Black Coffee: The Fed’s Golden Key

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.

Another busy week is crossed off the list. So without further ado, let’s get right to the commentary …

The threat of gold redemption imposes a constant check and limit on inflationary issues of government paper. If the government can remove the threat, it can expand and inflate without cease. And so it begins to emit propaganda, trying to persuade the public not to use gold coins in their daily lives.

— Murray Rothbard

We can ignore reality, but we cannot ignore the consequences of ignoring reality.

— Ayn Rand

Credits and Debits

Debit: Did you see this? With inflation running at 7.1%, the real yield based upon the 10-year Treasury note is negative 5.3% – that’s a a new 50-year record. It’s also lower than the two spike lows of 1974 and 1980, both of which corresponded with epic gold bull markets. Oh … and the real yield is even more negative when measured by the 3-month Treasury bill. But no matter which way it’s measured, the message is clear: US dollar holders are seeing their purchasing power decline with each passing day.

Credit: Of course, as the inimitable MN Gordon noted last week, “Management of a spineless currency by central planners always falls to frequent debauchery … followed by short episodic periods of crushing austerity. The central planners never seem to get it right. Their extreme intervention lurches the economy from boom to bust. Now they’ve done it again.” Indeed they have.

Debit: So … how much debauchery is actually going on? Well … the federal government spent $508 billion last month alone – that was the most spent in any December. Here’s something even more alarming: Through the first three months of fiscal 2022, the government has already spent $1.43 trillion – that’s a record for the first quarter of any fiscal year, which puts the annual deficit on a $5.6 trillion pace. And, no … the pols responsible for this insane spending don’t care. At all. After all, the Fed has their back – which they make clear during every press conference. Er … assuming you can read between the lines:

Credit: Unfortunately, unlike the inflationary period in the 1970s, the government’s irresponsible spending binge is now being paid for by responsible savers via those negative real yields. As macro analyst Daniel Amerman explains, “In 1981, savers earned an average interest rate of 14.03% on 3-month Treasuries, and came out on average 3.65% (ahead) after subtracting the costs of 10.38% inflation. (Today) the Fed allows us to earn an average interest rate of 0.04%, so we’re losing the value of our savings at a 7.5% annual rate; this is theft that creates great wealth for insiders, even as the average person grows poorer each year.” See for yourself:

Credit: Incredibly, with “official” inflation raging at 7%, this week a terrified Fed again refused to raise interest rates. No; not even a measly 0.25%. For those who are paying attention, that says it all. As Jim Quinn notes, the end game is here and there’s no way out for the Fed: “It looks like 2022 can go one of two ways: raging inflation, while markets surge higher, enriching the richest and impoverishing the middle class; or a recession and market crash where the working class sees their 401(k)s obliterated. Is this just part of the Great Reset master plan?” Hey, Jim … let me try to answer your question as simply as I can: yes.

Credit: One way to perform a monetary reset is by sharply devaluing the dollar relative to gold. Unless gold on the Fed’s balance sheet backs its liabilities 100%, dollar holders carry some degree risk. Put another way: the dollar is only “as good as gold” when the price of the yellow metal covers 100% of the Fed’s liabilities. In 1980, that threshold was crossed when gold hit $650; although panic buyers eventually drove it to $875 over the coming months – wildly overshooting gold’s equilibrium price by 34%. Then again, when it comes to spectacular overshoots, I’m pretty sure I just heard somebody say, “Hold my beer …”

Credit: Needless to say, the Fed understands gold’s importance relative to its balance sheet. In fact, financial journalist Jan Nieuwenhuijs notes that, central banks have openly described gold in recent public communications as, “‘the anchor of trust for the financial system,’ ‘the bedrock of stability for the international monetary system’ and, ‘a genuinely global means of payment.’ They also say that ‘if the system collapses, gold can serve as a basis to build it up again.’ One wonders if they are preparing for a new international gold standard.” Well … even if they’re not, a monetary reset via a dollar devaluation is all but certain.

Credit: Ironically, even if hyperinflation appears, any return to a new monetary system backed by the yellow metal will still be fought tooth and nail by statist pols and activists who depend upon a large free-spending government unencumbered by effective fiscal constraints. In fact, macroeconomist Alasdair Macleod warned this week that, “a return to sound money will be impossible without a sufficiently serious financial and economic crisis to discredit intervention in markets.” Only then, Macleod says, will governments reluctantly “stabilize their currencies and reduce spending to a bare minimum.” Imagine that.

