In Gold We Trust Report May 24, 2022 – Stagflation 2.0 – Incrementum: Full Presentation

The value of gold depends on three vectors – money, mining and geopolitics. Most analysts look at only one or two of these vectors. Incrementum’s annual report ›In Gold we Trust‹ is the only research that looks at all three in depth and in an integrated fashion. It is the most eagerly awaited and closely read report in the gold community. Don’t miss it!

James Rickards
Autor Currency Wars und The Death of Money

In Gold We Trust Video Intro: Stagflation 2.0

A Surprising Benefit to Owning Gold – Especially Now

By the year 41 BC, just a few years after the assassination of Julius Caesar, Rome was under the strict rule of a three-person dictatorship known as the Tresviri rei publicae constituendae.

Historians today refer to this committee as the Triumvirate, and it included a general named Aemilius Lepidus, as well as Gaius Octavius– who would eventually become Emperor Augustus.

But the leader of the group, at least at first, was Marcus Antonius, also known as Mark Antony.

Mark Antony was not especially popular. Many Romans rightfully suspected that Mark Antony had been involved in Caesar’s assassination. Plus he was sleeping with Caesar’s widow, Cleopatra.

But Antony’s power through the Triumvirate’s was absolute. He could raise taxes, establish new social and religious traditions, regulate daily life, seize private property, and even condemn people to death… all without any oversight or due process.

And he wasn’t shy about using this power to squash his opposition.

Antony put several of his political enemies to death– including the much beloved Cicero, who was trying to escape Rome when Antony’s goons killed him.

Antony also threatened to kill another Senator named Nonius. But unlike Cicero, Nonius managed to escape Rome… bring with him about $1.5 million worth of gold and jewels.

People in the ancient world knew that precious metals (and precious stones) were pretty much the only portable forms of wealth.

Human civilization at the time was completely agrarian, so most productive assets like land and crops were impossible to move. Gold was almost the singular option to move large sums of wealth, and it remained this way for centuries.

These days there are much better options. Many forms of wealth– financial securities, intellectual property, bank deposits, and cryptocurrency– are completely portable. So gold is no longer necessary as a way to move money abroad.

And yet gold still has a number of incredible benefits.

For starters, it’s a great way to hold wealth privately. When you own physical gold and store it in a safe, there’s no ‘counterparty’ like a bank or broker standing between you and your money.

No one is keeping tabs on your gold, your name isn’t in some database. And when you pass away, your heirs can easily take possession of the gold without any bureaucratic hurdles.

Second, over the long-term, gold has proven to be a pretty great investment.

Since August 1971, in fact, when gold formally decoupled from the US dollar, the gold price has increased 42x.

Comparatively, the S&P 500 has grown about 40x over the same period.

This isn’t to say that gold is a better investment. In fact, if you reinvested dividends, stocks outperformed. But history shows that gold is worth consideration.

Another benefit of gold is that it has traditionally hedged against systemic risks. It’s like an insurance policy; in times of real crisis, physical gold has historically been a great asset to own.

Notice that I keep saying “physical gold”, i.e. bars and coins.

A lot of people invest in ‘paper’ gold products, like Exchange Traded Funds (ETFs). And 99.99% of the time, these ETFs perform very similarly to physical gold.

It’s that 0.01% of the time– the real emergencies– when the performance of ETFs materially diverges from physical gold.

We saw this quite recently in the early days of the pandemic: in early March 2020, major gold ETFs actually fell by around 10%. But the price of physical gold bars and coins went through the roof.

So, in my opinion, physical is always better than paper.

Now, there are plenty of other reasons to consider owning gold– but there’s one in particular I want to leave you with today: diversification.

Most people understand the concept of diversification quite well: don’t put all of your eggs in one basket.

We constantly write about international diversification at Sovereign Man, i.e. ensuring that your assets, lifestyle, business, etc. isn’t all tied to the same country.

In financial investment terms, diversification means holding multiple assets that have a low correlation to one another.

To use a simple example, Coca Cola and PepsiCo are technically two different companies. But they share similar risks and rewards.

If Coke does well, chances are Pepsi is also doing well, and vice versa. So if you own stock in both Coke and Pepsi, you’re basically invested in the same thing. Your risks and rewards are not diversified.

Now, many people think they’re diversified because they’ve invested in, say, a bank stock and a tech stock– JP Morgan, and Amazon.

Sure, those two companies certainly have a lower correlation than Coca Cola and Pepsi. But you’re still invested completely in US stocks. And that’s not very diversified.

This is where gold comes in.

Compared to the general stock market, i.e. the S&P 500, gold has a very LOW correlation. In other words, there are years when gold does well, but the stock market does poorly. There are years where stocks are up but gold is down. There are years where they both do well, and year where they both fall.

So, mathematically speaking, gold represents diversification away from the stock market; their risks and rewards are totally different.

Interestingly, though, gold’s diversification doesn’t stop there.

If you look at the price history of gold (again, going back to 1971), it also shows very low correlation to the US economy, i.e. there are periods where the economy shrinks, but gold goes up. There are also periods where the US economy booms, but gold trades sideways.

There’s even a very low correlation between gold and the Federal Reserve, i.e. the gold price moves independently of whether interest rates rise or fall, or whether the Fed balance sheet rises or falls, or whether the Fed expands the money supply.

This diversification is a really interesting benefit of gold, especially right now in such volatile times.

