WEST PALM BEACH, FLORIDA – The only reason the government continues to function is because the Federal Reserve is lending it money. (The Fed is America’s central bank, so it controls the money supply in the U.S.)
Financial historians call this dynamic “monetizing the debt.” And it’s the thing a government does when it wants to destroy its currency.
The way they do that is with quantitative easing (QE).
In yesterday’s postcard, I explained why the Fed’s QE in the last decade (2008-2014) was not hyperinflationary. In other words, the printed money didn’t flow into everyday items… meaning it didn’t affect the dollar’s purchasing power.
Below, I explain why the Fed’s new QE campaign is hyperinflationary… and why I think we’re about to see a severe impairment of the dollar’s purchasing power this time. But first…
Our Global Odyssey
Greetings from West Palm Beach, Florida…
It’s been two years and two months since we embarked on our odyssey and I quit my job in Delray Beach.
Since then, many readers have written in, asking: How are we doing financially?
Normally, I’d never write about this… or even speak about it. But in the spirit of Radical Honesty, I will today.
Before I get to that, though, a quick word…
It feels a little insensitive to report on our financial good fortune during these hard times for so many.
But when I started writing these Postcards, I made a silent pact with myself that I’d share our story with you, no matter what.
Even if Kate left me again… even if I lost all our money on this crazy gold bet… even if we screwed up our kids’ chances by experimenting with their education… I’d keep documenting it all honestly.
For most of the trip, we had no income and we lived off savings. So we were very careful with our money and we did everything we could to stretch it.
The biggest thing we did was we tried to stick to countries with devalued exchange rates, where we could survive very comfortably with very little cash burn.
We like to joke that our favorite places are places the State Department warns Americans NOT to go.
I think we were successful at burning as little cash as possible. We went to Africa, India, Southeast Asia, etc., and typically lived on less than about $200 a week, not including travel. (We’re a family of five.)
We stayed in youth hostels and cheap Airbnbs, and whatever budget accommodation we could find. We ate street food. And we were careful. I think we could have survived for years doing this…
Even so, we put a big dent in our savings living like this for 18 months without an income.
Last year, I started writing emails to my friends and family, sharing what I was learning about economics, and nagging them to buy gold… but mostly, just letting them know where we were and that we were safe.
After several months of sending out these emails, Bill Bonner’s publisher agreed to work with me, and I started writing for a bigger audience.
I’m now getting paid to write these Postcards. It’s not much, but it’s enough to cover our costs as long as we don’t spend too much time in expensive places like America or Europe or Hong Kong.
(When we are in cheap countries, we’ve been able to get our burn rate below $2,000 a month – sometimes even $1,500 a month – including airfares. In expensive countries, we haven’t been able to live on less than $3,000 a month.)
And so far this year, we haven’t had to pay any rent. We stayed with my mother in London. Then we squatted for free in an empty apartment in Baltimore. We stayed as Bill’s guests in Rancho Santana. And Kate’s parents have been putting us up in Florida during the lockdown.
So we haven’t been tapping into our savings for six months, and we’ve managed to save about $10,000 this year.
Now, I’m about to go back to work as an investment analyst, so we’re getting a raise.
Then, we’re going to go back to living in cheap countries – if we’re allowed to travel again. If we’re not allowed to travel, we’ll travel around America, sleeping in campgrounds in a tent, which will also be cheap.
So things are comfortable for us, for the moment. We have our gold. We have our whole life insurance policies. And we have an ample income.
We’ve just got to survive like this for another decade while we wait for gold to go to $10,000… for the Dow-to-Gold ratio to go below 5… and for the world’s best businesses – like Disney and Coke – to get cheap enough for us to buy and hold them, so we can then live off the dividends.
No Turning Back
Back to the Fed and the dollar…
In these Postcards, we’ve been predicting since last summer that the Fed would begin monetizing the government debt. That was when we noticed subtle dislocations in the plumbing beneath the banking system.
“There isn’t enough liquidity in the banking system for the government to satisfy its gargantuan appetite for cash,” we concluded.
We said the government was beginning a “soft default” and the Fed was going to have to “bail out” the Treasury. We said if a recession came along, it would blow a hole in the Treasury’s finances and make this problem MUCH worse. We were long overdue for a recession, we said.
Now the recession has arrived – and it’s a catastrophic one. We predict the Fed will have to print between $10 trillion and $25 trillion over the next few years to keep the government functioning.
(As far as I know, I’m one of the few analysts on the internet – besides Bill and colleague Dan Denning – predicting such a high number.)
Here’s the thing…
There are hundreds of examples from history of governments that monetized their debts like this. It’s a completely normal, predictable response from policymakers who want to live beyond their means.
It’s happened hundreds of times before, in this exact SAME sequence (slowly at first, then suddenly). And every single example ended with the currency being worthless.
France has had three hyperinflations. The Germans, the Romans, and the Chinese have had them. Most recently, the Venezuelans. It’s a 100% record. No exceptions.
It’s as if, once you begin monetizing the debt, you cannot turn back until the currency is worthless.
