Where are we?

In 2021 we saw inflation begin to creep upward and peak in 2022. We saw unemployment, in that same time period remain somewhat stable. Old knowledge would suggest that the reduction of inflation would require the increase in unemployment & possibly a recession. Somehow we have managed to avoid the recession thus far, and we remain uncertain as to whether one will arrive.

In one of my more recent articles entitled Myopic Hindsight, I challenged the notion that the US had or would enter a recession even in the presence of the very bad numbers that are looming over the US Economy.

Now I have returned to create a better picture of what I feel may be ailing the US & the global economy more broadly.

In the year 1933 it is no secret that President Franklin D. Roosevelt suspended the Gold Standard. This action was followed by gold confiscation at 35 USD per ounce & a setting the US Gold Reserve price at 35 USD instead of the old 20.67 USD. The government also began buying up silver. Monetary Expansion was led by the Federal Reserve which reduced the cost of money & increased credit creation.

This was done to address the existing deflation in the US, as a deflationary spiral had sickened the economy. Increasing the money supply was hoped to create jobs and encourage investment as well as reducing the value of the dollar. Dollar Devaluation was done to make American Exports more competitive abroad to further stimulate business at home.

Well among the wealthiest Americans, this was a major change. Their wealth had been held in Dollars which were backed by gold. Their wealth was artificially backed by gold in the form of greenbacks - a promissory note. Suddenly the gold backing was gone and bullion couldn't be legally purchased on the open market. Businesses and foreign holders of dollars also depended on this gold backing.

In this time period, asset holders became uncertain about the future condition of the dollar and it's relationship of gold. Where did they go? They bought property & equities. The S&P500 rose 140% from March 1933 to April 1936. The Dow Jones Industrial Average rose 276% from July 1932 to November 1936. The price of the average single family home rose 26% to 4300 USD. Commodities rose about 47% and long term US bond fell to 2.5% from 3.5% because bond prices rose.

During this same time period, the American Middle Class produced a mixed bag of data. Household income had risen 38% to 1,800 USD from 1933 to 1936, but this was less than the income of 2300 USD in 1929. The Consumer Price Index rose 15% over this period as well, which at almost half of household income gains. Unemployment fell from 25% to 16% by 1936, but many Americans who had lost their jobs were forced into lower paying jobs.

President Barack H. Obama & Ben Bernanke worked together to help the United States recover from the Great Financial Crisis, which was the result of much financial mismanagement and poor regulation. This began with two rounds of Quantitative Easing (QE) which purchased a total of 2.3T of US Government Bonds to inject liquidity into the markets. This was followed by Zero Interest Rate Policy (ZIRP) to reduce the value of the dollar globally. The Federal Reserve began forward guidance to control market expectations. Lastly, Congress authorized stimulus to cut taxes & stimulate growth with more government spending.

Much like 1933, the objective of 2009's actions were to address the deflationary risks, increase market stability, and stimulate growth.

The financial markets were the heart and soul of this particular crash. So these people looked around at the market and thought to themselves, "Do I hold dollars or get in the market?" They obviously chose the market seeing such significant dollar devaluation. Notice how I didn't mention gold in 2009? The dollar is completely fiat, or unbacked, in this period. So for value people hold assets which might be denominated in dollars.

The S&P500 rose 101% from March 2009 to April 2011. The Dow Jones Industrial Average rose 97% into May 2011. Home prices only managed to rise 5% during this period, but homes were apart of the very leverage that lead to the deleveraging in the market. Commodities gained 50% during this period & bonds gains 20%.

The Middle Class, much like the Middle Class of 1933, produced a mixed bag of data. Income rose from 50,000 USD in 2009 to 52,000 USD in 2011, however still lower than the 55,000 USD median income of 2007. The Consumer Price Index rose by 6% over the same time period completely negating the gains in median income and turning them negative. Unemployment declined from 10% in October 2009 to 8.6% to November 2011. The Affordable Care Act also rose healthcare cost by 10% in this same time period.

In 1971, Richard Nixon removed the Dollar from the Gold Standard. At that time, gold was the ideal flight to safety currency. The United States cut a social contract suddenly and quickly. Major currencies were pegged to the dollar and all these currencies were not at risk of free fall. Over the course of the 1970s there was flight to safety, or Gold. Under the stead hand of President Reagan, trust in the dollar began to rise again but gold would remain a safe haven asset when the dollar was unpredictable.

During the 1970s the dollar was repriced against many assets which resulted in inflation. The trust in the dollar was declining faster than it's value could rise. Regardless of the value of an item like a pencil remaining stable, with stable supply & stable demand, the declining trust in the dollar would result in its devaluation alongside haphazard financial chicanery from Capitol Hill.