(You might also be surprised that silver represents significant diversification from gold; but more on this another time.)

Gold vs Dollar: Heavyweight Fight Could Be Turning in the Metal’s Favor

Physical Gold Investors Will Eventually Be Rewarded For Their Patience

Золотых слитков на ворсу золотых монетах много

chonticha wat/iStock via Getty Images

Many gold investors are scared right now. Indeed, at the end of February and at the beginning of March, the price of gold per ounce exceeded $2,000, whilst now in May, the price is just slightly above $1,800. Most of the sell-off was due to the hawkish Fed and the record-breaking inflation. The latter was not only due to very easy monetary policies imposed in 2020 but also due to poor logistics. The supply chains were broken because of the coronavirus crisis and after the sanctions were imposed against Russia in March. Geopolitical uncertainty has not gone away, the supply chains will take ages to rebuild, and the Fed cannot do much about currency devaluation. Gold is highly undervalued. But it is uncertain when exactly the gold prices will break their record highs. Let me explain this in some more detail.

Gold’s undervaluation

Although the hawkish Fed will probably hike the interest rates several times, I still think the gold prices are ridiculously low. Here is why I think so.

There are several ways to measure if the yellow shiny metal is overvalued or not. Two of them are the Dow/Gold and the Gold/Money Supply ratios.


Obviously, it compares the Dow Jones index to the dollar price per gold ounce. The higher it is, the more undervalued the gold is.

Dow/Gold ratio history

Dow/Gold ratio



Right now, the ratio is quite high, near 20. In the 1960s and the 1990s, it was 30 and 40. Soon after the ratio got high, the gold prices rose considerably, as can be seen from the graph below.

Gold price history



Very interesting is that one ounce of gold cost as much as the Dow Jones index in 1981 because the ratio was 1. So, in that respect, it is possible the gold prices would surge to unseen before highs, whereas the Dow would fall substantially from the current levels.

Gold/Money supply

US M2 Money Supply and Gold Price
Data by YCharts

The diagram above shows the gold price growth in the last 10 years was nowhere near the money supply growth. This also means the yellow metal is undervalued right now. The graph above suggests gold should cost $2,400.

Macroeconomic indicators and the Fed

There are several macroeconomic indicators that predict recessions. These are ISM’s PMI in Manufacturing and Non-Manufacturing PMI, unemployment rate, inflation, and the treasury yield curve. The Fed pays particularly close attention to the unemployment rate, inflation, and the stock market.

Unemployment rate

To start with, 3.6%, the current unemployment rate, is near the levels last seen in 2019, which is a very good indicator suggesting the economy is strong.

Unemployment rate

Trading Economics

Source: Trading Economics

So, if we put ourselves in the shoes of the Fed’s Jerome Powell, we will see there is an opportunity to tighten further, especially given the enormous inflation rate.



Trading Economics

Source: Trading Economics

The current inflation rate, last seen only at the beginning of the 1980s, certainly requires some intervention from the Fed. But the problem is that it is not enough to just decrease the money supply to fight inflation. The problem is that there are shortages of the key goods and commodities resulting from the pandemic-related supply chain problems as well as the situation around Ukraine. So, in that respect, the Fed’s measures can only have a limited effect on the inflation rate. Even if the base interest rate reaches 3%, thus triggering a recession, the prices of certain goods will probably still stay high. But the Fed is unlikely to do that since the financial markets will crash.

S&P 500

SPDR S&P 500 ETF price
Data by YCharts

Although the Fed has not raised the interest rates dramatically just yet, the S&P 500 is sufficiently down from the levels last seen in January. Most of the fall was due to the end of the quantitative easing (QE) program at the beginning of March 2022. At the beginning of May, the rates were only raised by 0.50% – not too much given the situation. But the markets are still down sufficiently. A lot more will happen to the stock market if the Fed gets much tougher, which, I think, will probably not happen since central banks do not want to provoke panic. But there is one more reason explaining why Powell will not get much more hawkish any time soon. That is due to the debt level, which is much higher than it used to be during the 1970s.

Debt level

As a friendly reminder, in the 1970s, there was a classical situation of stagflation – high inflation and high unemployment. Right now, the unemployment rate is not high but may go much higher if the Fed tightens. At the same time, if the Fed tightens, the inflation rate won’t go down by much. This will provoke stagflation. However, during the 1970s, the Fed was able to raise the interest rates to 20%(!) since the US debt level was not very high at the time. This is clearly not the case right now.

Debt History

Debt history

Trading Economics

Source: Trading Economics

The federal government collected $4.1 trillion in revenue in the fiscal year 2021 (FY2021) — or $12,294 per person but they spent $6.8 trillion in FY2021 — or $20,634 per person. The government has been spending more than they have been receiving for decades. Obviously, this led to a very high debt level. The current US debt stands at around $30 trillion. Let us imagine the base interest rate is at 3%. In order to service it, the government would need $900 billion per annum or almost a quarter of the 2021 budget inflows. This would force the Fed to print even more money in order for the Treasury to pay back the debt, further devaluing the currency.

That is why I think the Fed will tighten from the 0.75% – 1% levels but there won’t be a very big hike. That is bullish for gold.


Geopolitical uncertainty is very bullish for gold. At the end of February, when the situation in Ukraine only started and new sanctions against Russia were imposed, the gold prices popped from $1,800 to about $2,050.

