Gold’s role in the Greater Depression of 2020
Commodities / Gold & Silver 2020 Jun 05, 2020 - 06:40 PM GMTBy: Raymond_Matison
The most important measure for an economy, its recovery or advancement is employment - that is, the availability of good-paying jobs. When citizens have jobs, they earn an income with which they can pay for their needs, and pay taxes to the government for its needs. So jobs and income, are the key determinants of a healthy, modern consumer-driven economy. Over the last several decades business owners, globalists and bankers utilized foreign wage, borrowing cost, environmental and regulatory advantages to close production facilities in the U.S., moving thousands of factories and jobs to Asia. This job migration decision can be reversed at any time; however, it will take as many decades to bring jobs back to the U.S. as it did to move them overseas. Therefore, it will take many years to reverse this unfortunate U.S. worker-discriminating decision. As an unfortunate result, we are now to experience the consequences of a depression (a long lasting recession) instead of a recession.
Some economic observers and pundits have already publically stated that we are now in an economic recession. Official acknowledgment would require the passage, retrospectively, of two quarters of negative GDP growth to confirm this. However, considering all that has transpired since the beginning of this year in our country, admitting that we are now living in a recession is not a particularly bold projection.
In reality, we must acknowledge that we are living now in the Greater Depression of 2020! The descriptor of “greater” than that utilized for the Great Depression of the 1930s is appropriate, because this current depression is likely to be both steeper and longer than the previous one. Yes, it will take a couple financial quarters or until next year for the appropriate government agencies such as the Congressional Budget Office or others to announce and confirm officially that the country entered a recession, and then continued sliding into a depression in 2020.
On May 19, 2020 the CBO released a report entitled “Interim Economic Projections for 2020 and 2021” stating that the number of people unemployed in the second quarter of 2020 will be some 26 million people less than those employed at the beginning of this year. More current data for the filing of unemployment benefits implies that nearly 41 million people have lost their jobs. The CBO also stated that “Although economic conditions are projected to improve following their sudden drop, real output is expected to be 1.6 percent lower in the fourth quarter of 2021 than it was in the fourth quarter of last year.” The report’s chart shows clearly that the CBO will be able to confirm that the economy was in a recession in 2020; and if their projections are realized, then depending on the actual slope of recovery experienced, it may be able also to confirm a depression having started in 2020.
This year’s specific economic performance numbers are not particularly important to cite, as the ghastly economic numbers are legion. Most business enterprises across the country are simply closed, a record number of people have lost their jobs; therefore, a record number of people are unemployed, a record number are not earning any income, all public events are outlawed, automotive sales collapsed, retail sales stagnated, ditto with manufacturing, shipping and commercial transport grossly diminished, etc., etc. With all these measurements in record territory with negative implications, we are not experiencing a recession – we are securely in a depression from which the economy will require years to recover. To read the economic rationalization see: (The Last Minsky Financial Snowflake Has Fallen – What Now? http://www.marketoracle.co.uk/Article66849.html)
Because many of the current economic numbers are already known to be worse than those experienced in the Great Depression, announcing the Greater Depression is no bold forecast. So this is not a harsh prognostication; rather, it is the moderate application of historic experience to current events. If that sounds implausible, reflect on how impossible it should seem that a nation which boasted just a few months ago the lowest unemployment rates in U.S. history, now is experiencing its historically highest.
Near term future
An increasing number of state and national politicians have stated that in order to resurrect the economy, huge additional amounts of currency will need to be issued and distributed for various stimulus programs. Electronic printing or paper issue of huge amounts of currency will destroy its value. Thus the net result of government policies to deal with the corona virus will be twofold: first, it will have brought about the atrophying or destruction of our global reserve dollar currency, and second, there will eventually be more deaths attributed to the disabled economy than to the virus.
In prior sales of our nation’s debt - when the U.S. sold Treasury bonds - countries like China and other countries were eager to buy this debt. Now, with trade negotiations semi-frozen, some tariffs and sanctions in place, threats of delisting Chinese companies from U.S. exchanges, suspected U.S. instigation of riots in Hong Kong, and diplomatic relations at all-time lows, China is less likely to buy this debt. We should not lose sight of the fact that China’s historical purchasing of our Treasury securities has partially financed our government’s operations! If our debt offerings are unsold, and countries are unwilling to lend enough money to the U.S. for its government to cover its deficit or roll over its debt – government operations become disabled. If, instead of China and other foreign investors, the majority buyer of our debt becomes the central bank (Federal Reserve), the currency’s purchasing value will quickly decline, and lead to significant price inflation, and international retaliation. To the extent that the U.S. dollar is the global reserve currency, a decline in dollar reserve values will also create a global banking and economic meltdown.
