Episode 064 - A false sense of security
In this episode, we talk about the Federal Reserve in the USA, the government and how the system is truly rigged against you. I cover the systemic risk of banking collapse and how a short, sharp, shock event would be a far better outcome than the current long, slow decay of your future and buying power. But as in all things, there is light at the end of the tunnel.....
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Show Notes
Most people don’t understand money
Most people don’t understand financial services
They are very different animals
Start with definition of terms:
“Sound Money”
“Free market capitalism”
“Productive output”
Brief history of banking - Venice Italy
What exactly do banks do - They take deposits, and they lend it to others
What are the risks associated with banking?
- They don’t have adequate capital to pay back their depositors
- They lend to parties that can’t or won’t pay back the principal
- They punt on some ongoing interest rate dividend to them, which doesn’t eventuate
How do banks avoid this situation today? The Federal Reserve
The Fed Reserve is nothing more than a private cartel of banks that are funded by Fiat - Edict from the US Federal Government that they have the right to “create” money by buying US Treasury Bills (effectively IOUs) from the US government that underwrites the money.
This means that for every new $1 that is minted, the US government is creating a debt of that $1 to the US general public (and in fact 80% of the world’s countries that settle their inter-country debt in $USD).
But there is a general rule when it comes to money - Money cannot be “created”. It simply changes hands from one party to another.
Therefore if you have $100 today, and the Federal Reserve is injecting more money into the monetary supply to bolster the losses from adverse events (ie. pandemics, “too big to fail” organizations, FDIC underwriting of banks, etc.), it comes from the efficacy of your $100. This is why the USD has devalued since the formation of the Federal Reserve.
The US dollar has in fact devalued so much that $1 in 1913 is now worth $0.04 in 2020. This is a 96% devaluation of currency efficacy.
Imagine if you had $100 in 1913 sitting in a safe, and 107 years later you find out that it is worth $0.04, you would be pissed.
But here’s how it balances out... If you had spent that $100 on real estate in 1913, the value of that real estate (assuming you maintained it), according to the Case-Schiller index of real estate property valuation, that $100 would have gained over 3000% during that time.
So what happens is that the value of real things - real estate, gold, etc. doesn’t change. But the measurement of its value, changes as each increment of measurement ($1) loses its power.
And this is the core mistake that 99% of people make - they measure their net worth in dollars rather than measuring their assets based on real value.
Let’s talk about financial services
The simplest picture that anyone has when it comes to their money is the image of a bank.
A bank used to be a secure vault of storage - you would commit your money to a bank, and they would store it safely for you in their vault. When you needed to get access to it, you would front up to the bank and withdraw some or all of your money. The bank would provide you an incentive to put your money there, by paying you a portion of the proceeds that they would get from the right to lend that money to other customers. If a bank earned 10% on the money, they might pay you 5% for the “raw material”. The arbitrage between their deposits and their loans would be their revenue.
If they made bad loans, they would eat the loss. If they made good loans, they would enjoy the rewards. That’s on them - but you just want to know your money is safe.
Is it? No. In the case of modern day banking, you are “giving” your money to the bank, in exchange for an IOU from the bank. Just as the borrowers to the bank may default on their loans, the bank has the very same risk to you - they could shutdown and take your money.
How do you feel safe then if your money is devaluing naturally, and yet you want some interest to offset the loss of the value of the currency?
Well you have two options:
1. Don’t use a bank and buy income producing assets - ideally ones that increase in value at or in excess of the rate of loss of power of $1 USD (to simplify things, we’ll call that the inflation rate).
2. Use a bank, but only the bank that has some insurance policy that protects you. The most common is the FDIC policy that covers up to $250K of your deposits in the case of bank default.
Well who exactly funds the insurance policy of the FDIC? You do. It is built into the interest rate that you are not getting for your deposits. And who exactly pays out when a claim is made? You do. It is based on your governments wealth that is funded from the very taxes that you pay.
But let’s make this even more tricky to follow the rabbit....
The government is dead broke. Like a bank, when there is a run on for depositors wanting their money back, the government can’t meet its obligations to fund social services, promises made to its citizenry, the defense of the homeland, the education of the public and the health & well being of the biology of its citizens.
We’ve turned our perception of government into a sporting event with Team A vs. Team B. We forget the boring role that we expect them to provide for the citizenry. And we’ve taken our eyes off the ball here - debt levels at $26T means one of two things....
1. We can continue the charade that we can keep borrowing ourselves out of this mess, by borrowing from the future of us and our kids based on the constant devaluation of the $USD, or
2. We can default on the money, cause a massive panic, poverty and economic collapse that will not only affect the USA, but 80% of the rest of the world that relies on the $USD as the “safe haven” of monetary transfers
I think the answer here is #1
And this is relatively proven by looking at the extreme boom & bust cycles of the past 20+ years. With these cycles comes more Fed Reserve intervention, which just magnifies the problem again for the future.