Gold Price in US Dollars
Data by YCharts

Interestingly, the political situation got more tense, but the gold prices fell down as the Fed became more hawkish. In my view, the geopolitical situation will last for a while, whilst the Fed probably won’t tighten much more without harming the economy.

With the pandemic and the situation around Ukraine, many analysts and investors completely forgot about China and the US-China relations. The main focus of 2019 stock market analysis was the trade war between China and the US, something everyone forgot. There might also be some volatility in the future due to the news from that front.

Why is gold so undervalued?

But lots of gold’s undervaluation is not only due to the Fed but also due to the numerous gold derivatives, namely ETFs and futures. SPDR Gold Shares (GLD) is also part of the ETF market. Earlier on I wrote that buying physical gold is much better than investing in “paper” gold since the former is in limited supply. As a result of high supply of paper gold, the gold market is very large and therefore not very volatile. That is why a piece of very positive news on the gold market does not make the prices of the precious metal shoot up greatly. This does not mean the gold prices don’t have any meaningful potential.

There are still asset bubbles in the market.

For example, in spite of the Fed’s hawkish stance, the house prices in the US still rose in the first quarter of 2022. After the Fed started printing money in 2020, the house prices surged significantly.

The Federal Reserve

The Federal Reserve

Source: The Federal Reserve

Gold, meanwhile, on average only makes up 2% of investors’ portfolios. Not to mention just a few investors hold gold.


All that obviously means gold is undervalued. That is why, in my opinion, many assets may crash in gold terms. But I fully admit I cannot predict when and by how much the gold prices would shoot. However, when the market realizes this, it will most probably be too late. Gold is a perfect hedge against fiat currency devaluation and is a good asset to hold when many other asset classes are over-popular in spite of the stock market correction this spring. I suggest buying physical gold for the long term.

‘No Door Out’ of Whiplash Markets Sees Billions Exit Sector ETFs

(Bloomberg) — Traders are offloading sector-specific funds at the fastest pace on record as the looming bear market seemingly spares no corner of the equity world.

Most Read from Bloomberg

Roughly $11.9 billion has been pulled from sector exchange-traded funds so far in May, putting the category on track for the biggest monthly drawdown on record, Bloomberg Intelligence data show. That’s the first time those ETFs have posted net outflows since September 2020.

The magnitude of the withdrawals speak to the breadth of the stock market selloff as the Federal Reserve tightens monetary policy in the face of sky-high inflation. Money has exited from every category except for consumer staples, which is clinging to $154 million of inflows as consumers shift their spending to essentials amid building price pressures. While past episodes of broad-based sector episodes have proceeded the Fed swooping in to soothe markets, no such relief is expected now, according to Bloomberg Intelligence’s Eric Balchunas.

“Given how much traders rotate between the sectors themselves, whenever you see almost all of them with outflows, it is a bad sign because it shows nothing is working, there’s no door out,” senior ETF analyst Balchunas said.

The S&P 500 fell as much as 2.5% Tuesday before paring losses. Nearly every sector has dropped so far in 2022, except for energy, which rallied as Russia’s invasion of Ukraine fueled a spike in commodities.

While investors have pulled money indiscriminately from sector funds, performance is far from uniform. BI data show a record 85 percentage-point spread between the best- and worst-performing sectors over the past trailing 12-month period.

The raft of sector ETF outflows follows a record $119 billion haul in 2021. To State Street Global Advisors, a leading issuer of sector-specific funds, the outflows are a byproduct of traders shifting their exposure as bearish sentiment reigns.

“It’s not good. It’s general risk-reduction,” Matt Bartolini, head of SPDR Americas Research at State Street, said on Bloomberg Television’s “ETF IQ” program Monday. “The market will eventually start to find some form of a bottom and overall, sectors are a really strong-form of alpha-generation and if we take a longer-term view, their use-case in portfolios continues to remain intact.”

Where exactly the bottom for stocks lies is a topic of fierce debate. Even as the S&P 500 briefly dipped into bear market territory on Friday, remarkably average trading volume and a relatively contained Cboe Volatility Index suggested that the selloff isn’t yet showing signs of capitulation.

BI’s Gina Martin Adams also sees few signs of an approaching floor.

“Pair-wise correlations in the S&P 500 are still below average, and a long way under the above-normal levels that usually characterize market distress, a worrisome sign that a long-term bottom is elusive,” she wrote Monday.

(Updates prices.)

Most Read from Bloomberg Businessweek

©2022 Bloomberg L.P.

Fed’s Inflation Fight Is All Bark, No Bite

Fed officials talk a good game.

Esther George shared the Fed’s current stance with a CNBC reporter last week:

“Looking at the stock market is an important price signal – as many others are – to watch and see. This is a time of uncertainty. It’s been a rough week in the equity markets. What we are looking for is the transmission of our policy through markets’ understanding, and that tightening should be expected. It is one of the avenues through which tighter financial conditions will emerge.”

Translate George’s Fedspeak to plain English, and it appears the central planners are willing to accept lower asset prices in order to control inflation.

image-20220524124721-1The CNBC reporter and the rest of the corporate press seem happy to accept whatever George and the other wizards at the Fed say without question. More critical thinkers have questions.

Are George and other Fed officials lying about wanting to control price inflation?

Rising prices are a massive problem for most Americans. Politicians are feeling plenty of heat over the issue.

