Wednesday, September 8, 2021

Exorbitant Ignorance

Many Americans have been brainwashed to believe they have inherited the mantle of greatness passed down from prior generations. What they have actually inherited is the bill...

Those pundits who analyze the U.S. dollar reserve currency usually do so in the financial sense vis-a-vis the capital account. They happily ignore the long-term impact of an economy increasingly reliant upon foreign imports. They extol the fact that the dollar reserve currency allows the U.S. to import both capital AND goods from around the world on a seemingly unlimited basis. Vendor financing on a global scale. This has allowed the U.S. the "exorbitant privilege" of ignoring its ever-widening twin deficits - fiscal and trade.

Which is why it's no surprise the U.S. invented the concept of "Free Trade". No other major trading country - Japan, China, Germany believes in such a thing. Unlike the U.S. they are all trade mercantilists which believe as the British did hundreds of years ago:

"The Balance of Foreign Trade is the Rule of Our Treasure"

Historically those countries that rested on their laurels and relied upon their currency reserves to fund their standard of living soon found their currency reserves depleted. Mercantilist nations running trade surpluses happily relieved them of their burden. The most common example being Spain during its reign of empire. Of course in the age of fiat currencies and unlimited debt monetization, the price to be paid is not in gold reserves. The price is one that has been ignored for the past four decades - industrial capacity, intellectual property, scientific and engineering capability. A transition from a high productivity manufacturing economy to a low productivity services economy.


The silver lining in this rapid descent into Third World penury is the fact that China now needs the U.S. trade deficit as much as the U.S. does. China can ill afford to have its factories idled and its population mass unemployed, so instead they continue to accept the seemingly worthless dollar in exchange for their exports.

So does living off the largesse of all prior generations still confer greatness? Today's morons clearly believe it does. History won't be as kind. 

My wife and I both in our early 50s discuss what will happen to Social Security long-term. What most people don't know is that the program is already in the red. The so-called Social Security "trust fund" is a fictional entity that contains worthless IOUs from the Federal government to the Social Security fund. Each IOU from the government that must now be cashed in to pay retirees represents Treasury issuance on the open market. The Social Security "surplus" that existed for the past several decades during peak Boomer employment was squandered on successive rounds of tax cuts for the ultra wealthy. The Social Security surplus was "borrowed" by the Federal government in order to pretend the tax cut driven deficit was much smaller than it really was. Complicit economists merely claimed it was money we borrowed from ourselves which is why they excluded it from the "public deficit". However, now that Social Security proceeds are LESS than the payouts, it turns out that this private deficit is money we need to now borrow from others because we don't bring in enough taxes to borrow from ourselves anymore. Which means that if you are someone over a certain age who is soon to be reliant on Social Security, then you have to pray that we are now Japan and locked in a state of permanent deflation. 

If not, you must allocate a certain portion of your wealth to gold to protect against inevitable inflation. Don't fall for this bullshit that Bitcoins are the new gold. Having a certain allocation to gold in a portfolio will likely prove more valuable than stocks in the long-term. 

Gold has outperformed stocks for the past twenty years:

Nevertheless, when you put it all together, one realizes that the outsourcing of the economy has essentially ensured a deflationary outcome. As the U.S. fiscal deficit grows, the trade deficit grows in direct correlation. The U.S. is importing deflation from Asia. Which is why Biden's stimulus will have no long-term inflationary effect. The money is heading straight back to China where it originated. 

The balance of trade is record wide in 2021:

In addition, at the peak of the largest asset and credit bubble in human history, owning any risk asset at this juncture is a dangerous proposition. There will be plenty of gold and stocks puked back onto the market during the global margin call. 

Gold is warning us that inflation is a hoax. Those who don't heed that warning will soon realize that they were only renting exorbitant ignorance all along.