Uncomfortable Truths About Banking And Money

Most people like their truth palatable, easy to digest, and believable.  Unfortunately for our emotional needs, some truths are uncomfortable, unsettling, and difficult.

Regarding the United States, the U.K., Europe and Japan IT IS COMFORTING TO BELIEVE:

• Debt has increased exponentially for decades, and in the case of the US, for over 100 years. It has worked so far, so we want to believe it will continue for the foreseeable future.
• Our governments act as if they believe we can borrow ourselves out of debt, spend our way into prosperity, and pretend and extend indefinitely.
• Every major country has a central bank, so it is comforting to believe they are needed.
• It is comforting to believe that gold is unnecessary. As per Warren Buffett, we dig it from the ground, and then store it in a vault, where it sits.

These may be common and comfortable beliefs but they are all incorrect, and will be proven false in coming years.

In the US, national debt has increased from about $3 billion in 1913 to over $19,000 billion ($19 trillion) in 2016.  That is an average annual increase of about 9% per year, every year for over 100 years.  Can debt increase similarly for another 100 years to over $100,000 Trillion?

1. The crisis of 2008 hinted that “peak debt” had arrived. The Fed and other central banks responded to the crisis by creating more debt and supposedly “saved” global economies.  They made a bad problem much worse and merely bought time, which means the coming implosion will be more destructive.
2. Debt cannot increase exponentially forever. Place 1 penny in a savings account at 6% annual interest and allow it to increase exponentially for 1,000 years.  Your $0.01 has grown to a few hundred bucks – right?  No!  It has grown to $202,000,000,000,000,000,000,000.
3. Compound interest increases debt similarly, but in the US we begin with $19 trillion in debt, not one penny. Debt will not increase forever and there will be a reckoning in which assets will be marked down closer to intrinsic value.  What is the value of a 30 year bond yielding essentially nothing, issued by an insolvent government that cannot pay its bills without borrowing more?

Central Banks:  Every major country has a central bank.  Name one thing that a central bank produces, except massive quantities of paper and digital currency units that further devalue all existing currency units.  Central banks are valuable for their owners and for the financial and political elite – but not for most people and small businesses.

Gold:  If you listen to the financial and political elite they will probably inform you that gold is mostly useless.  But it has been money for thousands of years, is valued globally, and is convertible into paper and digital cash everywhere.  An ounce of gold sold for about $42 in 1971 and currently sells for about $1,250 in May 2016 – an annually compounded increase of about 7.8%.

Debt:  When the debt pyramid crashes, when bonds and currencies are marked down to near intrinsic value, when central banks create massively more currency units to “paper over” the coming crisis, will gold substantially increase in value?  Trick question!  Gold will always be valuable, but the dollars, pounds, yen, and euros will continue to devalue and, from a dollar-centric world it will appear that gold is becoming more expensive.  No – the apparent increase in gold price is largely caused by the devaluation of currencies.

Spend into prosperity, and borrow ourselves out of debt.  A moment’s reflection should demonstrate these are not true, even as political candidates promise more and more “free stuff.”

CONCLUSIONS

• It is comforting to believe that our politicians and central bankers will manage our countries and currencies for the benefit of all. Don’t plan on it.
• It is comforting to believe that debt can increase forever with minimal consequences. Don’t expect another hundred years of this nonsense and don’t expect an easy resolution to the excessive debt problem.
• It is comforting to believe that central banks are necessary. The truth will eventually become clear.
• It is comforting to believe in paper assets, debt based assets, and fairy tales, instead of gold, silver, platinum, land, and other real assets. Gold thrives, paper dies.
• It is comforting to believe that we can spend ourselves into prosperity. History suggests otherwise.

Which do you believe will have more purchasing power in ten years:  An ounce of gold or 13 one-hundred dollar bills?  An ounce of silver or a politician’s promise?  A ten year note purchased in 2016 that yields essentially zero, cost = $10,000, or 8 ounces of gold in 2026?

Confronting an uncomfortable truth today may improve your life tomorrow!

Gary Christenson

The Deviant Investor