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.
And so it goes … the fifth week of the ongoing financial market meltdown. As I noted last month, I wish I could say otherwise, but the reckoning is finally here; the piper is at the door and it’s time to pay up. Too bad most people still don’t seem to understand that.
Okay, let’s get started …
In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: ‘If you don’t work you die.’
— Rudyard Kipling, The Gods of the Copybook Headings
Credits and Debits
Debit: Did you see this? Although it’s terribly inefficient, barter is back. Yeah, baby! Eggs for toilet paper. An Easter ham for Clorox wipes. Malbec wine for N95 masks. Surprised? You shouldn’t be — pooh pooh this all you want, folks, but barter is the telltale symptom of a collapsing economy. Now fess up; you thought that could never happen here in America, did ya?
Debit: Meanwhile, in the last four weeks, 22 million Americans have filed for unemployment. For those counting at home, that’s more than the total number of jobs gained since the end of the Great Recession in 2010. It’s also 710 jobs lost for every confirmed American death from COVID-19 — a number that is surely lower than it should be, since the coronavirus is being blamed even when patients had underlying conditions …
Debit: In other news, it’s expected that over the course of the next several quarters, the Fed’s balance sheet will climb to $10 trillion. Remember, last September it was “just” $3.6 trillion, give or take a few billion. But I’m sure that’s nothing to worry about. Here … have an ice cream cone:
Credit: Since 2008 it has taken more than $1 of debt to produce a dollar of growth; today, a dollar of debt produces less than 40 cents of growth. “In other words,” Lance Roberts says, “without debt, there has been no organic economic growth. And what is indisputable is that running ongoing budget deficits to fund unproductive growth is not economically sustainable.” Imagine that.
Credit: Roberts continues, “The reality is that the ability to keep pulling forward future consumption to stimulate economic activity is gone. There are only so many cars, houses, and other goods that can be purchased within a given cycle — and after a decade, that limit has been reached. What if the Fed is throwing money into a debt chasm they can no longer fill?” For the answer, let’s go to this very short film by macroeconomic expert Peter Schiff:
Debit: Look; the dollar is clearly in trouble. We’re only five short weeks into the Fed’s latest quantitative easing (QE∞) campaign, but America’s central bank has already printed more currency than during the five years of previous quantitative easing programs for QE1, QE2 and QE3. And yet it still ain’t enough. Yeah, I know; that’s bad English. So sue me. Besides, we’ve got much bigger problems to deal with now.
Credit: As macroeconomist Daniel Oliver notes: “There’s a vast difference between credit inflation and monetary debasement. The QEs stoked the former by adding reserves to the banking system, which were then lent mostly to refinance or construct new assets. Overcapacity in capital assets puts downward pressure on consumer prices, even while (other) asset prices were going vertical.” But that was then.
Debit: This time around, almost all of the currency currently being created out of thin air won’t be used to construct new assets and create overcapacity. Instead, it’ll be used to help American companies pay their current bills on existing fixed capital that has zero cash flow because of the oh-so-wise coronavirus shutdown. Therefore, according to Oliver: “It is straight debasement.” And that is inflationary.
Debit: Hopefully, any additional price inflation caused by all of the new currency finding its way into the real economy without any corresponding increase in goods and services doesn’t eventually lead to hyperinflation, which isn’t a monetary phenomenon at all; it’s purely psychological, ignited when the public loses faith in its currency. By the way, it’s not price inflation per se, that shakes said faith — it’s the rate of inflation.
Credit: Here’s what people in Venezuela think about their debauched national currency, where prices were doubling almost daily in 2019 — and it’s almost certainly doubling even faster now:
MUST WATCH 🎥
Venezuelas currency, the #bolivar, is so worthless that bills are used as party confetti #hyperinflation
Coming to a fiat currency near you…
Gold Telegraph (@GoldTelegraph_) April 7, 2020
Credit: Indeed, as economist George Reisman points out, “In the German hyperinflation of 1923, there were frequent complaints of currency shortages, and its central bank claimed it was increasing the supply of marks in response to increased demand for them. But what was actually going on was that people were trying to buy goods as fast as possible, before prices rose even more.”