Credit: So what would an economic crisis terrible enough to force governments into accepting a return to sound money actually look like? Macro analyst Daniel Oliver of Myrmikan Research said this week that “the end game for the dollar – and what propels gold into the multi-thousands of dollars per ounce – will be sharply rising rates that destroy the value of the Fed’s assets and make further federal deficit spending impossible.” After 40 years of falling rates, such a scenario seems hard to fathom … but reality – not to mention economic law – can only be deferred for so long.

Credit: Meanwhile, precious metals analyst Jeff Clark says gold appears ripe for a sustained period of rising prices: “The government continues to pile on more and more debt, yet gold has underperformed; based on history, such a phenomenon appears unsustainable. The following chart shows gold’s ratio to US government debt; notice the current basing pattern that is very similar to the kickoff of its last bull market at the turn of the century. If this plays out like it has in the past, it suggests gold is likely to rise over the next few years.” In other words: the dollar’s purchasing power is likely to continue plunging.

Credit: So how high could the dollar price of gold actually climb in the coming years? Oliver says the nominal price that gold must reach in order to just return to the average level maintained by the Fed from 1914 to 1933 is $18,150 per ounce. And if the market for gold was to over-react to the same degree that it did back in 1980, Oliver says the yellow metal could see “a potential panic high of $44,700 per ounce. It’s difficult even for gold investors to imagine these prices – yet they’re what history and math suggest are coming.” Very true … although you certainly don’t have to convince this guy:

Credit: Like it or not, when currencies fail, the only way to restore confidence is by introducing a new monetary system that’s anchored in some way to gold. Unfortunately, according to Macleod this won’t happen until the coming currency crisis is bad enough to convince the public “that unsound monetary practices must be avoided at all costs because the current relationship between the state, the economy and fiat currency is wholly untenable. We can only hope that, when they are politically possible, the required actions are taken swiftly and without compromise.” Yes; which is why the key is to own physical gold before the transition – not after.

The Question of the Week

[poll id="409"]

Last Week’s Poll Results

Should all prices be rounded to the nearest nickel?

• No (48%)
• Yes (42%)
• I’m not sure (10%)

More than 2200 Len Penzo dot Com readers responded to this week’s poll and it turns out that slightly less than half of all respondents say prices should not be rounded to the nearest nickel. I think they should, if only because a penny is essentially worthless today. Frankly, even a nickel doesn’t buy much, if anything, anymore. Heck … come to think of it, I’d be fine with rounding prices to the nearest dime.

If you have a question you’d like me to ask the readers here, send it to me at Len@LenPenzo.com — and be sure to put “Question of the Week” in the subject line.

By the Numbers

Among the 50 largest US cities, here are the most — and least — expensive places to own a car based upon the average costs for car insurance, gasoline, toll roads, and parking expenses:

50 Columbus, OH (least expensive)

49 Milwaukee, WI

48 San Antonio, TX

47 Cincinnati, OH

46 Nashville, TN

5 Las Vegas, NV

4 New York City

3 Miami, FL

2 Los Angeles, CA

1 Riverside, CA

Source: The Zebra

Useless News: Felonious Conduct

Bill and Sam, two elderly friends, met in the park every day to feed the pigeons, watch the squirrels and discuss world problems. One day Bill didn’t show up. Sam didn’t think much about it and figured maybe he had a cold or something.

But after Bill hadn’t shown up for a week or so, Sam started to worry, But Sam didn’t know where Bill lived, so couldn’t find out what had happened to him.

A month passed, Sam went to the park as usual and — lo and behold! — there sat Bill!

Sam said, “Where you been?”

“I’ve been in jail,” Bill said.

Sam: “Jail? Why?”

“Well,” Bill said, “you know Sue, that cute little blonde waitress at the coffee shop?”

“Yeah,” said Sam, “I remember her. What about her?”

“Well,” Bill replied, “She filed rape charges against me! At 87 years old, I was so flattered that when I got into court, I pled ‘guilty’… but the judge gave me 30 days for perjury instead.”

(h/t: RD Blakeslee)

More Useless News

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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

After reading this week’s featured article explaining why I run my household like a business, Eric Bowlin left this comment:

“This is a really interesting take. I often look at my household in military terms.”

Eric, if I did that I’d be the private on KP.

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