Trust would be regained in the dollars as the petrodollar settled under President Jimmy Carter & Ronald Reagan. But the trust would be fundamentally different than it had been prior. Humans love shiny metals, but shiny metals are also tangible. The Petrodollar was a system of trust which would underpin the dollar's legitimacy and opposition would result in war.

I say all this to say that the source of any money is trust. The trust in gold was suspended in 1934 & somewhat reinstated under the Bretton Woods system. Prior to this moment much of financial trust was, "Do they have the gold like they say they do?" Whether they did or did not, the value was in the gold, not the promissory note. 1971 was a significant difference because it removed gold completely and attempted to instate a trust in promissory note. This was rather successful until the Great Financial Crisis.

I would argue trust was never fully established in the promissory note, by which I mean greenback, after the Great Financial Crisis. A new paradigm was not created, but rather global leaders hoped we could return to a new normal, while obviously lacking the dexterity to culture what little trust that remained. The evidence is in the difference of economic recovery for the middle class when compared to 1933, particularly the household income which was eclipsed by the consumer price index.

And then came Severe Acute Respiratory Syndrome Coronavirus 2.

The global economy was drawn to a halt as a result of Covid-19. Millions were stuck in their homes and works wasn't being done. President Donald J. Trump & Jerome Powell lugged out the good old Money Printer. Jerome Powell authorized quantitative easing to the tun of 4T USD to increase the money supply and inject liquidity into the economy. He also reinstated ZIRP with more forward guidance. President Trump & Congress sent multiple stimulus packages to help the American public & President Joe R. Biden did the same when he took office.

This was all done to support employment income and mitigate the effects of the Covid-19 pandemic. All of this action was taken with much less trust.

This forces more dollars into the market as people run to more trustworthy assets. The S&P500 rose 108% to ~4800 by January 2022. The Dow Jones Industrial Average rose 99% to 36,900 & the Nasdaq Composite rose 128% to 16,000 over the same period. Homes in the US rose 30% & commodities rose 50%. Cryptocurrencies like Bitcoin & Ether rose 814% & 4,700% respectively.

The Middle Class suffered more clearly this time. Median Household Income rose about 9% between 2020 & 2022 but was less than the median income of 2019 & this was eclipsed by the 15% consumer price inflation seen over the same period. Unemployment fell from 14.7% to 3.9% even though Americans took on lower paying jobs across this same period. Health care managed to increase by 10% once more.

Russia invaded Ukraine. I always thought this was a minor part of the story but it is much bigger than I was willing to let on. Global uncertainty had been tamed by US hegemony for a great period following the Second World War & suddenly that was gone. Europe, which was thought to be a shining light in a world of darkness, had once again fallen into its old ways of war. And the US was ineffectual in stopping it.

Similarly the Middle East has exploded in conflict between Israel & Hamas, Israel & Hezbollah, and Israel & Iran. This conflict also is quite plainly out of the control of the US hegemony.

Once again trust declined. Prior to this, the United States had elected Donald Trump who touted protectionist policies. Mr. Trump pulled out of the Trans-Pacific Partnership, the Paris Climate Accords, the Iran Peace Plan, launched new tariffs, and criticized NATO. This further set the stage of declining trust.

With no gold to hold the trust, it was up to the US government to replace it with fiscal responsibility. Mr. Biden has managed to maintain a deficit north of 2T USD and both presidential candidates promise to increase that deficit to 3T USD annually.

With all these pressures, I would expect a recession. But what I see is something far worse. The Dollar is going to lose the trust of its biggest holders as devaluation outpaces rates on dollar assets, particularly US Bonds. I only have a single piece of data to back this up because I learn as I see.

Japan has had low rates in their currency and people have borrowed the Japanese Yen at low rates to buy US assets in the stock market. This is our friend good old leverage. Japan raised rates and this entire system was under threat leading to a melt down in the US stock market.

Early August 2024, as this crisis unfolded over a weekend we saw a strong flight to gold, instead of the dollar, in the weeks following this crisis. Early October 2024, Iran was said to eminently be attacking Israel. We saw a sharp rally in the dollar index.

From these two experiences, I feel that gold is growing in its role during these great moments of uncertainty & distrust, not because it rallies during the calamity but because it maintains thereafter. Gold naturally declines as interest rates go lower because people swap to riskier assets to earn a higher yield, but as the Federal Reserve and many other major banks reduce their interest rates, it maintains its hold.

