{"id":70911,"date":"2022-01-29T02:15:43","date_gmt":"2022-01-29T10:15:43","guid":{"rendered":"https:\/\/lenpenzo.com\/blog\/?p=70911"},"modified":"2023-05-12T10:50:32","modified_gmt":"2023-05-12T17:50:32","slug":"black-coffee-29-jan-2022","status":"publish","type":"post","link":"https:\/\/lenpenzo.com\/blog\/id70911-black-coffee-29-jan-2022.html","title":{"rendered":"Black Coffee: The Fed’s Golden Key"},"content":{"rendered":"

\"hurricane-flags\"<\/a>It’s time to sit back, relax and enjoy a little joe …<\/em><\/p>\n

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.<\/p>\n

Another busy week is crossed off the list. So without further ado, let’s get right to the commentary …<\/p>\n

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.<\/em><\/p><\/blockquote>\n

— Murray Rothbard<\/strong><\/p>\n

We can ignore reality, but we cannot ignore the consequences of ignoring reality.<\/em><\/p><\/blockquote>\n

— Ayn Rand<\/strong><\/p>\n

Credits and Debits<\/strong><\/p>\n

Debit:<\/strong><\/span> Did you see this? With inflation running at 7.1%<\/a>, the real yield based upon the 10-year Treasury note is negative<\/strong><\/em> 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<\/strong><\/em> 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.<\/p>\n

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\nCredit:<\/strong><\/span> 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<\/a>. Their extreme intervention lurches the economy from boom to bust. Now they’ve done it again.” Indeed they have.<\/p>\n

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Debit:<\/strong><\/span> So … how much debauchery is actually going on? Well … the federal government spent $508 billion<\/a> last month alone – that was the most spent in any<\/strong><\/em> December. Here’s something even more<\/strong><\/em> 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:<\/p>\n

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Credit:<\/strong><\/span> 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<\/a> that creates great wealth for insiders, even as the average person grows poorer each year.” See for yourself:<\/p>\n

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Credit:<\/strong><\/span> Incredibly, with “official” inflation raging at 7%, this week a terrified Fed again<\/strong><\/em> 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<\/a>: 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.<\/p>\n

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Credit:<\/strong><\/span> One way to perform a monetary reset is by sharply devaluing the dollar relative to gold. Unless gold on the Fed’s balance sheet<\/a> 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 …”<\/p>\n