The United States government has effectively defaulted on its obligations four times in history.
WTF???
It happened to the Continental Dollar in 1779, the Greenback during the Civil War, the 1934 Liberty Bonds, and Nixon breaking away from the gold standard in 1971. If you count the Greyback, the currency of the Confederacy, that’s five effective defaults… and this starts to look less like an outlier and more like a pattern, complete with economic chaos and civil strife each time.
You can’t fight wars without a lot of money. Each new war requires a new, fake kind of money. That allows the government to accumulate vast new debts, and then pay them off in a depreciated currency. It’s a clever way of stiffing your creditors through counterfeiting and inflation.
Controlled Demolition of the Dollar
By now, you’ve seen the inflation data and the political panic it’s causing today. President Biden has directed his National Economic Council to “pursue means” to reduce higher costs, especially energy costs. This is after he banned new oil and gas drilling permits on federal lands and shut down the Keystone Pipeline. He’s starting to make Jimmy Carter look like a genius.
In the meantime, the Labor Department’s index of consumer prices – gas, groceries, healthcare, rents, etc. – was up 6.2% in October from a year before. That’s a 30-year high. Core inflation – which excludes food and energy – rose at 4.6% (the fastest rate since 1991). Producer prices, in the meantime, were up 8.6%. That’s the highest rate in 11 years.
The powers that be (like Federal Reserve Chairmen Jerome Powell and Treasury Secretary Janet Yellen) would like you to believe that this inflation is transitory – that it’s related to supply chain issues or labor shortages coming out of the pandemic. Yellen told National Public Radio that the Fed “would not permit” higher inflation expectations to “become embedded in the American psyche.”
Ha!
This is the same Yellen who didn’t see inflation coming in the first place. The Fed, who didn’t see it either, will now control it. These people really do believe they can command the economy.
And while they live in their multimillion-dollar homes, do they (or can they) even care about a higher cost of living for ordinary Americans? Aren’t they already engaged in a controlled demolition of the dollar?
Take a look at the text below from a study by the Richmond Federal Reserve on the history of Financial Repression, which, as a reminder, means keeping official interest rates lower than the actual rate of inflation:
In many countries during 1945-1980, financial repression effectively lowered the real returns to government debt holders and helped governments reduce their debt-to-GDP ratios, according to research by Reinhart and M. Belen Sbrancia of the IMF. Based on their calculations, real returns on government debt were negative in many countries over 1945-1980. The real returns to bond holders averaged -0.3 percent in the United States, and real returns were even lower on the bonds of those European governments that had been particularly ardent practitioners of financial repression, coming in at -6.6 percent in France and -4.6 percent in Italy . Real returns in Argentina over the period were a confiscatory -21.5 percent per year.
Financial Repression – something I’ve warned you about before – is a way for heavily indebted governments to reduce the real amount of money they have to pay back to creditors. Governments can lower debt-to-GDP numbers by keeping official interest rates below the rate of inflation. Bondholders get paid back in nominal terms.
But inflation – which the government “allows” to run hot – eats them alive. That’s where we are now – a stealth devaluation in the dollar that begins by stiffing creditors.
Why now? Because since 1850 – in 51 out of 52 countries, according to Horowitz Research – any time a country’s gross government debt is over 150% of GDP, those countries have effectively defaulted through either through devaluation, high inflation, debt restructuring, or outright default. Japan is the exception, for reasons that are beyond the scope of this week’s update.
U.S. GDP in 2020 was $22 trillion. Current gross government debt is $28.9 trillion. Yes, it’s a bit less if you “net” it out and remove the money the government “owes” to itself. But the debt-to-GDP ratio is 125% – well over the historical level where governments begin to find ways to default without actually defaulting.
And now you know why the Fed and Washington don’t really care about your higher grocery or energy bills. They have a bigger problem: how to keep the dollar con game going. And they know they’ve reached a critical stage. They want to pay off big debts – and rack up new ones – in a depreciating currency (they also want to get as personally rich as possible through higher stock and house prices).
Stocks are at all-time highs. Home prices are too (more on housing in the “Debt vs. Equity” section below). Bitcoin, wages, job openings, inflation at 30-year highs… everything is rising. Yet the financial elites are holding interest rates near zero and only slowly winding back billions in monthly stimulus to financial markets. Ask yourself why.
A controlled demolition of the dollar allows them to transfer trillions in wealth to themselves, via higher stock and house prices. It leaves wage earners and savers, stuck in dollars, holding the bag.
Different century. Same elites. Same strategy. Same greed.
