By Sean Kelly
“I bought gold for the first time in my life a week ago. I understand the case for gold. We’re on the way to some third world banana republic situation. Nobody’s worrying about the debt that’s being created.”
—Omega Advisors hedge fund billionaire Leon Cooperman
Today we tell a story of money-printing and unpayable debt, two essential elements of any self-respecting third world banana republic.
We’ll begin with the money-printing. This chart show the financial assets – bonds, mortgage securities, government debt instruments – that the Federal Reserve has purchased with made-up digitally printed money beginning in December 2007, which was the start of the Great Recession.
In the following seven years the Federal Reserve created more than $3.6 trillion. It was money creation at a breathtaking speed. You can see that the Fed attempted to reverse some the money printing in 2018. But thanks to pressure from Wall Street, it soon gave up and in 2019 began to restore some of the prior freshly printed money it had sought to reign in.
Now, in just the last 12 months, and with a boost from COVID-19 policy choices, the Fed has conjured more than $3.2 trillion dollars out of thin air.
The straight-up, hockey stick curve on the right side of the chart is money printing at rates reminiscent of end-stage third world banana republics.
The next chart, covering the same period, reflects the growth of the money supply (M2: cash, checking and savings deposits, money market securities, mutual funds, and other time deposits).
In the most recent seven months, the money supply has grown by $3.2 trillion dollars.
Now, a look at the national debt which just last week surpassed $27 trillion. As a percentage of the nation’s productivity (GDP) the US national debt is the highest it has ever been, including higher than in World War II. Even though it is not wartime, today’s US national debt is more than four times its historical average percentage of GDP.
That is another characteristic of third world banana republics. The debt explodes and becomes unpayable.
In the case of third world banana republics, the debt is often denominated in a foreign currency, usually dollars. While they can print their own currencies to pay domestic costs, they can’t print dollars.
But the US can print dollars. Indeed some Fed officials are so confident that they can print the country’s way back to solvency and inflate away the debt, they are gathered in small groups talking among themselves about ways to firehouse more made up money into the hands of the American people. Leading suggestions include the issuance of something called “recession insurance bonds.” The Fed would deposit these bonds directly into the people’s account. When the Fed deems it timely, it would flip of a switch and activate the bonds.
A competing plan would cut out the middleman of the taxpayers’ banks; it would simply create a bank account directly with the Fed for every American. These are cyncial plans, since even Fed academics realized they devalue the currency. But few of them understand that their plans are the equivalent of banana republic endgames; they think they are “currency management exercises.”
But their schemes are nothing less than terminal, printing ever more unbacked, made up money until the monetary system collapses. Only a few years ago, in the thick of its self-created hyperinflations, Venezuelan president Nicholas Maduro announced that he would give millions of Venezuelans ‘protective bonds” of 500,000 bolivars. “I am the protector of the people of Venezuela, of the humble, of the youth, of the workers, of the women, protector of the legacy of the commander Hugo Chávez,” Maduro said. The hyperinflation grew worse and poverty spread.
The country has never recovered.
One more chart to wrap up our story. Money printing, whether by third world banana republics or first world banana republics, devalues the existing currency. The deteriorating purchasing power of the currency is reflected in a rising gold prices.
In the view of many, our current gold bull market was born in August 2018. Here is a chart from that date showing gold’s trajectory in the environment of Washington’s most recent debt spree and the Fed’s unchecked money-printing.
The trend in the gold price is unmistakable.
Many are the countries have have set off on the third world banana republic desolation road, and followed it to its unhappy end. Few are those that have successfully reversed paths.
Leon Cooperman is right. “Nobody’s worrying about the debt that’s being created.”
He is wise to have noticed. And to have begun buying gold.
Protect everything you have worked so hard for from third world banana republic money-printing and unpayable debt by opening a Gold IRA.