Home Forums Hunting & Shooting Hunter's Campfire The Gold Standard, Yes or No?

Thanks, It will take me a little while to digest this. You see I'm only a high school graduate, pretty good at arithmetic and reading comprehension but I admit my unwashed plebeian condition.

Hastings,

Another good question. Let me try to expand a bit for you.

Within the confines of the U.S. Government, the two adults in the room as the U.S. Military, and the Federal Reserve. This chart will not imbed, but take a look. Our inflation has not breached 4% since 1991. That's almost 30 years ago. And since 1997, it's spent most of it's time below 2.5%.

Think about that for a moment. Despite all the capital injections following the housing crash of 2008-2009, there was no inflationary bubble as measured by CPI. Why is that? Remember that video on the Great Depression? Well Bernanke was a Scholar of the great depression, with several published papers on the subject, and understood better then anyone the mistakes of the 30's and did not repeat any of them. After TARP was passed, much of the money was "repurposed" in the form of direct capital infusions into the banking system to replace the destroyed base money. As a result, even though some banks went under, there were no serious bank runs, and no American loss access to their money in any banking institution for more than 24 hours. This, coupled with the follow on low inflation tells us the Fed did a very good job, under very adverse conditions, properly gauging the size and nature of the capital injections needed. In this instance the "money out of thin air" replaced the destroyed capital, in order to maintain liquid markets and prevented the total freeze of financial markets experiences in the 1930's.

Perhaps the biggest irony of all of this, is that the market operations conducted by the Federal Reserve actually MADE MONEY for the U. S. Treasury. I suspect there will be a similar profit by The Fed during this current go round. After all, they were buying distressed assets at artificially low prices...

Despite all the monetary injections, if anything Money Supply, as measured by M3 is falling behind our economic growth. The general rule of thumb is M3 should approximate your GDP. As you can see from the following charts, that's largely been the case for the U.S. since WWII:

https://fred.stlouisfed.org/series/GDP

https://fred.stlouisfed.org/series/MABMM301USM189S

M1's been mostly coming down since the 1960's,
https://fred.stlouisfed.org/graph/?g=dQQ

But that's offset by a significant decrease in the velocity of money as less in held in passbook/CD type banking accounts, and more is held in the form of stock. Keep in mind, in genera, the reserve requirement for bank assets is 10%, but brokerage accounts is 50%, and 100% for retirement type accounts such as IRS's and 401K's:

https://fred.stlouisfed.org/series/M2V

That was a long winded way of saying, you are worrying about the wrong players. The Federal Reserve and their management of the money supply is not the primary risk, our bigger risks are political.

As Far as, "what goes up must come down", that's a fatalist vision of financial markets that's not necessarily true. The Dow Jones industrial average started at 100. Today it's over 26,000. Do you really believe, bases on some parallax to gravity, the Dow is going back to 800 (today equivalent to 100 adjusted for stock splits and dividends)? Of course not, so lets dispense with that fallacy.

So lets talk about where we are relative to traditional conditions for a "debt bomb" relative to the U.S Federal Debt.

The historical figure for national "financial trouble" is a Federal Debt in excess of 200%. Recently, Greece, Italy and Portugal reached these levels and their economies nearly blew up, but Japans currently over 240% and their economy isn't blowing up. Why, and how does this difference relate to the United States?

The 200% number assumes "normal" interest rates. When Greece's debt approached 200% of GDP they were paying 8 and 9 percent, if not more, on their debt. The current rate on Japan's 10 year is .01%. Even though Japans total debt is high, their interest rate is low enough that their debt burden retaliative to their GDP remains low.

The same applies to the U.S. Although our Federal Debts been increasing, we've continued to refinance at lower rates decreasing our interest to GDP ratio. In other words, in a world of 0.625% interest on our 10 year treasury, the 200% "rule" does not apply. If it was possible to maintain a true interest rate on our debt around 5/8th of a percent, we could take out a truly absurd amount of debt before it became unmanageable.