No doubt Biden administration officials are urging the Fed to assure Americans their central bank is taking decisive action. So far, however, there isn’t much reason to believe George and her comrades are planning to do much more than talk.

April’s half percent rate hike in the Fed funds rate has been played up as bold because it was double the usual increment. Yet the country is now experiencing 1980 levels of inflation, and thus far Fed officials have only jacked up the funds rate to 1.0%. The response four decades ago was to hike the funds rate to 20%.

Absolutely no one at the Fed (or anywhere else) is even talking about that kind of action. That is probably because our debt- and stimulus-addicted economy would likely implode before officials even got to 5%.

Only if Jerome Powell and the FOMC were to emulate Fed Chair Paul Volcker can Americans know for sure they are serious about reining in the inflation they created.

Until then, it is safer to assume official talk cannot be trusted. After all, these people hardly have Volcker’s courage or credibility.

They lie routinely, and they are often wrong. For example, most recently, Americans were told inflation was merely “transitory.”

In reality, sky-rocketing prices might just be part of a plan.

The nation is grappling with the mother of all debt bubbles. Public debt across all levels of government, unfunded liabilities, corporate debt and consumer debt is far beyond the ability of the nation to cover. Some form of default is inevitable.

The question has always been whether the Fed will permit an outright default or orchestrate a default through inflation. Many, including us, have long expected officials will do the latter. They will attempt to print money and devalue the nominal mountain of debt until it looks more like a molehill.

The ability to do that is one of the features that politicians and central bankers love about fiat currency throughout history.

Americans aren’t loving inflation now that it has moved out of asset prices and into the real economy.

That’s why the strategy is always for those behind the inflationary fiscal and monetary policy to blame anyone, or anything, else. Have you heard Biden blame “Putin’s War” in Ukraine for making gas and food unaffordable?

The opportunity to mislead the public about who is responsible makes a default through inflation more palatable politically than a direct default, i.e. telling bond holders and Social Security recipients they are simply out of luck. It’s hard to dodge blame when folks suddenly stop getting the checks they were promised.

What’s more, Wall Street lenders just might survive inflation. They probably wouldn’t survive mass defaults. And if there is any certainty in this uncertain world, it is that the Fed will look out for the banks.

The FOMC has hiked rates just 0.75%. The equity markets are down nearly 20%. The markets could be down 40% by the time they deliver the next 75 basis point increase, giving the Fed plenty of cover to reverse course.

Billionaire Bill Ackman: Markets Are Imploding Because Investors Don’t Have Confidence in the Fed

  • Markets aren’t confident that the Federal Reserve can tame record inflation, Bill Ackman tweeted Tuesday. 
  • He predicts that inflation can only come down if the Fed aggressively raises rates, or if stocks crash.
  • “It ends when the Fed puts a line in the sand on inflation and says it will do ‘whatever it takes,'” Ackman said.

Bill Ackman, the CEO and founder of Pershing Square Capital Management, said markets are facing a precarious environment because the

Federal Reserve

has lost credibility in its attempt to combat inflation. 

“Inflation is out of control,” Ackman tweeted Tuesday in a Twitter thread. “Inflation expectations are getting out of control. Markets are imploding because investors are not confident that the @FederalReserve will stop inflation.”

The Fed has lost its credibility in fighting inflation because it pivoted too late and has been too dovish, Ackman explained. Now, the only way to cool things down is with aggressive monetary policy or with an economic collapse. 

He pointed out that, currently, there’s unprecedented job openings and 3.6% unemployment, as well as long-term supply and demand imbalances across sectors. 

“There is no prospect for a material reduction in inflation unless the Fed aggressively raises rates, or the stock market crashes, catalyzing an economic collapse and demand destruction,” Ackman said. 

What’s more, with inflation notching 40-year highs, the Fed has catalyzed a downward market spiral and spooked buyers. The only way that the market can soar once again is if the government can tame inflation expectations, Ackman said. 

Meanwhile, fellow billionaire investor Ray Dalio said the Fed’s inability to mitigate high inflation is going to create an environment of negative real returns

To Dalio, traditional safe havens like cash and bonds are no longer attractive for investors. And his Bridgewater colleague Bob Prince forecasted that the US is on the cusp of stagflation and investors do not fully appreciate the extent to which inflation will remain elevated. 

“It ends when the Fed puts a line in the sand on inflation and says it will do ‘whatever it takes,'” Ackman said. “And then demonstrates it is serious by immediately raising rates to neutral and committing to continue to raise rates until the inflation genie is back in the bottle.”

Here's What Happens When You Load Up On Gold Regularly

The Team 

MAY 24, 2022

Join Mike Maloney and Jeff Clark in today’s video update, in which they discuss Jeff’s recent appearance at the VRIC conference in Vancouver. You’ll also learn some of Mike’s personal investment history and why purchasing regularly has worked so well for him.

Predicted Global Economic Crash

This is part two to a May 4, 2022 article called “A Monetary Reset Where the Rich Don’t Own Everything,” the gist of which was that national and global debt levels are unsustainably high. We need a “reset,” but of what sort? The “Great Reset” of the World Economic Forum (WEF) would leave the people as non-owner tenants in a feudalistic technocracy. The reset of the Eurasian Economic Union would allow participating nations to opt out of the Western capitalist system altogether, but what of the Western countries that are left? That is the question addressed here.