Similarly, there is Bitcoin. I believe bitcoin has inherent value and is worth much more than it is priced, but that is because I am a crypto native. From a monetary perspective, bitcoin is a financial instrument that absorbs devaluation & distrust. The currency has climbed over its 15 year life span because of currency devaluation and increased distrust. What I like to remind people is that Bitcoin rose above its previous all time high of 69,420 USD while the Federal Funds Rate was above 1%. That has never happened in a bitcoin bull market.

Right now the economy is doing well, but the dollar is not. The dollar is looking to reestablish trust, if it wants to maintain its value. If it does not, it will begin to bleed. Trust is lost slowly then suddenly. Even if the economy does well, the dollar or the measuring stick, will suggest it does better than it is doing because it is devaluing.

The recession is very well possible but it is still unlikely as time moves forward. If it doesn't materialize by Q2 2025, it won't happen.

Furthermore, the formal definition of a recession is 2 quarters of declining Federal GDP, coupled with declining incomes, employment, & industry. The US GDP declined in the first & second quarter of 2022 and it was coupled with declining incomes. The best and the brightest government paid economist claimed we weren't in a recession & I happened to agree with them simply because commerce never stopped. Drowning in other calamitous markers suggesting doom was eminent, a recession felt correct.

How did we manage to dodge the recession? The only reason is government spending. You can see below that the US deficit in 2022 was massive. The US Economy is composed of nearly 70% consumption, and the US Government can consume by printing dollars at will. This can hide a weakening economy for a short period.

In 2023, after the end of Covid era spending the deficit was still ~ 1.5T USD & in 2023 managed to hit 1.8T USD. The deficit of 2024 wasn't much better. I expect deficits to continue cratering in the future as the old age dependency issue continues to realize itself. Throughout this time I expect the gains of the middle class to continue to be eclipsed by net inflation and housing to continue to rip well out of their reach.

Because they are supposed to be. Stocks are not in a bubble in the sense that we want to believe right now. AI may be in a bubble, but the entirety of the financial system isn't. In fact much of the stock market is being carried by the magnificent 7. Stocks are just pushing toward all time highs because the dollar to falling in value. The measuring stick makes the market look bigger than it is.

Gold is printing new all time highs every month it seems because distrust is growing & because the measuring stick is losing value. It is my personal opinion that an ounce of gold is the best measuring stick & if at all possible we should measure our assets in it to see how well they perform.

In recent weeks, the Global M2 ticked upwards, the Federal Reserve cut interest rates & indicated further rate cuts. China is in the middle of deflationary crisis & has recently unleashed massive stimulus to encourage consumption. Beyond this, the world is on the brink of war in two places which also encourages higher spending.

Equities and property are currently being the hideaway from uncertainty in tech stocks, because they have such a strongest hold on future rent in their respective markets. In the coming years, investors will begin to lose trust in government bonds as they remain underwater in real rates.

In the 1860's the United States was faced with a crisis - whether Black Americans were real people or not. In the midst of this, the fabric of the nation was shaken. Somewhere through this crisis, the US government minted the two-cent coin & upon it inscribed In God We Trust.

Money is the earliest and most successful social contract throughout human history. At the center of that social contract has always been gold for a myriad of reasons I would rather not dig into. As technology sped up so did the human animus and this presented an opportunity for a fiat currency to exist and the United States took that chance.

One prerequisite for fiat currency is violence. Kublai Khan decreed that the paper was worth something and if you disagreed you met a sword. The United States lead many operations to protect the integrity of the dollar heading into the 1990s, but since has lost its bite. The isolationist & protectionist Trump followed by Mr. Biden's tacky withdrawal from Afghanistan weakened the threat of America's violence. Trump displaying reluctance to use that violence combined with aggressive words & Biden displaying incompetence.

This is a factor on trust. Jean-Jacques Rousseau's The Social Contract states that a social contract with the threat of violence is null, because the contract wouldn't exist absent violence. Apart of that contract is the belief that violence will follow a contractual violation. These two presidents have participated in the dilapidation of that contract & there is little hope for a better future considering the election.

The trust in the American Hegemony is the same as the trust in the American Dollar. One of the best factors in selecting a currency to store value in is its national. productivity & property rights. The US's only challenge has weak property rights - China. In may ways people are stuck with the USD, but we have open and free markets which support the purchase of gold.

As the trust continues to ooze from the USD - slowly then suddenly - we will continue on our current gold rush. Smart money will find its way in the S&P500, Dow Jones Industrial Average, Single Family Homes, & other commodities like gold, bitcoin & ether.

I look forward to seeing the US Dollar devalue through this decade to a level that will price in its changing future. I also look forward to seeing commodities rise at a similar pace to equities.