Credit: Yes, yes … I know what you’re thinking: Is there any way to avoid what seems to be coming? Well … if you listen to macroeconomist Alasdair Macleod — no. He is warning that, “The problem is now so large that, to maintain both economic stability and price levels for financial assets, central banks will have to issue so much base currency that fiat currencies will become almost worthless.” Uh oh.
Credit: According to Macleod, the banks will soon begin expanding credit again — only this time it won’t be for funding new businesses and other typical financial fare. No; this time, it will be “to buy up physical assets, sealing the fate of fiat currencies with a final expansion of bank credit as the banks themselves dump worthless currencies for real assets.” See? Banks are human too. After all, even they can lose faith in the currency of the realm.
By the Numbers
Here’s statistics during the hyperinflationary peaks for several notable economies:
29,500% The highest monthly inflation for the Weimar Republic (Germany) in 1923.
3.7 Days it took Weimar prices (denominated in marks) to double in 1923.
313,000,000% The highest monthly inflation for Yugoslavia in 1994.
1.4 Days it took Yugoslavian prices (denominated in dinars) to double in 1994.
79,600,000,000% The highest monthly inflation for Zimbabwe in 2008.
24.7 Hours it took Zimbabwe prices (denominated in Zimbabwe dollars) to double in 2008.
13,600,000,000,000,000% The highest monthly inflation for Hungary in 1946.
15.6 Hours it took Hungarian prices (denominated in pengos) to double in 1946.
Source: Zero Hedge
The Question of the Week
[poll id="317"]
Last Week’s Poll Result
How do you prefer your bacon?
- Crispy (75%)
- Chewy (25%)
More than 1900 Len Penzo dot Com readers answered last week’s poll question and I’m almost pleasantly surprised to say that 1 in 4 of you actually prefer their bacon like I do — chewy! I figured that number would be closer to 1 in 10.
If you have a question you’d like to see featured here, please send it to me at Len@LenPenzo.com and be sure to put “Question of the Week” in the subject line.
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Useless News: President Heaven
Ex-Presidents GW Bush and Barrack Obama, and President Donald Trump died in a plane crash. Before they knew it, the three men found themselves at the gates of heaven where God was determining if they’d be let in.
So God asks GW Bush, “What do you believe in?”
Bush says, “I believe in free trade, a strong America, and the family.”
God says, “Good, you can sit to my right side.”
Then God asks Obama, “What do you believe in?”
Obama says, “I believe in democracy, and helping the poor.”
God says, “Good, you can sit to my left side.”
God then asked Trump, “So … what do you believe in?”
Trump says, “I believe you’re sitting in my chair.”
(h/t: J Siefert)
Other Useless News
Here are the top — and bottom — five Canadian provinces and territories in terms of the average number of pages viewed per visit here at Len Penzo dot Com over the past 30 days:
1. Newfoundland & Labrador (1.58 pages/visit)
2. Alberta (1.54)
3. British Columbia (1.53)
4. Manitoba (1.49)
5. Ontario (1.45)
9. New Brunswick (1.21)
10. Nova Scotia (1.20)
11. Saskatchewan (1.15)
12. Yukon (1.13)
13. Nunavut (1.00)
Whether you happen to enjoy what you’re reading (like those crazy canucks in Newfoundland & Labrador, eh … for the second month in a row!) — or not (ahem, all you hosers living on the frozen Nunavut tundra) — please don’t forget to:
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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 me at: Len@LenPenzo.com
From Janice:
I had no idea you were a prepper!
I am. With apologies to Dr. Pepper … wouldn’t you like to be prepper too?
If you enjoyed this, please forward it to your friends and family. I’m Len Penzo and I approved this message.
Photo Credit: stock photo
Hey Len, I love your black coffee series, and in general I agree with much of what you include in the articles each week. That being said I think you are way off base on the coronavirus. We were in a tough spot, and while there were certain things the current leadership could have done differently (early testing, having a unified response) they didn’t. As an engineer you understand how exponential curves work, had we done nothing hospitals all over the country would have been overrun with patients and millions would have died. Showing the ratio of unemployment to deaths is very misleading. should the number be 1:1? Should it be one job lost and 50 Americans dead? There had to be a response, and I believe the states that shut down did the right thing.
