and any small indication that their desired outcome is materializing is an excuse to party like a rockstar. Morgan explains the thought process behind the overreaction, and then showers cold water on the whole party by bringing up silly things like facts and logic. “Despite the celebratory stock market gains this week, much of the week’s data actually reinforced the concern that a full-blown recession rather than imminent recovery awaits unsuspecting stock market bulls.” Data-schmatta. Who needs facts? This ship is unsinkable… What’s that scraping sound?
Golden Rule Radio: Miles again shares hosting privileges with Tory and Rob. Together, they go over the week’s news, noting that it was highly eventful. They begin with the CPI print that came in higher than expected, but put that fact in context by pointing out not only the suspect contributors to the number, but the highly manipulated way in which CPI is now calculated. Many of the most significant outlays of money by consumers on a daily or monthly basis are omitted from CPI. Miles puts the incredibly optimistic response by the markets on “paper” by showing a chart of the market action. In the most recent bounce, there have been four gaps in the chart, indicating jumps in market action caused by wild enthusiasm and heavy buying. Ominously, Miles notes that, “you always close your gaps,” meaning that what goes up must come down. The hosts also look at the dollar’s recent down leg, election year market moves, and historically applicable gold charts.
