From the May 7 J. Taylor's Gold, Energy & Tech Stocks newsletter.
I’m not ruling out hyperinflation in the future, but the chart on your left suggests that we have already had a huge amount of inflation, especially since Nixon took us off the gold standard in 1971. And most importantly from my point of view, you need to recognize that the huge rise in the cost of living has come not because an asset-based money supply exploded, as it did when the Spanish invaded the New World and took gold back to Europe. Rather, the explosion in consumer prices displayed by the chart on your left was “achieved” by increasing debt, which by its very nature is deflationary. When you borrow today, you do so at the expense of consuming tomorrow. Thus, debt money (which is what we have now) as opposed to asset money, such as what invaded Europe when the Spanish invaded South America, has the seeds of deflation sewn into its structure.
To hammer my deflationary argument home, I like to show the two charts above. The chart above on your left shows total U.S. dollar debt (red line) and total GDP (blue line). Note the enormous growth in debt to GDP. True, the trend appears to have rolled over a bit, but only a very little. The point I would like to make is that it isn’t the debt by itself that is problematic but rather the growth of debt relative to GDP. That same relationship is pictured in the chart above on your right, except that it dates back to the start of the 20th century and hence puts into perspective how far out of line our debt-to-GDP ratio has risen above more normal levels.
Now this debt is starting to weigh very heavily on the demand side of the global equation. Why so? Because income growth has not kept up with debt growth. We have reached that point in the Kondratieff cycle, when debt cannot grow further. It must now be repaid.
But wait! Can’t the Fed simply print money to repay the debt? Both Keynesian advocates as well as most of my gold bug friends think the Fed has the power to “print” money to inflate the debt away and keep demand up so the economy can avoid a decline. In theory, the Fed could “print” away our debt by hyperinflating the currency and literally dropping thousand-dollar bills from helicopters over the American masses. But exactly the opposite has been happening, as the chart on your left shows. The real median household income has fallen sharply since the Lehman Brothers decline in late 2008, despite massive “printing” of money by Bernanke. The masses are finding that their living standards are in a massive downgrade, because wages are declining not only in nominal terms but in real terms, partly because the money Bernanke is shoveling into the banking system is being used to speculate on commodity prices, which in part is being used globally as a means to get out of paper money.
I do not believe the ruling elite wish to inflate the dollar out of existence, at least not until they have another currency system ready to take its place that leaves them in control. So I do not buy the idea of hyperinflation. Realize, as A. Gary Shilling said on my show, the Fed does not “print” money. The Fed pumps newly created money into the banking system as reserves. And the problem is that we are facing a similar “pushing on a string” problem now as we did in the 1930s. The banks are not lending, because they can’t find creditworthy borrowers, or those that are creditworthy are not borrowing, because they are flush with cash. That is especially true of large corporations that grew profits dramatically after Lehman Brothers by cutting jobs and utilizing low-cost high technology.
So why isn’t the Fed dropping money from helicopters, as Bernanke promised? First of all the image of helicopter drops was more of a propaganda image than an intention of the Fed. Its real job – the one they don’t want the American people to know about – is to pacify the American public while picking their pockets to bail out their shareholders.
And who are the shareholders that really count as far as the Fed is concerned? The Fed’s ownership structure is displayed below as it existed just after the Lehman Brothers decline. Adding up Bank of America (19%), JPMorgan Chase (15%), Citigroup (8%), and 15% for the combination of Wachovia (8%) and Wells Fargo (7%), you have 57% spoken for.
The next tier are somewhat important but not anything like the big four, which companies are directly linked to the families that were so instrumental in setting up the Fed, as discussed in The Creature from Jekyll Island. The likes of US Bancorp (3%), State Street (3%), HSBC (2%), Suntrust (2%), and Bank of NY Mellon (2%) add another 12%. In other words, nine banks out of a total of 2,900 Fed member banks own 69% of the Federal Reserve Bank. Those are the interests that the Fed is really looking out for, not you or me. Now, if that is the case, do you think the Fed is interested in having the assets of its member banks raped and pillaged by a massive hyperinflation? Do you see why this is not Zimbabwe or hyperinflation Germany?
On top of that, keep in mind that the natural market forces are begging for deflation because the debt has grown so much more rapidly than income as discussed above. My thinking is that the Fed will inflate as much as they can, so long as the shareholders of the Fed keep benefitting from that activity, as they most certainly have, post-Lehman Brothers. But if further inflation hurts the major shareholders of the Fed, then I would look for a new monetary system to be backed by the Fed in conjunction with a growing move toward a one-world government. And you can see the signs of that now with the Fed extending some $2 trillion to a sinking European banking system and economy that is mired in the economic pathology of socialism.
The bottom line for me is that the US has already had a massive hyperinflation with the dollar losing 97% of its purchasing power since the creation of the Federal Reserve in 1913. The debt is too onerous to be repaid. So we will have to see massive defaults in terms of transfer payments to the masses and huge numbers of bankruptcies in the future. This will all be very deflationary and that means that the price of most everything could fall dramatically in the future, including even, for a time, the nominal price of gold. However, I fully expect the real price of gold – the price of gold relative to nearly everything else – to remain and very possibly rise. That will continue to be positive for the gold mining industry. Again, that is why I want to own cash to be able to buy them back when gold mining shares become even cheaper.
Jay Taylor will speak at the New York Hard Assets Investment Conference on "Why Gold Shares are in a Bull Market of a Lifetime" on Monday, May 14, and participate in a Bulls and Bears Keynote Panel on Tuesday, May 15.
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