Our Forefathers Had Some Innovative Solutions

Fortunately for the United States, our national debt is in U.S. dollars. As former Federal Reserve Chairman Alan Greenspan once observed, “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.”

Paying government debt by just printing the money was the innovative solution of the cash-strapped American colonial governments. The problem was that it tended to be inflationary. The paper scrip they issued was considered an advance against future taxes, but it was easier to issue the money than to tax it back, and over-issuing devalued the currency. The colony of Pennsylvania fixed that problem by forming a government-owned “land bank.” Money was issued as farm credit that was repaid. The new money went out from the local government and came back to it, stimulating the economy and trade without devaluing the currency.

But in the mid-eighteenth century, at the behest of the Bank of England, the colonies were forbidden by King George to issue their own currencies, triggering a recession and the American Revolution. The colonists won the war, but by the end of it the currency was so devalued (chiefly from British counterfeiting) that the Founding Fathers were afraid to include the power to issue paper money in the Constitution.

Hamilton’s Solution: Debt-for-equity Swaps

That left Treasury Secretary Alexander Hamilton in a bind. After the war, the colonies-turned-states were heavily in debt, with no way to repay it. Hamilton solved the problem by turning the states’ debts into equity in the First United States Bank. The creditors became shareholders in the bank, earning a 6% dividend on their holdings.

Might that work today? H.R. 3339, a bill currently before Congress, would form a National Infrastructure Bank (NIB) modeled on Hamilton’s U.S. Bank, capitalized with federal securities acquired in debt-for-equity swaps. Shareholders would receive a guaranteed 2% dividend on non-voting preferred stock in the bank, with the option of recovering the principal after 20 years.

If the whole $30 trillion U.S. federal debt were turned into bank capital, leveraged into loans at 10 to 1 as banks are allowed to do, the bank could do $300 trillion in infrastructure loans. To start, the Federal Reserve could buy NIB stock with the $5.76 trillion in U.S. Treasury securities currently on its balance sheet, capitalizing potential loans of $57 trillion. The possibilities are breathtaking; and because the money would enter the money supply in the form of low-interest loans to local governments that would be paid back over time, the result need not be inflationary. Loans for infrastructure and other productive ventures would raise supply to meet demand, keeping prices stable.

Lincoln’s Solution: Just Issue the Money

Hamilton’s solution to an unsustainable federal debt was terminated when President Andrew Jackson closed down the Second U.S. Bank. That left Abraham Lincoln in a bind. Faced with a massive debt at usurious interest rates to fund the Civil War, he solved the problem by reverting to the solution of the American colonists: just issue the currency as paper money.

In the 1860s, these U.S. Notes or Greenbacks constituted 40% of the national currency. Today, 40% of the circulating money supply would be $7.6 trillion. Yet massive Greenback issuance during the Civil War did not lead to hyperinflation. U.S. Notes suffered a drop in value as against gold, but according to Milton Friedman and Anna Schwarz in A Monetary History of the United States, 1867-1960, this was due not to “printing money” but to trade imbalances with foreign trading partners on the gold standard. The Greenbacks aided the Union not only in winning the war but in funding a period of unprecedented economic expansion, making the country the greatest industrial giant the world had yet seen. The steel industry was launched, a continental railroad system was created, a new era of farm machinery and cheap tools was promoted, free higher education was established, government support was provided to all branches of science, the Bureau of Mines was organized, and labor productivity was increased by 50 to 75 percent.

The Japanese “Free Lunch”

Another option is for the U.S. government to “monetize” its debt by having the central bank purchase and hold it or write it off. The Federal Reserve returns interest and profits to the Treasury after deducting its costs.

This alternative, too, need not be inflationary, as has apparently been demonstrated by the Japanese. The Bank of Japan (BOJ) started buying government bonds in 1999, after reducing interest rates to zero, then dropping them into negative territory in 2015. Today Japan’s government debt is a whopping 260% of its Gross Domestic Product, and the Bank of Japan owns half of it. (Even the outsized U.S. debt to GDP ratio is only 126%.) Yet annual inflation is now only 1.2% in Japan, not even up to the BOJ’s longstanding 2% target. To the extent that prices are rising, it is not from money-printing but from lockdowns and supply chain disruptions and shortages, the same disruptions triggering price inflation globally.

Hedge fund manager Eric Peters discussed the Japanese experiment in a recent article titled “Can a Modern Nation Pull Off a Debt Jubilee Without Full Monetary Collapse?” Noting that “core prices in Japan’s economy remain almost identical today as they were when its zero-interest-rate experiment began,” he asked:

Could the central bank create money, buy all the outstanding bonds, and simply burn them? Execute a modern version of an Old Testament debt Jubilee? …. [M]ight it be possible for a country to pull off such a feat without full monetary collapse? We don’t know, yet.

A Treasury Issue of Special Coins or E-cash

For future budget expenses, rather than borrowing, the government could follow President Lincoln and just issue the money it needs. As Thomas Edison observed in the 1920s:

If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%.

When the Constitution was ratified, coins were the only officially recognized legal tender. By 1850, coins made up only about half the currency. The total face value of all U.S. coins ever produced as of January 2022 is $170 billion dollars, or less than 0.9% of a $19 trillion circulating money supply (M2). These coins, along with about $25 million in U.S. Notes or Greenbacks, are all that is left of the Treasury’s money-creating power. As the Bank of England has acknowledged, the vast majority of the money supply is now created privately by banks as deposits when they make loans.