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OK, so now you know what is going on. The Fed Reserve is not your friend. The government is in debt so much to the Fed that it can’t function correctly, and society has been swindled out of the spending power of their money.
Those that have saved up to retire, are the first victims in this because either they will never get their money out of their deposits (ie. if they use the stock market and it crashes due to Fed Reserve intervention), or they put their money into a retail bank only to find the day comes when there is a run-on the banks and the FDIC can’t pay out to make all depositors whole.
And with all of these possibilities in play, and those with savings holding the bulk of the risks, there is one other potential - THE GREAT RESET
The great reset is just a term for a complete collapse of the economic system worldwide, and a resetting of value of Fiat currencies. As things get worse, with no sign of any change for the future, the potential of a reset of value in currencies is more likely. Most would prefer this to be eased in, but the way that things are going - particularly with the pandemic and constant request for stimulus to the people, creates an innevitable situation as the real economy retracts. The lack of a tax base to fund government debt means that you can’t reverse this cycle.
Here’s the warning I have to give to everyone
If you are banking on just socking away your money into some interest bearing asset, with no counter balance in other real assets that do real things, you are probably going to get rekt.
If you can honestly see a way clear of a country with $26T of debt and $100T of future unfunded liabilities, I’d love to hear how that could work. I’m sure congress and the entire banking sector would also love to hear it. And if you are just someone who wants to break free of the rat race of being a work slave, you probably don’t spend much time thinking about these things. You’ve got better things to do - just keep working, dollar cost average invest into the markets, and punt on the future being better than today.
Can you honestly see that based on what is going on with out of control central banks and government mismanagement?
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Now some hope....
As the value of a $USD is diminishing and the risks of it collapsing entirely is out there, what if you were to change the way you measure value into another form?
Now I’m not talking about using EUR or Pesos or some other currency. I’m saying that the assets that are inflating here are real assets that provide real value to real people. Food, shelter & clothing to begin with. If you own the means of production of these things, you will always be able to survive. Because the means are an asset generating a true dividend.
If you own land, you can grow food. If you own rental real estate, you can provide shelter to tenants. If you can fabricate the things you need, you probably don’t need to purchase them from others - but if you do, and you can barter for something you have, you are wealthy.
Yes, this is somewhat medieval, but it works. It works through wars, famine, poverty and economic collapse. Consider how those who were victims in large wars managed to survive - they had something that others wanted and they traded (often for their own freedom) with those things.
And one of the best things you can hold (physically) that has value is gold. No, I’m not trying to sell you gold. I’m trying to suggest that if you need something that has value and can survive an economic collapse, physical gold & silver is likely to be one of your best options. Keeping at least 10% of your asset portfolio in gold, is a hedge against the dollar collapse and pending reset.
You may also want to match this with crypto currency. But know the risks here - through government regulation, laws and edict they can wipe out crypto-currency entirely with immediate effect. The only way that this could be avoided is if there was a vibrant economy trading on that currency - ie. vendors accepting crypto currency for goods & services, and customers paying for said goods & services with crypto currency. If that was to exist, then they couldn’t just wipe it out. But if all it has become is a HODL asset, then it isn’t going to vote any politician out of power if they ban it.
Yes, the gains could be extraordinary but remember that if the economy can’t sustain the power requirements of running large bitcoin mining factories, then it won’t verify transactions and at that point it is a useless asset. And if other countries are controlling the mining, and those countries become enemies of your nation, then they possess a weapon to destabilize your country. All they do is to not verify transactions, and the currency loses all value.
There are a lot of “ifs” here, but the constant evangelism of the power of crypto currency but without any critical analysis of the risks associated just mirror the exact same evangelism of the US economy without any critical analysis of the risks associated of $26T of debt.
A true contrarian must be a critical thinker and must recognize herd mentality when they see it. Diversification may be a worthy approach here, but return as much to the basics of what people need and want, and how you can be a part of the supply chain to provide it. Simply pretending all of the risks away doesn’t remove the risks. In fact, it amplifies them because bad people do bad things when everyone’s backs are turned.
We will keep an eye on these events as we see them, but don’t dismiss macro economic warnings outright. We are teetering on the brink of collapse here - that’s not some conspiratorial statement. That is based on factual evidence - just look at the debt laden US government and try and think how we can solve that. Meanwhile more stimulus bills are being pushed through congress, to garner favor with voters, etc. because no one wants to be the bad guy here.
