$1 Trillion in 3 Months
Debt is Going Hyperbolic
I wrote in January, 2022, that I didn’t think the Federal Reserve could possibly fight inflation because it would essentially bankrupt the Treasury. Well, they’ve put on the appearance of trying to fight inflation, but there’s no way they can win this battle, and the reason why remains the same as I described over a year and a half ago.
We’ve just learned that the government borrowed more than $1 Trillion in a period of 3 months this summer! Given that the average maturity of U.S. debt is a little over 6 years and heading higher, let’s assume that they’re paying the 10-year rate of 4.33% on this $1 Trillion. That’s an expansion of the annual deficit by $43.3 Billion in just 3 months! This massive expansion in deficits is why I said the Fed could never get anywhere close to the Taylor rate — which is the rate needed to return inflation to the Fed’s 2% target — without bankrupting the government and therefore putting all welfare and entitlements at risk along with national defense and upwards of 10 million jobs closely reliant on federal spending.
Even if the government weren’t adding to the debt at this pace, the Treasury still has to roll over existing debt at higher interest rates, which adds to the deficit and the debt like a snowball rolling down a hill. Including the profligate spending that the government refuses to stop growing exponentially, this is rapidly coming to a crisis.
We’re waiting on the Fed’s September rate decision as I write this, and the market is pricing in a 99% probability of a pause. But pausing Fed Funds rates at 5.25% while inflation is still more than double the Fed’s 2% target does not end inflation. Something closer to 10% would be needed (and that’s if you believe government numbers, which I don’t). But the Fed can clearly see the writing on the wall that the government is going bankrupt, the banks are increasingly dependent upon the Fed’s emergency lending facilities, and the economy is crashing. Whether or not Jay Powell & Company raise another 25 bp is meaningless because they’ll never get to the Taylor rate and they’ve already gone too far for the economy to support. A major liquidity squeeze is already underway.
So what comes next is popping bubbles, crashing markets, bankrupted companies, government shutdowns, and mass layoffs. This will at first appear deflationary as debt gets destroyed in the bankruptcy process, but the Fed can’t sit back and fiddle while the entire country burns down. They’ll do emergency rate cuts and quantitative easing, sending inflation back into the stratosphere. Which is why I wrote that the Fed can’t fight inflation — and if they did, since they did try — they would only create the conditions in which they would have to massively add to inflation again anyway.
Powell failed to live up to his Paul Volcker dreams of raising rates beyond anyone’s comfort or belief so as to conquer inflation. That’s because with a national debt of $33 Trillion and a private sector economy completely addicted to low rates, this is nothing like the 1980s. In fact, in 1980, the entire national debt wasn’t even $1 Trillion, and now the government is adding that every 3 months! We’re now in a late stage bubble economy in which the only path forward is seemingly hyperinflation.
Here’s my January, 2022, infographic for why the Fed would fail:
My prediction is that the Fed is planning on introducing a central bank digital currency (CBDC) in order to manage the coming hyperinflation. Having programmable digital currency will enable the Fed to revalue currency on the fly, change interest rates frequently, even going negative, and institute mandatory rationing and price fixing. In August, the Fed launched its FedNow payment infrastructure which is the foundation of any CBDC.
The best way to prepare yourself for the coming currency crisis and hyperinflation is with capital assets — like solar panels, a garden, your own water well, etc. — and real assets such as precious metals. All fiat monetary instruments and derivatives, including bonds and money market funds, are likely to lose value very quickly, perhaps in a panic selloff.
There's only about $2.3 trillion of cash in circulation (53 billion notes) versus $17.6 trillion of deposits at commercial banks and $5.25 trillion in MMFs. In other words, only 10% of "cash" is actually able to be withdrawn and held as physical bills and coins. That's only about $7 per American man, woman, and child. So when you go to your ATM, if you're not first in line, you likely won't get any money out. And even if you do, the notes will quickly lose value anyway.
Where should you deposit your funds instead of MMFs, bank accounts, or physical cash? I would highly recommend putting them into an *allocated* precious metals account which is regularly audited to ensure that all of the metal is there 100% backing your deposits and not subject to any creditor claims whatsoever. Here are two that I recommend:
BullionVault - https://PassantGardant.com/BullionVault
Either of these companies will be able to store your wealth in gold, silver, or platinum in any number of fully insured vaults around the world. BullionVault has vaults in New York, London, Toronto, Zurich, and Singapore. OwnX has vaults in Delaware and Texas. Both will allow you to transfer money to and from any bank account and trade metals online. Not only will keeping your wealth in precious metals protect against bank runs and money market runs, but it'll also protect you against inflation and hyperinflation.
When should you move your wealth to precious metals? I would recommend doing so immediately, as the prices of gold and silver will likely be skyrocketing soon as everyone tries to rush into the protection they provide. Companies like BullionVault and OwnX may need to turn away new customers if they cannot secure enough precious metals to meet depositors needs since they are 100% backed by physical metal. Unlike with banks and MMFs, allocated precious metals repositories cannot suffer runs because customer assets are segregated and allocated to them specifically. There's no loss of value or first mover advantage to redeeming your assets. They'll still be there no matter how many other customers want to take delivery.
Should I trust unallocated precious metals accounts such as the Perth Mint? It would be better than a savings or money market account, but you have to realize that an unallocated precious metals account makes you a creditor to the institution you're buying from. They will "owe" you gold or silver without necessarily having any at the time. They are essentially short of gold and silver, which is not a good place to be right now. When it comes to withdrawing your metal, they will seek to find it in the market, or if they can't, will owe you the dollar equivalent value of it. This is a risky bet compared to allocated accounts which have the metal stored in your name in serial-numbered bars.
Again, I recommend allocated accounts first and foremost, but unallocated if that's all that's available by the time you get around to it. Best to act quickly now.
What about holding physical gold and silver directly? Yes, absolutely, that's a good idea up to a certain amount. Having too much in your own possession can be risky because of theft, but having enough on hand to barter for food, fuel, etc., for up to a month or two would be a great idea, especially if there's a bank holiday and you can't access cash. You can also document your precious metals holdings to your home insurance in case of theft or fire to be at least partly protected. My recommended dealer for physical precious metals is:
MoneyMetals - https://PassantGardant.com/MoneyMetals
Any other ways to protect or grow wealth during this financial crisis? Sure, you can also purchase precious metals related equities such as royalty and mining companies using your brokerage account. Some good tickers include AG, EMX, EXK, FNV, FSM, HL, JNUG, MTA, PAAS, RGLD, SAND, SILJ, and WPM. This is not trading advice however -- do your own due diligence. If you don't yet have a brokerage, I would recommend:
Robinhood - http://PassantGardant.com/Robinhood
Mining and royalty companies represent leverage to the underlying metals, which are likely to be going up in price significantly as people rush to protect themselves from the collapsing global financial system.
How can I stay informed about what's going on?
Unfortunately, I expect censorship to significantly restrict the free flow of information going forward. Rep. Thomas Massie wrote on Twitter that the government is looking to shut down any social media posts that discuss anything which might "promote a bank run". Manually check back to this Substack often and also watch less censored alternative media such as ZeroHedge and Rumble.
Once again, my four recommendations to protect yourself and potentially profit from this crisis include:
BullionVault - https://PassantGardant.com/BullionVault
MoneyMetals - https://PassantGardant.com/MoneyMetals
Robinhood - http://PassantGardant.com/Robinhood
Good luck and be safe! Please share this post with your friends and family so that they are also protected!