In next month’s report, I’ll show you how this controlled demolition plays out. Inflation is both a monetary and psychological phenomenon. Once it takes hold in the popular imagination, it runs rampant. The only contrarian possibility, at this point, is that bond yields have already peaked and may go deeply negative. I’ll look at both scenarios as we look to re-balance our asset allocation strategy for 2022.
Debt vs. Equity
Now, let’s move on to housing. One quick note on house prices: Median U.S. house prices are up 30% in in the last 10 years. Incomes, meanwhile, are only up 11%. If you go back over the last 50 years – since Nixon unhitched the dollar from gold – house prices are up 118% while incomes are up only 15%. House prices have gone up 7.6 times faster than incomes since 1965, according to research done last month by Real Estate Witch. Author Michelle Delgado writes:
Since 1965, average home values have skyrocketed from $171,942 to $374,900 – a 118% increase. Meanwhile, median household income crept up just 15%, from $59,920 to $69,178 in 2021-inflation-adjusted dollars… To afford a home in 2021, Americans need an average income of $144,192 – but the current median household income is actually $69,178… The average house-price-to-income ratio is 5.4, more than double the maximum of 2.6 experts recommend.
It’s not surprising that income growth, adjusted for inflation, has been so poor. Automation, globalization, and de-facto dollar devaluation have lowered the real value of your wages. Most Americans have been going sideways or backwards for at least 30 years. But what about house prices?
Around 25% of the gain in house prices since 1965 has taken place since the housing market crashed in 2008. In the previous 43 years, house prices only went up around 1.74% a year on average – around the rate of inflation. In other words, before the housing market bubble, you didn’t try and get rich flipping houses in America. Houses weren’t financial assets or tools to move up your retirement date through speculation.
All that changed with the financialization of the market in the mid-2000s. Wall Street got involved in securitizing mortgages and insuring them. We had a great boom. And then a bust. And now? Check out the chart below. It’s taken from the New York Fed’s Quarterly Household Debt and Credit Report, which was released earlier this week.
Notice anything weird? The first thing I notice is that the previous high for new mortgages was in late 2003. That makes perfect sense. Why?
In June of 2003, former Fed Chair Alan Greenspan lowered the Fed Funds rate to 1%… and left it there for 12 months. It was extraordinary at the time. And it kicked off a mortgage boom which would result in house price boom… and then later a house price crash (one which I predicted in my 2005 book, The Bull Hunter).
It was only in the latter half 2020 that new mortgage originations hit a new high. The second thing I notice in the chart above is the vast majority of new mortgages were taken out by borrowers with a credit score higher than 760. For most of the previous 20 years, there was a more even distribution. People with lower credit scores were actively buying new homes, until recently.
When the Fed began chucking $40 billion a month into the mortgage-backed security market in March of 2020, it kicked off another housing boom. But it’s been a housing boom for the wealthy, who have high credit scores and jobs that can be done remotely, through Slack, Zoom, and email. Household debt increased by $286 billion in the third quarter of this year, to a record level of $15.24 trillion ($230 billion of that increase was mortgage debt).
The Fed also reports that the total net worth of Americans has increased by $31.1 trillion since the pandemic began. Around 65% of that increase – or $20.46 trillion – has come from higher stock prices. But $4.5 trillion has – or around $910 billion per quarter for five quarters – has come from higher house prices. Homeowners and stock owners have never had it better.
But you know what they say when things can’t get any better. They don’t. The Fed has blown another gargantuan bubble in stock and house prices. And the people who have the most to lose – those who own homes and stocks – are at or near retirement age. This is why we continue to warn you about the “Big Loss” ahead.
Crazy Times Are Dangerous Times
There are times in history when whole countries go a little crazy. France in 1789… Germany in 1933… China in 1968. If you take anything away from this week’s update, I hope it’s this: the United States of America is going a little crazy… right now.
Crazy times are dangerous times. Look around you. Inflation is starting to steamroll the Middle Class – where home ownership is either out of reach entirely or only achievable by going into debt for life.
Federal Reserve governors, senators, and the Speaker of the House are getting rich on stocks, lobbied by the technology, defense, and pharmaceutical companies they’re supposed to regulate.
And you wonder why people are upset? Why they seem sharply divided and angry on almost any issue (masks, vaccines, the Kyle Rittenhouse trial, climate change, debt, gender, critical race theory, etc.). These are all signs of a kind of collective madness. And our point all along has been that it starts with the money.
Once the money goes bad, everything follows. The big metrics we use to follow the money tell us we’re at a tipping point with the money. And history shows that once the money goes, civil society, the free market, and individual liberty are all in grave danger. Helping you understand and avoid that danger is our big job for 2022 and beyond.
Dan Denning
Coauthor, The Bonner-Denning Letter
Laramie, Wyoming