Even before the grave economic effects of the corona virus on our economy, the government was expanding its fiscal policy – that is, it started expanding its budget with additional spending intended to benefit the overall economy. Government politicians were quite supportive of increased multi-trillion dollar spending even as it increases the budget deficit, and national debt. Politicians know that the FED will accommodate this additional spending by offering more Treasury bonds for sale. Therefore, politicians will never act with a sense of accountability or responsibility. Reflect that it is politician prior financial irresponsibility over decades that has brought the nation to its current catastrophic over-indebted situation.
So let us now project what one important economic measure may become as we calculate the ratio of our nation’s debt to GDP at the end of this year. No scrupulous accuracy is required here; ballpark estimates will suffice. If the country’s GDP of roughly $22 trillion were to decline this year by 25%, as the debt from special government spending programs rises from $24 trillion presently to $30 trillion, its debt/GDP ratio would rise above 180%. If it takes five years for GDP to get back to 2019 levels, while additional recovery and bailout programs further increase national debt, this ratio will rise to levels rendering our national debt as junk.
Economists Reinhart and Rogoff determined from their historical studies of country currency failures (This Time is Different, Carmen M. Reinhart and Kenneth S. Rogoff, 2009) that a ratio of debt/GDP exceeding 60% was conducive to debt default and currency failure. For that reason, this debt limit was legally established and incorporated in the Maastricht treaty at the formation of the European Union - in order to protect the Union from government defaults. At this time, all of the significant member countries have ratios substantially exceeding this limit, signaling their instability. The ratio of debt/GDP as it may be for the U.S. over the next several years belies severe economic problems from which it may not recover. Given the precarious economic state of the European Union, the over-indebted United States, and slowdown of China’s economy with its own significant internal debt, there is no escape from the debt destruction that is to come. As defaults rise loans will fail, and as bank solvency will be questioned, some significant banks will fail also. As domestic and foreign banks fail, this will become a financial and economic crisis of global codependence of our interconnected world. Therefore individual, corporate, municipal and government loan defaults around the world will effect negatively the whole global economy.
The rationale for a gold allocation
We are reminded by many investment sages that every investment portfolio should contain five to ten percent allocation of physical gold. The rationale offered is that in the event that stock or bond prices decline by one third, the ten percent gold allocation would rise to offset the loss. For example, in a stock portfolio valued at one million dollars, the loss protected portfolio would contain $100,000 worth of physical gold. Now, if the portfolio of stocks declines by $300,000 and the value of the investors fund has declined to $700,000, the gold portion of the portfolio is expected to rise to $400,000 so that the actual portfolio value remains unchanged. In this example the gold price would have rallied four times. If the gold value rises less than four times, the overall portfolio would suffer some loss – but less than implied by the simple decline in stock prices without any gold allocation.
Among individual gold enthusiasts and gold dealers it is impossible to find those today who believe that gold prices in the next several years could decline. Most observers would project that gold prices will rise multiple times, and could exceed $10,000 per ounce in the next several years. So what is seemingly incongruent with their gold price expectations? If the price per ounce of gold is likely to rise that dramatically, and almost all gold followers and gurus are unified as to gold’s likely price rise – why on earth should one allocate just 5-10% of that portfolio to gold? Why should that allocation not be 20%, 40%, or 60%, or even more? After all, if the reason for investing is to earn profits, why should one limit oneself to what almost everyone agrees will be a highly profitable investment?
It is easy to conclude that large money managers with billions of dollars under management cannot increase their gold allocations to a high percentage. First, the gold market simply isn’t large enough to accommodate such a policy for everyone. The global financial markets representing both equity and fixed income is approximately $170 trillion in size, while the estimated value of physical gold is $11 trillion. Due to great market volatility these numbers do change, but they suffice to provide perspective. Given these parameters, we can see that there is not enough gold in existence to provide more than a 6.5% allocation to gold for all financial assets. In addition, the proper storage and protection of large gold holdings require special and expensive actions.
However, for the middle class investor there are essentially no practical limitations. It may take a period of time to accumulate a significant gold position, but it is still easily achievable. For example, a $10 million portfolio with a 20% allocation to gold would require $2 million allocated to gold. At a price for gold at $1,750 per ounce would require the purchase and storage of 1,143 ounces of gold, a volume approximating two six-packs of beer. That amount of bullion or coins can easily be stored in commercial storage, a private safe, or hidden somewhere.
