Peter Krauth of Gold Resource Investor discusses rising inflation and the role of hard assets.
Sure Mr. Biden, money is Cheap. But whose money is it?
The White House recently sent a $6 trillion budget plan to Congress.
Let that sink in for a moment.
Biden’s first comprehensive budget calls for big spending on infrastructure, education and, of course, climate change. His plan covers $6 trillion in expenses against just $4.2 trillion in revenue. This is a massive 37% increase from 2019 spending levels, and suggests a $1.8 trillion shortfall, almost double what it was in 2019.
The idea is to spend it now while the money is cheap, with interest rates at historic lows. In fact, they are at the lowest level in 5,000 years of history.
Bernie Sanders said it was “the most important agenda for working families in our nation’s modern history”, explaining that the budget would reduce poverty through the creation of millions of well-paying jobs.
But the losses pile up to become debt. Paying off that debt becomes a huge burden, so governments use fiscal repression to keep interest rates low. This eases the challenge of repayment, but leads to huge inflation.
Therefore, the next generation’s best hope is to arm itself with hard assets, including gold as a staple.
a debt explosion
It took the US 211 years, from 1789 to 2000, to accumulate $5.7 trillion in debt.
It had doubled in just nine years from 2000 to $12 trillion in 2009. Since then, it has more than doubled again, currently weighing in at $28 trillion.
More than half of the entire US public debt, in its 230-year history, has been created in the last decade alone.
This chart clearly shows that things accelerated in 2000, and then exploded higher with the global financial crisis. The COVID-19 pandemic has just added petrol to that fire.
And now we’re looking to stack even more.
According to the IMF, at $28 trillion, US debt accounts for about 133% of GDP. Italy is at 157%, Canada at 116%, France at 115%, UK at 107%. For comparison, Japan’s debt is closer to 257% of GDP.
But before you start thinking that all is well because we’re not near Japanese levels, let me pour some cold water on that idea. Consider that a World Bank study shows that the national debt-to-GDP ratio is over 77% for extended periods, which causes a significant slowdown in economic growth. In fact, it is concluded that every percentage above 77% is actually Cost 1.7% of economic growth.
And for perspective, the US debt-to-GDP peaked at 106% after World War II, then 30% consistently throughout the 1970s?? fell to the extent of 40%. Levels have risen since then, but a financial crisis in 2008 as the mortgage crisis pressed on the accelerator, and the 2020 COVID-19 pandemic has pressed the pedal firmly against the floor.
The US Department of Labor reported that the Consumer Price Index climbed 4.2% from April 2020 to April 2021. This means that the prices of consumer goods have jumped the most in any 12-month period since 2008.
Many of the trillions of dollars we’ve added to our collective debt are floating around. There are some goods and services that we can point out that have not increased in value.
Food is no exception. The Food and Agriculture Organization of the United Nations (FAO) Food Price Index tracks international prices of the most traded food commodities globally. From mid-2020 to the end of March, food prices (except for meat, so far) had increased for nine consecutive months. In fact, each meal had set new three-year highs, except for meat, which would have been undergoing replacement.
Of course, even under pandemic restrictions and lockdowns, people still had to eat. So that helps explain the support and strength in food prices. But it goes far beyond food.
Major international consumer goods producers Procter & Gamble, Kimberly-Clark and Coca-Cola recently warned they would raise prices as their raw material costs soared.
This next chart shows that in spades.
Source: Duct Research
At Berkshire Hathaway’s annual shareholder meeting earlier last month, Warren Buffett said, “We’re seeing a lot of inflation. It’s very interesting. We’re raising prices. People are raising prices for us and that’s got to be accepted.” Used to be.” “We have nine homebuilders in addition to our construction housing and operations, which is the largest in the country. So we actually do a lot of housing. The costs are up, up, up. Steel costs, you know, just every day They’re going up,” he said. Berkshire also has businesses in several industries including Benjamin Moore Paints and Shaw Flooring. If anyone has a pulse on inflation, it is a buffet.
Money velocity kick started inflation
We can also look at this from the point of view of velocity of money. Currency velocity is essentially the rate at which a dollar is exchanged from one unit to another in the economy over time. The next chart shows that falling dramatically since the late 1990s. Interestingly, it has coincided with a large jump in public debt since then.
But the Fed could get the inflation it’s so eager for. And not a moment too soon.
The velocity of money may kick into high gear and begin to accelerate as the pandemic limits on activity begin to fade. There’s a lot of demand out there with people eager to travel, renovate, go to concerts or sporting events, or simply enjoy a restaurant meal.
There is an example. As stated in the most recent annual in gold We Trust Ronald-Peter Stofferley and Mark J. Walleck’s report,
“In 1933 and 1946, the velocity of money was equally low, and in both cases the US government resorted to radical measures. In January 1934, it devalued the US dollar by about 70% against gold, and during the 1946 period In?? 1951 it implemented fiscal repression, in collaboration with the Federal Reserve, which capped interest rates to low levels. Both times, this large-scale intervention resulted in the inflation rate becoming significantly higher in the years to come. , the velocity of money is at an even lower level than it was in 1933 or 1946. We expect history to repeat itself and central banks will seek their salvation in financial repression.”
Record historic global debt and slashing rates to 5,000-year lows are likely to propel inflation, something we haven’t seen in a long time.
Gold has been feeling it since 2000, but has once again kicked into high gear since late 2019. There is no doubt that you have seen and felt an increase in food and everything else. The Fed says the recent surge in inflation is fleeting, but the action in precious metals says otherwise. This is the reason why gold prices have increased by 42% in the last two years.
Continuing high inflation, coupled with low nominal interest rates, creates an environment of extended negative real interest rates. And then gold flourishes. At $1,900, gold is still down 9% from its all-time high. But adjusted for inflation, gold is still down 26% from its all-time high of 1980.
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With money so cheap, record global debt will continue to rise as governments keep spending money they don’t have. This, along with historically low interest rates and a possible resurgence of money velocity, means that inflation will rear its ugly head.
It’s time to fight back. own gold.
Peter Krauth is a former portfolio advisor and resource market veteran over 20 years, with specialized expertise in precious metals, mining and energy stocks. He is the editor of two newsletters to help investors profit from metal market opportunities: Silver Stock Investor, www.silverstockinvestor.com and gold resource investor, www.goldresourceinvestor.com. In those letters Peter writes about what he is buying and selling; He does not take any salary from the companies for the coverage. Peter has contributed several articles to Kitco.com, BNN Bloomberg, The Financial Post, Seeking Alpha, Streetwise Reports, Investing.com, TalkMarkets and Barchart and has a Master of Business Administration from McGill University.
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