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In the early 1980s, a chairman of the Coinage Subcommittee of the House of Representatives observed that the Constitution gives Congress the power to coin money and regulate its value, and that no limit is put on the value of the coins it creates. He said the government could pay off its entire debt with some billion dollar coins. In a 2007 book called ”Web of Debt,” I wrote about this and said in today’s America it would have to be trillion dollar coins.

In 1982, Congress chose to choke off this remaining vestige of its money-creating power by imposing limits on the amounts and denominations of most coins. The one exception was the platinum coin, which a special provision allows to be minted in any amount for commemorative purposes (31 U.S. Code § 5112). In 2013, Georgia attorney Carlos Mucha proposed issuing a platinum coin to capitalize on this loophole, in order to solve the gridlock then in Congress over the debt ceiling. Philip Diehl, former head of the U.S. Mint and co-author of the platinum coin law. He said:

In minting the $1 trillion platinum coin, the Treasury Secretary would be exercising authority which Congress has granted routinely for more than 220 years . . . under power expressly granted to Congress in the Constitution (Article 1, Section 8).

Prof. Randall Wray explained that the coin would not circulate but would be deposited in the government’s account at the Fed, so it would not inflate the circulating money supply. The budget would still need Congressional approval. To keep a lid on spending, Congress would just need to abide by some basic rules of economics. It could spend on goods and services up to full employment without creating price inflation (since supply and demand would rise together). After that, it would need to tax — not to fund the budget, but to shrink the circulating money supply and avoid driving up prices with excess demand.

A more modern option is for the Treasury to issue “e-cash,” an electronic form of cash transferred on secure hardware not requiring an internet connection. The ECASH Act, H.R. 7231, introduced on March 28, 2022 by Rep. Stephen Lynch, “directs the Secretary of the Treasury to develop and introduce a form of retail digital dollar called ‘e-cash,’ which replicates the off-line-capable, peer-to-peer, privacy-respecting, zero transaction-fee, and payable-to-bear features of physical cash….”

Unlike the central bank digital currencies now being developed by central banks globally, e-cash would be anonymous and not traceable, having all the privacy attributes of physical cash. Various models are in development, including one already introduced in China in 2021, an offline-capable smart payments card that was part of the government’s digital yuan rollout.

A People’s Reset

Those are alternatives for relieving the government’s debt burden, but what about the massive sums in student debt, medical debt, and rent and mortgage payments now in arrears? Biden promised in his presidential campaign to forgive student debt or some portion of it. But whether this can legally be done by presidential order, without congressional approval, is controversial. Arguments have been made both ways.

For most student debt, however, the creditor is actually the Department of Education, a cabinet-level department established by Congress with some limited power to cancel debt. In August 2021, for example, the Department canceled the student debt of the disabled. Congress itself could also write off the debt. The challenge is getting agreement on which debts to cancel and by how much.

What of the student debt, mortgage debt, and credit card debt held by private banks? Private banks have a contractual right to repayment. They also have an obligation to balance their books, meaning they could go bankrupt if unable to collect. But as British economist Michael Rowbotham observed, these debts too could be written off if the accounting standards were changed. Banks don’t actually lend their own money or their depositors’ money. The money they lend is created simply by writing the borrowed sums into the deposit accounts of their customers, so voiding out the debts would be cost-free. The accounting standards would just need to be changed so that the books would not need to balance. The debts could be carried as nonperforming loans or moved off the books in special purpose vehicles, as the Chinese have been known to do with their nonperforming loans. As for which debts to write off and by how much, that is a policy question for legislators.

Would that sort of debt jubilee be inflationary? Yes, to the extent that students and other debtors would have money to spend from their incomes that they did not have before, money that would be competing for a limited supply of goods and services. Again, however, inflation could be avoided by powering up the production of goods and services sufficiently to meet demand.

That means powering up small and medium-sized businesses, which generate most local productivity and employment; and that means providing them with affordable credit. As UK Prof. Richard Werner observes, big banks don’t lend to small businesses. Small banks do, and their numbers are rapidly shrinking. A national infrastructure bank could do it but would have trouble making prudent loans for businesses and farms across the country. The Soviet Union tried that and failed. Prof. Werner proposes instead to form a network of local public, cooperative and community banks.

Arguably, local publicly-owned banks could also be capitalized with debt-for-equity swaps, using the ballooning state bond debts. We have plenty of debt to go around! A network of state-owned public banks on the model of the Bank of North Dakota would be good.

Other Options

To the extent that taxes are needed to balance the money supply, a land value tax (LVT) would go far toward replacing income taxes, without taxing labor or productivity. See “Pennsylvania’s Success with Local Property Tax Reform” in the book “Earth Belongs to Everyone” by Alanna Hartzok. An LVT excludes physical structures (e.g. houses) and taxes only the value of the land itself, including the natural resources on and under it. It thus returns to the public a portion of any appreciation in value due to public works (new schools, subway stops, etc.), without taxing improvements made by the property owners themselves. It helps curb land hoarding and speculation, and ensures that land sites are put to good use.

Independent community currency and cryptocurrency systems are other possibilities for circumventing debts in the national currency, but those topics are beyond the scope of this article.