So what percent of your investment portfolio should you allocate to gold? Clearly, the allocation for the average investors should exceed the 5-10% recommended by most gold experts. It is equally clear that the allocation should not be 100%, as diversification is a sound investment principle. The actual percent allocated to gold would depend on many factors including the composition of your portfolio, including tax considerations of liquidating a part of your older assets. But if you do not have gold, buy it now; at this point there is no more time to waste, as the reckoning time is finally here. You should also consider not being invested in financial markets at all. See the January 20, 2020 report: FOMO or FOPA or Au? http://www.marketoracle.co.uk/Article66455.html
Gains on gold may not be free
Let us now consider what could go wrong with this “dependence on gold” theory. You have been wise and insulated your investment portfolio against loss with a generous allocation to gold. The gold price rise has served you well, and two years after the big financial market decline you feel almost confident financially as your portfolio value is now greater than before the fall. Is this a reasonable expectation?
You should remember that your federal government has been trying to deemphasize and suppress gold prices since the 1970s, when the dollar was uncoupled from gold.
You should also acknowledge that gold has been the nemesis of a freewheeling spendthrift government that wants to print and spend without any accountability.
When the gold paper certificate was still in circulation one hundred years ago, a one ounce gold coin was worth $20, and you could exchange one for the other at any time. With that one ounce gold bullion now valued at about $1750 in purely paper fiat currency, it is clear that over this time period the paper currency has lost 99% of its value. This result is less than commendable for the government/FED performance, and disastrous to all citizens.
The government/FED axis has also eliminated larger denomination paper currencies. Indeed, a couple of years ago there was some brief consideration of eliminating the one hundred dollar bill. Thankfully, this harebrained idea was abandoned. However, at one time paper currency included larger denominations including a $10,000 bill, with former Treasury Secretary Salmon P. Chase on its face. In the early 1950s, one could buy three General Motors Chevrolets with that Chase bill. If the bill was still in circulation (it was discontinued in 1969), it would take three of those large face amount bills to buy a single Chevrolet today. That would be another easy reminder of just how huge a failure paper fiat currencies have been (for citizens, not government), so it needed to be extinguished from people’s memories - hidden by elimination.
In the 1960s and 1970s many U.S. citizens were eager to own a foreign made car. As foreign auto dealerships were not that common, some citizens would pay for a foreign car in cash while visiting Germany, and drive their new car around Europe, and at the end of their trip they would ship their “used” car back to the U.S. Law permitted that one could bring items valued under $10,000 duty free and without any declarations. Since that law has not been amended for annual currency devaluation, today you might be able buy just two wheels of that auto for the $10,000. Said another way, $10,000 in 1971 dollars adjusted by CPI (which has been manipulated downwards after cost of living adjustments increasing Social Security payments in 1973) has the purchasing power of $63,300 today. Another excellent reminder on fiat currencies.
In Germany in 1923, at the time of the Weimar hyperinflation, the only way to enjoy a decent standard of living was to have foreign currency. Should that event ever rise to a modest probability in the U.S., citizens would likely come to a similar realization and seek to also hold a “foreign” currency. In fact some citizens are already contemplating that possibility, and that is why they are looking at gold (a foreign money to the populace) and cryptocurrency such as Bitcoin. To control the citizenry, the government/FED axis is looking to eliminate all paper currency and issue only electronic money, which can be totally controlled with the click of a single electronic button. How devious and convenient!
The reason for showing these examples is to convey to you that government and its real leaders will always act in a persistent fashion to confiscate portions of your income, savings, and investments. Within the context of your having outsmarted the government by exchanging their paper currency for real money (gold and silver), you will have displeased some powerful central planners. Therefore, do not assume that when an ounce of gold is priced exceeding $10,000, the axis will not have trotted out some law that tries to capture a large part of your gain. Remember, financial suppression is something the government has applied at various times against its citizenry for over one hundred years. See: America’s One-sided Domestic Financial War http://www.marketoracle.co.uk/Article62968.html
Alternative to a market decline
Every gold dealer is claiming that gold going up – but rarely does one suggest a larger gold allocation to an investment portfolio. Traditionally markets rise when the economy and corporate earnings are expected to increase or recover. In a period of economic decline, the stock market performance should lead the economy down, trashing markets. However, there is an alternative possible to this more reasonably expected experience. It is possible for the stock indexes to rise, with stock prices seeking new highs. In that lesser experienced event – it is the dollar currency that gets trashed while the market appears to advance.