Hi Evan, thanks for your comment. I hope you’ll post your thoughts here more often in the future!
Of course, I do understand the exponential function. However, I dispute your claim that millions would have died.
Think about it: There are roughly 330 million Americans. I am not a doctor, but no virus I know of has a 100% infection rate; I suspect the worst of the worst is 50% or maybe slightly higher, but let’s use that figure. That means 115 million Americans infected — and with a death rate of even 1%, which is clearly high even for this disease, that is barely a million deaths worst case. When this is all over I suspect the death rate will be under 1%.
A big part of any engineers job is to evaluate risk — but we don’t do it in a vacuum. We look at the risk from multiple angles, quantify it, and then conduct a trade study and weigh the results of the trade offs . It is clear to me that the government didn’t do that. They only considered the risk from the medical angle. Specifically, they failed to weigh the risks of letting the virus run its course, against the risks of shutting down the economy — which have yet to be fully felt yet. (Never mind the fact that the “risks” from the medical angle were based on sophomoric statistical models.)
I think there are a few issues with estimating a death rate: first is poor testing, we don’t know how many people have been infected and never shown up in the offical numbers, obviously this would lower the death rate. Secondly we also don’t know what the rate would be should the hospitals that are stretched thin begin to be overwhelmed. There are many cases where patients would die except for medical intervention in icu’s. This increases more and more in a pandemic scenario as nurses and doctors become I’ll.
The most important factor in my opinion is that all the data we have now has been effected by 4-8 weeks of shutdowns. Had everything stayed open I think things here would look like Italy or Spain on a much greater scale.
Even a million deaths at 1% death rate I find difficulty to square with my conscience.
Time will tell which was the greater mistake, shut everything down and crash the economy, or allow hundreds of thousands to millions of people to perish in the name of capitalism.
Unfortunately, shutting down capitalism in such a draconian way will surely toss many people into poverty — and poverty kills too, through shorter life spans for people of all ages, not just the old and immune-compromised.
Len, Sweden has tried your approach. They had 2-4x higher infections and 10x higher no of deaths than their neighbouring scandinavian countries. They still claim that they have better herd immunity and are better prepared for the future. We’ll have to see. But the data says deaths/infection are worse for no lockdown case.
I understand your philosophy of letting people choose their risks.
Your decision to go out and be infected is your personal choice as long as the cost/benefit of your choice is limited to you.
But your decision to go out and subsequently potentially infect other people and overload a school, workplace, hospital is a negative externality. It is well within a government’s purview to limit your free choice because the consequences of your choice are not limited to profit/benefit and loss/cost for your immediate self.
Also, I always hear criticism of govt overreach but the real question is, “Who wants to be the 1-4%?”. Soft lockdowns in our country don’t prevent us from going out. And the real question is: Are you doing it? Or are you encouraging your family and kids to be a part of your experiment?
I understand your philosophy of letting people choose their risks … But your decision to go out and subsequently potentially infect other people and overload a school, workplace, hospital is a negative externality.
You built a beautiful straw man there, Kyron. As such, it doesn’t deserve a response.
It is well within a government’s purview to limit your free choice because the consequences of your choice are not limited to profit/benefit and loss/cost for your immediate self.
I reject your statement out of hand for a couple of reasons:
1) Please show me the particular Article and Section in the US Constitution that permits the government to suspend my inalienable rights for any [fill in the blank] reason. (Never mind that because my rights are inalienable, such a claim would be invalid anyway.)
2) If only risks could be evaluated in such a binary manner. That’s a noble claim everyone can agree to — but life is not that simple. You’re fallaciously arguing as if there are only two choices and two impacts: quarantine vs. free passage AND infection vs. non-infection. But that only makes sense in Utopia. What about the multitude of other factors and sub-factors? For example, your comment completely ignores the costs and societal impacts of job loss, industry destruction, and broken supply chains that result from mass quarantines.
On the contrary Len, you are the one lurching into binary options and US constitutions. Funny how you won’t respond to actual data on the exact opposite of your suggestion but are very happy claiming immediately “it doesn’t have to extremes” and throwing words like strawmen and fallacies and (oh, wait for it, wait for it …) the constitution.
