The Federal Reserve Has No Choice but to Keep Printing Money

CHISWICK, WEST LONDON – Some Federal Reserve presidents are calling for the central bank to tighten monetary conditions…

On August 9, the Associated Press said:

The president of the Federal Reserve Bank of Boston [Eric Rosengren] added his voice Monday to a growing number of people, inside and outside the Fed, who say the central bank should begin to dial back it’s extraordinary aid for [the] economy.

Also on August 9, Bloomberg reported:

Federal Reserve bank of Atlanta President Raphael Bostic said the central bank should move to taper asset purchases after another strong month or two of employment gains.

On August 11, Bloomberg again:

Federal Reserve Bank of Kansas City President Esther George said the central bank needs to move ahead with reducing monetary stimulus.

And on August 10, the Associated Press wrote:

St. Louis Federal Reserve Bank President James Bullard said that Friday’s [positive jobs] report… means the economy is making sufficient progress to start reducing, or tapering, the Fed’s $120 billion in monthly bond purchases.

What’s going on? More below. But first…

One Piece of Advice I Love

Greetings from London…

My family and I are a traveling family. That means we are houseless and we don’t live anywhere in particular.

We started living like this three years ago, when we gave all our things away, handed in the keys to our apartments, and hit the road with nothing but a suitcase, our passports, and some cash.

Since that day, we’ve been to 30 countries over five continents, we’ve had an epic adventure, and we’ve rebuilt our family bond. It has been the best three years of my life.

I’ve said this before, but if I had died after that trip, I would have died with a smile on my face, knowing my life was complete and fulfilled. 

But that period of our lives ended abruptly on Christmas Eve 2020.

That’s when my mother died unexpectedly from complications related to Parkinson’s disease…

And I inherited 50% of a beautiful townhouse in London, filled with antiques and childhood memories, all in a great spot to raise a family. We could easily settle down and make a normal life here.

Ha ha ha! What a test of our hobo tendencies!

But actually, it’s not a test…

My father lives in New York alone. He also has Parkinson’s disease, and he’s fighting cancer. He is about to start two months of chemotherapy.

We are going to quickly tidy things up here in London and then return to New York to be with him.

The only question is, what do we do with this beautiful house and all the family heirlooms inside it?

I don’t know. I’ve been going around and around all the different possibilities, and I just have no idea what the right thing to do is.

One piece of advice I love and have found very useful in the past is this: When you don’t know what to do, do nothing.

So maybe that’s what we will do: nothing. We will lock up the house, go to the U.S. to be with dad, and see what happens. Maybe we will get a signpost in the near future that helps us make a decision…

In the meantime, we are making the most of London… meeting people, seeing things, and having adventures.

Here we are on Sunday, having a picnic in the gardens of Chiswick House…

It was built in 1729, and it’s one of the finest examples of neo-Palladian architecture in the world. It’s just a five-minute walk away from where we live.

In the background, a cricket match. Chiswick Cricket Club is playing a match against Sonning, a village on the River Thames. Dusty (13) and I were both selected for the team.

What a joy to play in the same cricket team as my son at such a lovely cricket ground…

Taste of the Doom Loop

Back to tightening the money supply…

The United States government is broke.

When I say it’s broke, I don’t mean it defaulting on its obligations. What I mean is, the only way it’s able to keep functioning is because the central bank prints money for it.

If the feds stopped printing money, the government would quickly start defaulting.

To avoid bankruptcy and default, the U.S. government must keep consumers spending. Consumption is the core of the U.S. economy, accounting for 68% of GDP.

There cannot be any decline in consumption, or we’ll get a doom loop of falling stock and house prices… leading to less consumption… leading to falling stocks and house prices… leading to less consumption.

In a situation like that, the government’s tax revenues would implode, and we’d quickly get a debt crisis.

To keep consumers spending, the government gives them money.

These subsidies are called transfer payments. Today, they make up nearly 25% of total consumer spending. And they show up in the government’s massive budget deficit.

Before last year, the largest-ever government deficit was $1.4 trillion, in 2009. Last year, the government deficit was $3.13 trillion. This year, it’s projected to be another $3 trillion or so.

(Watch for them to cancel student loans soon. Canceling student loans would be one of the most effective transfer payments. Young people have a tendency to consume their extra income… And canceling student debt wouldn’t cost the government any additional cash flow.)

So despite these Fed presidents calling for a reduction in stimulus, I don’t think there can be any taper or traditional tightening cycle.