Given that the Federal Reserve has recently created trillions on new dollars, and is expected to create additional if not unlimited trillions – it is possible that the currency gets destroyed, even as we are not fully aware of its destruction. Therefore, the rise of financial markets may be announcing a different phenomenon taking place than a hoped-for economic recovery. It may be confirming that destruction in the value of our dollar currency exceeds any real gain in economic activity, requiring the transacted price of goods, including stocks, to be larger in amount of that devaluing currency, and therefore giving the faulty impression that stocks and markets are going up. In Weimar’s Germany of the 1920s, its stock market rose for a couple of years even as the relentless printing of currency was leading to hyperinflation and total destruction of its currency.
Can we avoid the worst outcome?
The government and the FED can be expected to continue the “printing” of dollars, because if they stopped, the nation’s finances would be thrown into comprehensive chaos, and soon thereafter government itself would risk collapse. As the value of the dollar declines and approaches an eventual collapse, it will evaporate the trust that people have had in government and democracy. Therefore, there can be no stability in government, if there is no stability of the currency. In this regard, the government’s approval of a central bank which issues debt-based currency, over time all but guarantees eventual currency collapse. Everyone will lose money as pensioners, professionals, government workers, and small business people will have had to sell their valuables just to survive. Unfortunately, when money collapses, there will be a similar collapse of decency and morals, as people become desperate for the very basics of life.
The downfall of our democratic republic is also now visibly taking place. The persistent printing of debt-based money has led to a 99% decrease in the value of our currency in less than one hundred years, and a decrease of 84% in purchasing power of the 1971 dollar, when the dollar was totally uncoupled from gold. In this regard, Communist revolutionary leader Lenin is “said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
Notice also the gradual but persistent shrinking of our liberties, with government inciting fear (corona virus and otherwise), and increasingly dictating to the people. In a true democracy it is people who dictate to the government, as government is accountable to the people. Famously, Thomas Jefferson stated that ‘When governments fear people, there is liberty. When the people fear government, there is tyranny.”
The nation has been seeking ventilators for its corona virus victims. However, the economy has been infected with a deadly political virus which has shut down our economy. In addition, the economy has also been suffering for decades from the severe bacterial disease of Keynesian monetary policies. With this viral and bacterial onslaught the real victim is the economy, and our way of life. The people will have to rally and unite to ameliorate their ideological, cultural and political beliefs, and rediscover decency, if our constitutional republic is to survive.
The scoreboard
So let’s look at the scorecard: the value of our paper currency continues to erode savings, pensions, and investment, which over longer periods of time is visible as theft. The nation and its taxpayers, who have been made responsible to service its national debt, which government and politicians incur without pause, has seen debt rise without citizen approbation from simply burdensome to a level impossible to pay off under any conditions excluding the collapse of the currency. As unemployed workers cannot contribute to taxes, government borrowing will accelerate now with well understood results on the value of currency.
The stock and bond markets have followed the pronouncements of the Federal Reserve rather than economic fundamentals in recent years. Indeed, it is the near-daily pronouncements and crisis actions of the FED that confirm that our economy is in deep trouble; if the economy and markets were stable and sound, we would or should hardly be aware that the FED exists. Therefore, their frequent public presence or actions are actually quite foreboding.
The stock and bond market are full-blown bubbles. Astute money managers are now forced into purchasing gold or cryptocurrencies to protect their investment portfolios against irresponsible fiscal and monetary policies. Market volatility has raised investment risk as corroborated by the drastic, rapid and record market decline between February and March of 2020, when the DJI dropped 35% in just one month. This is a market to avoid for the foreseeable future. It is a time to own gold and silver bullion or coins.
We are already starting to witness riots in a number of cities. The basis of grievance will change, from acts of municipal law enforcement to basic food needs, jobs, home security, and finally to government and the Federal Reserve – as the riots will expand and become more intense. Civility and decency may become scarce in large cities, as smaller cities and communities will be safer and better, but not immune. Lord Rothschild, advised in the eighteenth century that the time to invest is when “there is blood in the streets”. By that measure there likely will be many investment opportunities coming over the next several years. But to take advantage of those future investment opportunities we will first have to successfully navigate this period with health and our financial foundation intact. We will need to survive the Greater Depression of 2020.
Raymond Matison
Mr. Matison was an Institutional Investor magazine top ten financial analyst of the insurance industry, founded Kidder Peabody’s investment banking activities in the insurance industry, and was a Director, Investment Banking in Merrill Lynch Capital Markets. He can be e-mailed at rmatison@msn.com
Copyright © 2020 Raymond Matison - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed to be reliable, but we cannot accept responsibility for any losses
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