Your rights are very alienable if they impinge on other people’s rights. That is a core guiding principle for when a government can intervene. You are welcome to engage in any free market transaction without any government interference as long as the transaction costs and benefits are limited to the parties of the transaction. Can’t find it in the constitution, you say? Cry me a river!
Its the same reason government can put people in jail or can issue capital punishment. I fail to remember exactly what the constitution says about a prisoner’s inalienable rights to life, liberty and the pursuit of happiness …
What we have is a soft lockdown. People can still go around and shop for most items and look for jobs in non impacted businesses, buy homes, etc. There are some businesses growing and many are suffering horribly.
To act like there is a governmental overreach on an issue like this is misguided regurgitation of libertarianism. The very people you bleed for are the very people without insurance, emergency funds and people least able to protect themselves from an infection. You may frame it as a right to choose freely from your arm chair but there isn’t a free choice here to assume a risk of infection in return for money for those folks. It is a forced choice because they really have no other choice. They will choose in a way to endanger themselves (which nobody should care if they do) and others (which the government can care and set rules).
Kyron, it’s not the data that is in question, it is how said data is being used to draw conclusions — and that is fatally flawed. But that hasn’t stopped people from doing it anyway. No need to mock my use of terms like “strawman” if you don’t understand the meaning; if you are confused by the terminology, try looking it up. Then you can come back and try to intelligently rebut why your argument wasn’t a strawman.
Point number two: the Constitution is a yoke on the federal government — conversely, it defines the accepted powers of the US government. In short: if the US Constitution doesn’t authorize it, then the federal government can’t do it. All of your arguments concerning the Constitution belie the fact that you mistakenly believe it bestows rights to the people. Sadly, most Americans today are under the same false impression. I blame our failing education system for that.
“To act like there is a governmental overreach on an issue like this is misguided regurgitation of libertarianism.”
LOL! That’s rich. Based on the arguments you’ve put forth here, nobody should be surprised you’d make such an uninformed and specious assertion.
“The very people you bleed for are the very people without insurance, emergency funds and people least able to protect themselves from an infection.”
I didn’t know I am “bleeding” for any particular subgroup. And who, pray tell, are the people “least able to protect themselves from infection”? What does that even mean?
“You may frame it as a right to choose freely from your arm chair but there isn’t a free choice here to assume a risk of infection in return for money for those folks.”
Interesting. My argument is for keeping business as usual. Doing so doesn’t stop you or anyone else from taking potential steps to decrease their risk of infection; keeping business as usual doesn’t stop those who are afraid of becoming infected from self-quarantining in their homes. In fact, Kyron, nobody should ever take away your right to remain in a state of self-quarantine or “soft lockdown” for as many months or years as you feel necessary to avoid catching COVID-19. Business as usual accommodates BOTH parties — the afraid and the unafraid. THAT’s how Libertarianism works, Kyron!
Ironically, your argument infers the so-called “soft lockdown” that’s being imposed on EVERYONE (except of course the tyrants who have passed these edicts) — the same “soft lockdown” that has now INVOLUNTARILY forced 30 million Americans out of their jobs — ISN’T impacting others’ rights (like their inalienable right to earn a living). But I understand; all those lost jobs and broken lives are acceptable to you because you somehow perceive this “soft lockdown” as being necessary for YOUR increased safety. The cognitive dissonance is absolutely breathtaking.
Hi Len,
I got my $1,200 stimulus this week from Uncle Sam and I’m turning it all into silver. Assuming I can find some!
Sara
Smart. The Fed won’t like that though.
I don’t think we have to worry about hyperinflation because the federal reserve can reverse everything they’ve done, which will prevent the US becoming Venezuela or Weimar.
Chuck, the Fed was slowly reducing its balance sheet for about a year — I think it was from a high of just over $4 trillion to $3.6 trillion — and then the repo market blew up. So that proves that they can never reduce their balance sheet again.
Thanks for the comment!
Len,
I’ve never quite understood WHY the FED’s “balance sheet” made a lick of difference. The federal debt I get…..in theory, it has to be paid back……in theory. But I don’t get the concern over the FED…maybe you could share your knowledge on it ?
You’re right, Andy. Technically, the Fed’s balance sheet doesn’t make a lick of difference. Until it does.