I can’t believe I’m writing these words, but I’m starting to imagine the total collapse of the dollar to hyperinflation.
How It Starts
Anyway… this is how it starts…
(And why this new QE campaign is so different from last decade’s QE campaign – something we started to address in yesterday’s Postcard.)
The government is giving cash directly to American citizens.
No one knows exactly how much cash they’ll end up giving out, and they’re going to keep increasing it anyway. But let’s say it’s $2 trillion over the next quarter… which is about 10% of gross national product.
Meanwhile, many businesses have closed around the country… restaurants, retailers, entertainers, tourist services, brokers, and soon, the entire shale oil industry.
So you have more cash chasing fewer goods and services. That’s inflationary.
Second, globalization is broken.
In a video call for The Bonner-Denning Letter last week, I reported how China has kicked out journalists and shut its borders to foreigners. (Paid-up Bonner-Denning Letter subscribers can access that call here.)
When this virus crisis has passed, the world is going to be angry at China. Many supply chains will return to America, and we’ll have to produce our own goods.
Local manufacturing is more expensive because American labor is more expensive. This is inflationary.
Finally, those dollars that would have gone to China in payment for imported goods will not go to China anymore. They’ll remain inside America and circulate here instead. That’s also inflationary.
I’m not saying this will happen quickly. Or even soon. Or that it won’t require A LOT more helicopter money and unwinding of globalization before people begin to notice the dollar’s purchasing power eroding… but we’ve started down the path.
And we know where it ends…
– Tom Dyson
P.S. I can’t believe we continue making the same basic mistake of debasing our currencies, over and over again. This one lesson – the importance of sound money – is a lesson we simply cannot seem to learn, no matter how many times it happens.
This one’s going to be a BIG ONE, too. It’ll be the first time in human history that a world currency collapses into hyperinflation. The first global hyperinflation! Talk about man’s progress…
So what happens next? If you haven’t read it yet, Bill Bonner wrote an urgent briefing about the crisis we’re in… the feds’ role in it… and what he sees coming. It’s a MUST read. Just go right here…
P.P.S. I’ve been heavily advocating swapping your stocks for gold for the last nine months.
We just saw an awesome bear market rally in the stock market that retraced 40% of the recent crash. (I warned you about bear market rallies like these here.)
If you haven’t swapped any of your stocks for gold yet, now is an excellent time to start. (The Dow-to-Gold ratio – our ultimate barometer – is around 14.)
I would NOT be buying stocks at the current level. And I’d be expecting the bear market to come back any day for another big crash. Just saying.
Like what you’re reading? Send your thoughts to [email protected].
FROM THE MAILBAG
Tom’s most recent Q&A video – which included some behind-the-scenes action from his daughter, Penny – got readers talking…
Reader comment: It was wonderful to see Penny in today’s video and hear her lovely voice!
Reader comment: Now that’s what I’m talking about! Spontaneity! Penny as the cameraman (cameragirl?) with the little, whispering voice behind the camera. Love it! Also like the added special effects. Getting fancy, bro!
Reader comment: The video with you and Penny in it was adorable! Thank you for sharing and not editing that out!
Meanwhile, others talk homeschooling… and share how the Postcards have become a trusted financial resource for them…
Reader comment: I’ve enjoyed reading your Postcards for the past several months. I homeschooled my five children for many years, and now they are homeschooling our grandchildren. Ignore the naysayers who declare you’re not structured enough. There’s plenty of time for that later.
Your kids are getting the best real-world education you could ask for, at the moment. It’s true that they may eventually want a permanent “home base” to come home to. But I know many successful homeschoolers who were fairly unstructured before 8th or 9th grades. Enjoy this special time with them. The years fly by.
Reader comment: The education that you are giving your children is priceless and well worth the sacrifice that you have made of leaving your work and reuniting with your family. Congratulations on making a tough choice.
They may not appreciate their special education, or what you and your wife have done for them, but they will appreciate it all once they get out into the “world” and find out how well you and your wife have prepared them for life. Because of the experiences of your trip around the world, the life lessons that other people often have to learn after leaving the nest will already be ingrained in their minds. This will make them more mature and well-adjusted to the “real” world.
Keep moving forward, my friend, you are doing a wonderful thing.
You have been a great resource for financial information and have great insight into the financial world. The money I have spent on the newsletters from Bonner & Partners and Stansberry Research has been the best money ever spent. Thank you for doing what you do. I know that it takes a lot of time and dedication. It has been a great education.
Reader comment: I’m just giving you a gut reaction after reading Tom – for a year – and Bill for… maybe a decade. Bill’s ability to write and give hilarious, sound financial advice with the background of having swum with the sharks for two score years, while keeping Elizabeth happy… and Tom’s ability to be the ringmaster for the Dyson Family Circus, regaining Kate’s love, and explaining the Dow-to-Gold long-term investment strategy with a Brit accent, are unmatched anywhere. Just keep it up! Y’all are the last gasp of the culture we once had from the mid late ’40s to the mid ’60s. God bless y’all.
Tom’s note: As always, thank you for your messages! Kate and I read every one. Please keep writing us at [email protected].