Of course, reality is not that simple, and something would have to give. At what point would something give? Unfortunately, such calculation are not simple linear relationships, and involve some real math and coding that I'm not willing to do unless I'm getting paid for it. You can see in just our casual conversation how many variable I've introduced, and a proper econometric evaluation could easily require 10 times that many providing we are just using previously derived variables and not conditioning our inputs. This is why when the Nobel Prize winning Econometricians were asked about their views of the current situation, their basis answer was "we would need to evaluate the data".

In general, the current data does not support the hypothesis that without an exogenous shock, in the short term, the U.S is on the verge of a total financial collapse, or as you call it, "A day of Reckoning".

If did see such a "Day of Reckoning", what are the likely catalysts, or series of catalyst that would precipitate such an event?

For this I draw your attention to the recent events in Argentina. After the election of a socialist government, their markets dropped 40% over night and interest rates spiked from 20 to a high of 80%. It was a similar right to left power transition in France that allowed George Soros to become a billionaire. He shorted the Franc following the election of socialist in France, and literally made a billion dollars of the crashing French currency.

Now, imagine if four months from now Joe Biden wins the election? Major brokerage houses are predicting a 12% fall in S&P earnings just as a result of his tax policy alone. Democrats already hold the house, and what about the Senate? Republicans will be defending 23 seats to the Dems 12. That difference is enough to potentially swing the Senate. If we extend the 12% decrease in earnings across our whole stock market, that would destroy in excess of 3 trillion of assets on a straight line valuation alone. Keep in mind stock prices are leverage to their growth rate. As growth rates shrink so do P/E ratios, so this 3 trillion could quickly grow to 6, or 9 trillion is losses. With Biden's stooges at the head of all the three letter agencies, most of Trumps regulation cuts would be undone, and every regulation is a tax, thus further impacting earnings and market losses. Just sleepy Joe's proposed ban on Fracking alone could reduce GDP by 3%, and turn us from a net energy exporter to an energy importer, and crash the high yield bond market which is currently dominated by issuance from frackers and other oil issuers. Now let's throw a few hundred trading algorithms on top of that, and well, things could get real interesting.

And, we all know what a democrat controlled government would do. There would be a "stimulus package". I can imagine it being on the scale of 10 to 20 TRILLION (20 trillion under Speaker Cortez) dollars, and the single biggest transfer of wealth in history. There would be no money for banks to rebuild our capital structure, but plenty of money for "historically marginalized communities" and the like.

Twenty trillion for people to drink beer, smoke pot, and not work (i.e. stay unemployed), and that's not including the use of the crisis to pass "Universal Health Care", and in the process not only increase spending, but destroy a significant portion of our insurance industry, and their role in our capital structures.

So then what? Well, the Fed can't really cut interest rates, because they are already approaching zero. If we cut too close to Japan's rates, we loose the benefit of the previously explained "carry trade". A large source of demand for our treasuries would dry up overnight. So who's left to buy this 20 trillion in debt. Sleepy Joe's New Fed.

So, Trillions of market cap destroyed. We'd be in a recession, especially after the destruction of our oil and health insurance industries, and the Federal Reserve would be the only buyer for trillion in new debt, all of which would be wasted, and provide no real long term benefit for the economy.

While this is going on, lets defund the police, especially the FBI's domestic terrorist investigators. No assets of any energy or timber, or other resource company would be safe anywhere in any Blue State. Even in Red states you can imagine the FBI's civil rights division going after prosecutors for prosecuting eco-terrorist for "civil rights" violations.

I'm not sure how much of this the Americian people would tolerate, but that's what a politically created short sellers opportunity would look like.

That's ok.

It took me awhile to write it. In the process, it gave me a lot to thing about as well.

Silver in 1916 was $16/ ounce
104 years later....
Silver in 2020 is $16/ounce

Sounds like we got much better at mining it.

https://www.macrotrends.net/1470/historical-silver-prices-100-year-chart

It looks like $16 /ounce in 1916 on this web site