In any case, if the global economy comes crashing down as many pundits are predicting, it is good to know there are viable alternatives to the technocratic feudalism of the WEF’s Great Reset. In his 2020 book “The Great Reset,” WEF leader Klaus Schwab declared that the COVID-19 pandemic “represents a rare but narrow window of opportunity to reflect, reimagine and reset our world,” making way for a polycentric technocracy. It is also a rare opportunity for us to implement an alternative system with a mandate to serve the people. We might call it the People’s Great Reset.

Ellen Brown
Web of Debt

This article was first posted on ScheerPost

Global Debt Surges to Record $305Tn in First Quarter on US and China Borrowing

Global debt surged to a record $305 trillion in the first three months of this year as the US and China, the world’s two largest economies, continued to borrow amid slowing economic growth exacerbated by Russia’s war in Ukraine.

Total debt climbed by $3.3tn in the January-March quarter, the Institute of International Finance said on Wednesday.

At more than 348 per cent of global gross domestic product, debt is about 15 percentage points below its peak in the first quarter of 2021, according to the IIF.

Reflecting the surge in inflation, the global debt-to-GDP ratio declined for the fourth consecutive quarter in the first three months of this year. The drop was more evident in mature markets.

“As the ripple effects of the Russia-Ukraine war continue to disrupt global economic activity, [economic] growth is expected to slow significantly this year, with adverse implications for debt dynamics,” IIF said in its Global Debt Monitor report.

“On the back of strict lockdowns in China and tighter global funding conditions, the anticipated slowdown will likely limit or even reverse the downward trend in debt ratios.”

Although global debt was largely driven by $2.5tn and $1.8tn borrowings by China and the US, respectively, in the euro area it declined for the third consecutive quarter.

The surge was underpinned by corporate sector borrowings — excluding financial institutions ― and general government borrowing, with debt outside the financial sector now topping $236tn — nearly $40tn higher since the onset of the pandemic. Cumulative debt in emerging markets is now approaching a record $100tn, the IIF said.

The inflation outlook will also play a role in global debt and will continue to help reduce debt ratios in general.

“As central banks move ahead with policy tightening to curb inflationary pressures, higher borrowing costs will exacerbate debt vulnerabilities,” the IIF said. “The impact could be more severe for those emerging market borrowers that have a less diversified investor base.”

Governments and central banks around the globe have poured an estimated $25tn in fiscal and monetary support to stabilise financial markets and minimise the effects of the pandemic on their economies. They borrowed extensively during the past two years to shore up finances and bridge fiscal gaps during a period of historically low interest rates.

However, the US Federal Reserve has started raising interest rates to combat inflation that hit 40-year high. The Fed plans to continue increasing benchmark rates this year and next, which will raise borrowing costs, particularly in emerging markets.

The war in Ukraine and sanctions on Russia have worsened global growth and inflation prospects. The International Monetary Fund lowered its 2022 and 2023 growth forecasts for the global economy to 3.6 per cent, revising it down 0.8 and 0.2 percentage points respectively from an earlier estimate.

Many emerging and mature market economies have entered the Fed’s latest rate hike cycle with high levels of dollar-denominated debt, the IIF said.
Since the onset of the pandemic, global government debt has risen by 14 percentage points, or $17.4tn, to 103 per cent of global GDP by the end of the first quarter of this year.
Faced with rising borrowing costs, sovereign balance sheets are under pressure. Financing needs of governments are still well above pre-pandemic levels, while higher and more volatile commodity prices could force some countries to increase public spending even further to ward off social unrest — especially if their economic growth remains lower than expected.

“Interest expense is becoming an increasingly heavy burden for sovereigns”, with sharp projected increases across mature markets, the IIF said.

The higher interest rate situation is particularly difficult for emerging markets that have less fiscal headroom, it said.

Non-financial companies have piled up more than $14tn of new debt since 2019, bringing total non-financial corporate debt to over$90tn at the end of the first quarter of this year.

While very large cash holdings of publicly listed companies provide a buffer against adverse shocks, rising debt levels have increased the sensitivity of corporate balance sheets to soaring interest rates.

Rising financing costs, coupled with heightened geopolitical risks, erased more than $16tn from global stock markets this year.

“One third of small-sized firms in mature markets are now facing difficulty covering interest expenses, making it particularly challenging for central banks to engineer a soft landing this time around,” the IIF said.

The sharp reversal in global risk appetite and economic uncertainty stemming from Russia’s military offensive in Ukraine has also forced a marked slowdown in debt for projects and deals adhering to environmental, social and governance standards.

“However, the growing focus on energy independence should accelerate efforts to scale up climate finance, supporting the development of climate and, more broadly, ESG debt markets going forward,” the IIF said.
Source: The National News

Sri Lanka Is a Small Preview of a Global Default Crisis

A woman sits beside Liquefied Petroleum Gas (LPG) cylinders along a street in Colombo, Sri Lanka on May 23, 2022. (Photo by Ishara S. KODIKARA / AFP) (Photo by ISHARA S. KODIKARA/AFP via Getty Images)

A woman sits beside Liquefied Petroleum Gas (LPG) cylinders along a street in Colombo, Sri Lanka on May 23, 2022. (Photo by Ishara S. KODIKARA / AFP) (Photo by ISHARA S. KODIKARA/AFP via Getty Images)

By Ruth Pollard

High school teacher S. Jeeva has spent two days in the baking sun lining up for cooking gas in the north of Sri Lanka’s capital. He’s been standing with thousands of others waiting for a delivery that, so far, hasn’t come. Meanwhile, many of his students, who will sit for important national exams Monday, have joined protests against the government at the waterfront along Colombo’s iconic Galle Face Green.

