Black Coffee: The Central Bankers’ Failing Battle to Stem the Tide

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 hope everybody had a great week. I know I did. Of course, I love weekends even better, so let’s dig right in and then I’ll get mine started.

All the perplexities, confusions, and distress in America arise, not from defects in their constitution or confederation, not from want of honor or virtue, so much as from the downright ignorance of the nature of coin, credit, and circulation.

— John Adams, letter to Thomas Jefferson, August 25, 1787

Then he heard a distant rumble — louder than thunder. Looking out to sea, Sawat saw a grey wall of water, the width of the horizon, tumbling at high speed towards the shoreline.

— Kevin Ansbro, Kinnara

Credits and Debits

Debit: As a kid growing up in the 1970s, I’d get wide-eyed whenever I spotted a US $100 bill; they were a rare sight. Not anymore. In 2008, the $100 bill surpassed the $20 bill in circulation volume — and this year the Benjamin surpassed the $1 bill, making it the most widely circulated bill. In fact, the number of $100 bills has doubled since the Great Financial Crisis. Remember that the next time you’re told inflation remains subdued.

Debit: On a related note, I see the mortgage default rate last quarter climbed 3% year-over-year; that’s the first such annual increase since the Great Financial Crisis in 2008. Yikes. Of course, since we’re living in the best economy ever, I’m sure that’s nothing to worry about.

Credit: Then again, maybe we should. Dave Kranzler notes that 21 key global and US economic indices are all worse now than back in late 2007 — despite the fact that the Fed funds rate is less than 50% as high as it was previously. That’s like having a six-shooter with only a few rounds in the cylinder — and bad news for those who are expecting the Fed to ride to the rescue and save the day like they have during previous recessions.

Debit: By the way, as the Fed has done its best to extend — if not completely eliminate — the business cycle over the past few decades, the number of recessions have become fewer, and the time between them has grown. As a result, a growing number of people have little experience with economic downturns. While the average adult of all ages has lived through six recessions, 40-year olds have experience just two. See for yourself:

Debit: As Egon von Greyerz points out, in 1971 US debt was $400 billion versus $22 trillion today; a 55-fold increase. At the same time, US GDP was $1.2 trillion in 1971 versus $20 trillion today. In other words, a 55-fold increase in debt only produced a 17-fold increase in GDP. And that’s when $1 of debt yielded $5 of growth; today that same dollar yields less than 40 cents of growth! Am I the only one who sees a problem here?

Credit: Meanwhile, 2019 budget deficit is on pace to surpass $1.1 trillion, which would be the highest since 2012. As Ryan McMaken observes, “What’s especially notable is the current deficit is occurring during a time of economic expansion, when deficits should be much smaller. So if they’re this large now when times are good, how big will they become when we enter a recession?” Good question. Hopefully they’re not this big:

Credit: Of course, America will continue using debt to enjoy its artificially-high standard of living. But there are signs the time is fast approaching when there will be an insufficient number of buyers willing to continue funding our fiscal irresponsibility. As a result, financial analyst Lance Roberts says “the next crisis will be the ‘great reset’ — which will also make it the last crisis.” Wow. And some of you think I’m a doom-and-gloomer?

Credit: One sign that America’s ability to live beyond its means is drawing short, is an article published this week in the Global Times, which is the unofficial mouthpiece for China’s government; in it, they call for a new international monetary system that is anchored to gold “as a means of rebalancing the world financial market.”

Credit: It’s one thing when a Chinese mouthpiece calls for a new monetary system. It’s entirely another when Bank of England Governor, Mark Carney, takes aim at the dollar’s “destabilizing” role in the world economy, calling for a replacement reserve currency, as he did this week. No, really. Folks, I can’t stress this enough: When the dollar finally loses its role as the world’s reserve currency, its purchasing power is going to fall sharply.

Debit: So how did we get here? Why are millennials the first generation to miss out on the American Dream? Well … blame the financialization of the American economy. Fifty years ago, financial services comprised 4% of the US economy; today it’s roughly 20%. And that gargantuan Wall Street economy is why the vast majority of all income growth goes to the top 10% of Americans.

Credit: If there’s a silver lining to America’s Wall-Street-created Frankenstein economy, Charles Hugh Smith points out that during the next recession, “financialization — the parasite that has eaten our economy from the inside — will collapse along with the mountains of debt that fueled it.” That it will. Best of all, financially speaking, the world will begin to start making sense again. Which is more than I can say for this:

Credit: Believe it or not, it’s possible even central banks may not survive the coming reckoning. As Tuomas Malinen notes, “Most economists and the vast majority of the general population erroneously believe that central banks are, basically, indestructible. But most fail to appreciate that with the current level of liabilities central banks hold … we may be (approaching) the end of the central banking era.” Let’s hope so.

The Question of the Week

[poll id="283"]

Last Week’s Poll Results

Which of these traits would you rather have?

• Eat without getting fat (36%)
• Photographic memory (34%)
• Never get tired (30%)

More than 1700 people responded to this week’s poll and it turns out that Len Penzo dot Com readers were almost equally split regarding their particular preference for an extraordinary personal attribute. As for yours truly, I think I’d prefer eating without getting fat. Anyone who sees me would know that is definitely not a trait I currently have.

By the Numbers

A new study shows that student loan debt continues to be a growing issue in the US as the cost of college continues to rise:

$1,520,000,000,000 Current total student loan debt outstanding.

57 Percentage of graduates from the Class of 2018 at non-profit 4-year public and private colleges with student loan debt.

$38,186 The average student loan debt outstanding for Class of 2018 grads from private institutions.

$27,524 The average student loan debt outstanding for Class of 2018 grads from public institutions.

$38,776 The average student debt per borrower in Connecticut. That is the highest among the 50 states.

$19,742 The average student debt per borrower in Utah. That is the lowest among all 50 states.

Source: Forbes

Useless News: College Life

On the first day of college, the dean addressed the students, pointing out some of the rules: “The female dormitory will be out-of-bounds for all male students, and the male dormitory will be off limits to the female students. Anybody caught breaking this rule will be fined $20 the first time. Anybody caught breaking this rule the second time will be fined $60. Being caught a third time will cost you $180. Are there any questions?”

One student raised his hand and asked, “How much for a season pass?”

(h/t: Cowpoke)

Other Useless News

Hey, while you’re here, please don’t forget to:

1. Click on that Like button in the sidebar to your right and become a fan of Len Penzo dot Com on Facebook!

2. Make sure you follow me on Twitter!

3. Subscribe via email too!

And last, but not least …

4. Consider becoming a Len Penzo dot Com Insider! Thank you.

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

A few days ago I found this invitation from Jamie sitting in my inbox:

I’m hosting a Google On Air Hangout to discuss buying a car! The event will take place on Saturday, August 313st at 12 p.m.

Um … I think you meant to say “August 313th” — unfortunately, I’m going to be out of town that day.

If you enjoyed this, please forward it to your friends and family. I’m Len Penzo and I approved this message.

Photo Credit: brendan-c