And if they decide to try, they’ll get a taste of the doom loop I mentioned above and quickly change their minds.

Three Things You Do When You Suspect the Government Is Broke

So what’s the first thing you do when you suspect a government is broke?

Normally, you sell its bonds… And you bet that the market will begin to demand much higher interest rates from the government in order to attract loans.

I’ve bet against U.S. government bonds so many times, I’ve lost count. I’ve lost money every time.

I won’t do it anymore because I’ve realized they will never let interest rates rise on the government’s bonds. The Fed uses its money printer to suppress them.

Macro historians call this behavior “yield curve control.” As I’ve written before, the last time the U.S. government used it was after World War II.

What’s the second thing you do when you suspect a government is bankrupt?

You bet against the government’s currency – in this case, the U.S. dollar. I would’ve done this trade, too… except I realized a long time ago that it wouldn’t work.

That’s because if the U.S. government went bankrupt, all paper currencies would lose value. Then, the dollar’s exchange rate would appear to be static, or even appear to rise.

We call this a “global synchronized currency devaluation.”

Finally, what’s the third thing you do when you suspect a government is broke?

You watch for inflation.

Governments always start debasing their currencies when their finances get stressed. We’ve seen it dozens of times throughout history – in Weimar Germany, Zimbabwe, Argentina, Venezuela…

Right now, inflation is rising in America.

The latest data shows consumer prices rising at 5.4% per year and producer prices rising at 7.8% per year. But I don’t think the government’s bankruptcy will show up fully in Consumer Price Index (CPI) and Producer Price Index (PPI) stats, either.

They’ve built in so many adjustments to the calculations, they aren’t sensitive to inflation anymore. I wouldn’t be surprised if these are the peak inflation statistics in the U.S.

Release Valve for the Feds’ Bankruptcy

So what will be the release valve for the U.S. government’s bankruptcy?

I think it will show up in the prices of labor, food energy, industrial metals, farmland, and timberland… and, above all, hard money (gold and silver).

It’s starting to happen in the labor market. I saw this from Bloomberg last week regarding wages…

For the first time in decades, the American worker is finally in command when it comes time to talk money. There are tell-tale signs everywhere that this is so.

Like the way some employers – such as Kroger Co., Chipotle Mexican Grill Inc. and Under Armour Inc. – are frantically pushing up hourly wages to try to retain employees. Or the way others – like Starbucks Corp. and Drury Hotels – are dangling hiring bonuses to entry-level applicants. Or the way CVS Health Corp. is no longer requiring job seekers to have high-school diplomas.

Or the way Dan Sacco, the owner of Your Pie restaurants in Iowa, is instructing his general managers to poach workers from rivals with offers of better hours and higher pay. “Everything is fair game now,” Sacco says.

There is still a long way to go for the government’s bankruptcy to be fully reflected in the markets.

In the meantime, we wait patiently with all our liquid capital in gold, silver, and steel…

– Tom Dyson

Strong words from a reader, after Tom explained why he wouldn’t invest in crypto today…

Reader comment: Tom Dyson’s bias against crypto seems illogical. He won’t buy crypto because the government needs to “block all the exits” from the financial system, while touting gold as an exit from the financial system. He says crypto is too mainstream at a $2 trillion market cap, while touting gold at a $10 trillion market cap.

He says bitcoin has a “dubious use case” (store of value), while touting gold’s use case (store of value). Meanwhile, since bitcoin last touched $10k, it’s up over four times, while gold has gone nowhere. I’m glad I own some bitcoin AND gold.

Meanwhile, others reflect on the Dyson family’s journey…

Reader comment: I read your reports every day and love your honest and descriptive writing skills that help me in many, perhaps unintended, ways. For whenever Kate chooses to do unit studies on the War Between the States, I have found a great resource!

And do take pictures of all your mom’s beautiful things which reflect her beautiful nature and character. Snapfish is a great tool for creating booklets of photo memories and easy enough for the kids to use. Someday a great-great-great grandchild of yours might like holding a book in her hand while she reads about her very interesting ancestors.

Reader comment: Looking at the pictures of your family over time I study your eyes. I have seen while on the road many times, an almost manic look in yours and exhaustion in yours and your children’s faces and a few times happy.

While in England that changed. I see all of you as more solid inside, rested and happy. I wish you all the best on your next journey and hope for the best. Thank you for sharing.

Tom’s note: As always, thanks for writing in! Please keep your messages coming at [email protected], and I’ll try to answer as many questions as I can in a future Friday mailbag edition.