Both are symbols of the economic and political crisis gripping the nation — the result of decades of corruption and financial mismanagement that pushed the country to default on May 19.

It is, Jeeva says, his students’ democratic right to protest and demand a better government. Daily life has become such a struggle that it is impossible for them to study. “How can they memorize their material if they have no lights, no power, no fuel to get to school,” the 32-year-old language teacher told me. An endless row of empty blue LPG gas cylinders lines the street next to him. These teenagers should be thinking about their future and preparing for university — instead they are worrying about how the island nation will ever emerge from under its pile of debt.

What happens in Sri Lanka matters way beyond its borders. Global markets see it as a bellwether for a raft of potential defaults across the developing world as countries face a growing, post-pandemic debt burden.

So what does a country in default look like in 2022?

Armed soldiers are on the streets and there’s days-long queues for gasoline and cooking gas. Harvests are down by 50% because farmers either cannot afford to cultivate crops, or they’re only growing enough for themselves because there’s no fuel to transport what they’ve produced.

Pharmacies are running out of medicine; and hospitals are dangerously short of lifesaving drugs and devices. Incomes are shrinking and inflation is accelerating above 30%. Parents are eating just one meal a day so their children can have three, while doctors report that patients are rationing essential medicines for serious conditions like heart disease and diabetes.

There’s also growing unrest — protesters may not be burning down the family homes of the ruling Rajapaksa clan as they did on May 9 — but there are daily demonstrations throughout the country calling for the resignation of President Gotabaya Rajapaksa (his brother Mahinda stepped down as prime minister on May 10 after that deadly violence.) Police and security forces are pushing back with water cannons and tear gas. It’s a tactic that risks tipping the country further toward a broader rebellion.

How did Sri Lanka go from being named by Lonely Planet the world’s best travel destination for 2019 to nearly running out of foreign reserves and defaulting on its debts? The warning signs were there from the moment the powerful Rajapaksa clan retook control of the country following a sweeping election victory in November 2019. Their divisive dynastic politics, combined with questionable financial decisions — including heavy capital-market borrowing that now accounts for some 38% of the debt — go a long way to explaining its path to ruin.

Yes, the pandemic was a disaster for the tourism-reliant economy, and so too were the deadly Easter Sunday bombings in 2019 that ushered in a return of the Rajapaksa dynasty, but the rot had set in well before that. Sri Lanka’s interest payments on decades of borrowing are now almost equal to the principal, as political economist and senior lecturer at the University of Jaffna, Ahilan Kadirgamar, noted.

Importantly, Sri Lanka has lost its agency — with the International Monetary Fund, the World Bank and its bilateral lenders, China, India and Japan — if it ever had any to begin with. Kadirgamar says the country has never set its own terms for its development: It has always been at the mercy of external powers. There have been 16 IMF agreements since 1965. “This time it is much more desperate,” he told me. “We cannot even pay for the next shipment of fuel even though the ship is sitting outside our port.”

There are many other emerging-market economies with similarly unsustainable debt that are facing the possibility of default, says Kadirgamar. “Things are unraveling across the globe, with the disruptions from Ukraine and Russia on a scale we have not seen in recent history.” The international community is watching the situation and wondering: Can Sri Lanka’s crisis be solved via a framework applicable to other countries?

In South Asia, Pakistan is teetering on the edge economic peril. If the government doesn’t increase fuel prices, it is in danger of defaulting in just three months. It needs an IMF program to avoid this eventuality. The World Bank noted in March as many as a dozen developing economies may be unable to service their debt in the next year. The biggest challenge for these nations, it says, is sovereign debt restructuring, just like Sri Lanka.

The Group of Seven economic powers announced their support for debt relief efforts for Sri Lanka on May 19. Assistance may also come up at the Quad meeting in Tokyo on Tuesday, where the leaders of the US, Japan, India and Australia will hold talks on issues of regional concern. In the meantime, Sri Lanka is negotiating with the IMF for a bailout that will help it negotiate debt restructuring with its creditors. The country has previously said it needs between $3 billion and $4 billion this year to pull itself out of crisis, but the true extent of its debt has yet to be exposed.

Only last week, new Prime Minister Ranil Wickremesinghe (in his sixth time serving in this role) revealed a previously undisclosed debt of $105 million to a Chinese bank that had also fallen due. That means, as Lakshini Fernando, the senior vice president and economist of Asia Securities, told me, Sri Lanka actually defaulted on $183 million, not $78 million as previously thought.

In the short term, Fernando said, the situation is only going to get worse, especially for daily wage earners who are most vulnerable to inflationary pressures. “The only way the entire population is going to simmer down is when there is gasoline available and no more food shortages, and that is not going to happen any time soon,” she said. But because Sri Lanka is such a small economy, a large and immediate infusion of US dollar aid could quickly stabilize the situation.

Then it will be up to the government to ensure the structural reforms are in place to ensure Sri Lanka does not find itself back at the IMF for the 18th time. And on a global scale, the international community will need to step in to try and stop the domino effect of the nation’s default rippling through any more emerging economies.

Ruth Pollard is a Bloomberg Opinion editor. Previously she was South and Southeast Asia government team leader at Bloomberg News and Middle East correspondent for the Sydney Morning Herald. @rpollard

© 2022 Bloomberg L.P.

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