As I noted above — and I’m not telling you something you don’t already know — hyperinflation is a psychological phenomenon. At some point, the Fed’s balance sheet will get so large that it will break the market’s confidence in the US dollar. Then the market will respond by getting rid of those dollars as fast as they can.
Here’s how I look at it: If the Fed’s balance sheet truly didn’t matter, then nobody would ever have to work, or produce wealth of any kind because the Fed could simply print money and hand it out to the masses. Poverty could be eliminated forever! The only place I know of where that can happen is Utopia.
That’s my story and I am sticking to it.
Inflation is an invisible tax. What the Fed doesn’t tell people is that the purchasing power of the notes they have been pumping out are constantly being reduced so everything keeps costing more and more. Inflation hits the middle and lower income classes the worst. What most people don’t know is that the dollar has less then 3% of its original value left and it is set to go to zero — all by design!
True, Cowpoke.
(By the way, although I was tempted to keep it, I edited your Irish brogue at the end of your comment. “all be design!”) LOL
It’s probably because I ate me Lucky Charms this mornin’!
Lets look at todays text. Lens and Investopedia
KEY TAKEAWAYS
Inflation is a measure of the rate of rising prices of goods and services in an economy.
Inflation can occur when prices rise due to increases in production costs, such as raw materials and wages.
A surge in demand for products and services can cause inflation as consumers are willing to pay more for the product.
Some companies reap the rewards of inflation if they can charge more for their products as a result of the high demand for their good. Investopedia
Critical Thinking
Does not say When a government uses paper money to fund a lifestyle illusion of excess. But we are ok if 20% produce 80% of the wealth.
Compare and contrast
My stats 75% of my students spend 5-10 min on my learning page. 17% are doing assignments. Thats the big joke. Only 35-40% of the US population invest in securities. They pump up 401k on Friday and the instuitions take 30%-37% just like Vegas. So they pulled their money in FEB. and the essential workers are dumping in on Friday. So from April 19-April 20 we earned the same as a bank CD.
Written to adjust for inflation
Corn beef was $12.00 now is $32.00
Oragnic lettuce 2 lb $4.49 now 50 cents,
Tried to go to grocery store could not get their! Lines to drive through restaurants blocking the road!
S and P 2500-3200
Gold 1250-1675
Bonds? When do they go negative?
Reality check please,
When I realized that the marketing of retirement as a 25 year vacation before death is a joke.
Lesson
Let me do a risk assessment. My retirement corvette or health insurance? Both are a game I play by myself. Which will depreciate faster me or the car? I guess I have to run 6 miles for every mile i get to drive!
Love this blog Len! Noticed the boys in the basement sneek alot more girls down their than guys! Some things never change!
Thanks, Duke. So …where do you shop for your organic lettuce?
If what the Fed is doing now is MMT, and you said that last week, then there will be no hyperinflation, because MMT has a hyperinflation absorption mechanism baked into it. It’s called taxation. The gov will just raise taxes as much as needed to keep it in check.
Sorry, Jude; I’m not buying it. Raising taxes in the face of high inflation makes no sense.
Let’s assume prices are rising sharply on a monthly basis; that would mean lower- and middle-class living standards are falling as a result. Do you really think a politician is going to get away with raising taxes in that environment? That would only make everyone’s living standards even lower! It’s pouring gasoline on the fire.
And if they could get away with it, there is still the problem of inflation caused by supply side shocks. No amount of taxation can fix that!
Thanks for your comment.
I’m with you Len. Raising interest rates (not taxes) is the the normal way to lower price inflation.
Len,
Ok things became unraveled, but it seems we are getting back to where we were last year. Manipulated markets that go up when all indicators point to nothing but bad news and metals although the physical is expensive the paper price is still dragging them down and of course that’s the price that counts because it’s from the Crimex. I see things should be falling apart, but I see the same game that’s been going on since 2008 and actually before. Maybe it’s possible all the dumbing down of the nations people from the government/Bankster news sources have worked and the people really are to stupid to realize what’s going on. I’m starting to think this crap show is like the movie Groundhog Day (Great movie by the way), it’s just the same thing over and over.
The end game is here, Jared. The bankers’ denouement is coming — but it is going to take a little more time. The economic shut down is suppressing money velocity (yes, even more than it was before the shut down) and that is currently working as a counterbalance to the effects of the Fed money printing. We may not begin to see higher inflation until later this year or early next year. Velocity of money needs to pick up, and that can’t really get going until the economy opens back up.
Bartering has always been a part of our economy and also, both links you posted cite the same information. 🙂 Interestingly, the information is about happenings in my area of the country (Seattle) which, I should point out, is also home to the Buy Nothing Project. I’m sure you’ve heard of it, but if not, I will tell you the Buy Nothing Project was the first scaled facebook based gifting economy. I think we should look at if people in the PNW are more open and willing to participate in alternative economies, which have been demonstrated to foster greater social bonds, before jumping the cliff shouting the end of time has arrived. Maybe it has or maybe the creativity and knowledge of our strong tech sector has gifted us a willingness to explore new ways of connecting and sharing. But I wouldn’t worry too much. We love our dollars too. In fact, we want to hold on to the dollars and trade our time and our stuff before we let go of our dollars.
You’re correct, SJ. Bartering has always been around, but not at the level it is now, as evidenced by the attention it is getting in the media! 😀
Thanks for your comment!
Comex is losing control of its derivative universe.
Too much demand for redemption with physical gold.
https://www.zerohedge.com/markets/lethal-bullion-banks-looming-600-trillion-derivatives-crisis
It’s definitely getting interesting, Dave. Maybe we’ll soon see the true prices for gold and silver after all.
If you don’t look at anything else in this article, do see the chart showinhg Russia and China’s holdings of U.S. Treasuries vs. their holdings in physical gold:
https://www.zerohedge.com/geopolitical/real-reason-russia-china-teamed-heres-what-comes-next-american-preeminence-dollar
I think Russia dumped all of their Treasuries last year or the year before, after the US imposed sanctions on them.
May be what the FED fears most…. deflation rather than inflation. A LOT of the current bailout ‘money’ is like that of 2008…..merely shifting digits in bookkeeping columns at banks to show them solvent.
The potentially inflationary part is the money that goes to actual people or business that would spend that into the economy.
But you have to balance that against the HUGE amount of income, demand destruction for goods/services, and (most important) the lack of new credit issued (from whence most all new money comes) that has occurred from the economic shutdown.
Look at oil for example….some of the current price under 20 bucks is due to OPEC/etc overproducing to destroy the US shale competition, but most of it is simply due to the reduced demand.
When the switch for the economy gets flipped to ‘on’, I think consumers are going to be WAY more conservative in spending/borrowing for a long time to come…..assuming they have anything to spend ! We my eventually get back to the type of economy we had pre-virus…..but I’d bet it takes years and years, if ever.
That’s just it, Andy. The malaise is due to our debt-based monetary system that has reached its effective limit. It’s a math problem.
Those who are willing to take on more debt, are unable to do so: households, corporations and students are tapped out. And the remaining households, corporations and students who actually CAN take on debt, refuse to do so.
So the Fed can issue all the additional credit it wants now, but it’s like pushing on a string — so that leaves helicopter money to Main Street as the only real stimulus measure left.
Yes, the government can take on more debt as long as the Fed doesn’t lose control of interest rates — which will require the Fed’s balance sheet to balloon into the stratosphere to keep that from happening — but we’re clearly on the exponential part of the debt curve now. So the government can’t create enough economically positive infrastructure projects and shovel-ready jobs to account for all of the debt required to keep the system from imploding in the coming years. Never mind that the service on the debt is going to overwhelm tax revenues even with the Fed holding down rates!
Economic vibrancy will NEVER return until either:
1) the current debt is allowed to clear, either via the free market, or via a debt jubilee (but the Fed won’t allow either of those to happen because they would cause the debt-based monetary system to implode)
2) the dollar is sharply devalued against gold (soft reset)
3) the dollar is sharply devalued against — and then converted to — a new currency backed by gold (hard reset)
Well, I’ve long based my financial holdings on it being #2 or #3…….75% of our liquid holdings are silver/gold, with almost nothing in the traditional market…..quite a bit above the “traditional” 10% recommendation of most financial folks.