The China Myth, Exposed

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For almost twenty years, the myth of a “rising China” and the “Chinese century” has been gathering steam.

Of course, the U.S. is recognized as a superpower now, but its days as the greatest power in the world were numbered, according to this myth.

China was prized both  by U.S. manufacturers for its cheap labor and by U.S. consumers for the cheap prices on Chinese exports (never mind that the goods were shoddy with few exceptions and often fell apart not long after you removed them from their glossy clamshell wrappers).

The globalists praised the advent of highly integrated supply chains and just-in-time logistics that would bind global economies together and pave the way for One World governance, taxation and money.

There was only one problem with this narrative. It was completely false.

Chinese labor is running low because as many as possible have already moved from the country to the city.

Tight supply chains proved fragile as we saw during the COVID-19 pandemic when the U.S. could not get protective gear made in China and China threatened to cut off exports of antibiotics to the U.S.

Our craze for cheap Chinese goods meant that China piled up over $1.4 trillion in U.S. Treasury notes which makes China our biggest creditor.

Beyond that are horrific human rights abuses such as organ harvesting (without anesthetic) from political dissidents, concentration camps, reeducation camps, forced abortions, forced sterilizations, firing squads and more.

The Silicon Valley CEOs simply turned a blind eye in pursuit of profits. The cost in lost U.S. jobs was catastrophic.

The China myth has now been revealed to be a fraud. China has shown its true colors by suppressing freedom in Hong Kong in violation of a treaty with the UK that was supposed to run until 2047.

China’s military is still weak, despite advances in recent years. Its economy is bloated with unpayable debt and it is alienating potential friends from Australia to Japan and beyond.

The globalist dream for China has crashed and burned. Good riddance.

Meanwhile, dramatic developments may be under way within China itself…

Washington Times national security reporter Bill Gertz has excellent connections inside the U.S. intelligence community and a long track record of accurate geopolitical predictions far in advance of events.

Gertz now reports that China is going on red alert.

It’s putting up signs telling citizens how to get to bomb shelters. Military factories are being moved away from factories that produce civilian products. Ham radio operators report rumors of an impending attack on some remote islands technically controlled by Taiwan.

These activities suggest China may be preparing military action of some kind.

More importantly, rumors persist of an internal power struggle between Chairman Xi and what is known as the Shanghai political faction led by Zeng Qinghong.

China is entirely subordinate to the Chinese Communist Party. You can study the Chinese government all you like, but you won’t learn anything about how China works unless you study the role of the party.

The Communist Party and its survival come first. Everything else in China is devoted to that end.

The problem is that the Communist Party itself is opaque and difficult to understand. Written rules mean nothing. What counts are personal loyalties and control over organs of state power through party cadres.

For the time being, Communist Party Chairman Xi seems to be in a dominant position. He has the most firm grip on power of any leader since Mao Zedong, who died in 1976.

Considering China is much richer and more powerful militarily today than in the days of Mao, Chairman Xi is arguably the most powerful individual in history with firm control over the lives of 1.4 billion Chinese and many more in surrounding countries.

It’s difficult to know, but Chairman Xi may be walking on shaky ground.

It’s often difficult to sort fact from fiction in China, but investors should be braced for some kind of geopolitical shock emerging from China in the next few months.

It could be military action or what could essentially be a coup.

The rumors may amount to nothing, but they may indicate a major shock. And I should point out that Bill Gertz has a great track record for accurate forecasting.

Treasuries, gold and cash would benefit from a Chinese shock, while Chinese stocks and emerging markets would be badly damaged.

Investors should prepare accordingly.

Below, I show you why the Chinese economy is basically a house of cards, and why it’s mired in the “middle income” trap. Read on.

Regards,

Jim Rickards
for The Daily Reckoning

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How Secure Is Biden’s Lead?

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The drumbeat of polls showing Biden with a big lead over Trump is unrelenting. The RealClear Politics poll (actually an average of many different polls; a good statistical technique) shows Biden with an 8.6-point lead over Trump (49.3% for Biden versus 40.7% for Trump).

Of course, national polls don’t mean much because the U.S. does not have national elections, we have state-by-state votes for Electoral College electors.

But a lead of over 8-points is significant; even adjusting for skew and other biases, that puts Biden firmly in the lead. At the level of swing states (where it really does matter), Biden also dominates. His lead is 6-points in Wisconsin, 6.4-points in Florida, and 7-points in Pennsylvania.

That last number is critical. It’s hard to see how Trump retains the White House if he does not win Pennsylvania. So, is it all over but the shouting? Should we just hand the keys to 1600 Pennsylvania Avenue to Joe Biden?

I’ll reveal the answer shortly. But first let’s look at the bigger picture…

There has never been any mystery about the Republican nominee for president — it’s Donald Trump, case closed. But the identity of the Democratic nominee was contested between Joe Biden and Bernie Sanders during the primary season as other contenders dropped out one by one.

Finally Sanders stepped aside and Biden became the presumptive Democratic nominee, although curiously, Biden never did win a simple majority of the delegates — the nominating process and primaries were brushed aside by the COVID-19 pandemic.

But no one cared because the competition dropped out and released their delegates to support Biden. Now, the world awaits Biden’s decision on who his Vice Presidential candidate will be.

An announcement is expected in a few days.

The candidate will definitely be a woman (Biden pre-announced this), but the identity is still unknown. Elizabeth Warren appears to be the frontrunner, and she would be acceptable to the Bernie Sanders wing of the party, which seems to be calling the shots.

But whoever it is, the VP pick will probably be president within a year if Biden wins. That’s because Biden’s cognitive impairment will render him unfit for office early in his administration. Biden is already surrounded by Sanders’s handlers. Some Obama retreads will make up the Biden cabinet.

Under the 25th Amendment to the U.S. Constitution a majority of the cabinet and the VP can declare the president “unable to discharge the powers and duties of the office.” In that case, the Vice President becomes Acting President.

At that point, the takeover of the White House by the radical wing of the party will be complete. It’s already well underway…

For example, the Democratic primary election was recently held in New York’s 16th Congressional District. Challenger Jamaal Brown defeated incumbent Representative Eliot Engel in a close race.

The district is safe for Democrats, so Jamaal Brown will likely be elected to Congress in November to replace Engel. The initial reaction of most readers might be, “Who cares?” If you don’t live in that district, you’re not directly affected, and even if you do live there, you’re just swapping one liberal Democrat for another so what’s the big deal?

Actually, it’s a highly significant development. Here’s why:

Engle was not just another member of Congress. He had been in power for 32-years and was Chairman of the House Foreign Affairs Committee. Engle was not in the running for House Majority Leader or Speaker, but he was definitely in the leadership ranks and was one of the most powerful Democrats in Washington.

Normally, when either party has a long-time incumbent in a safe seat, you just put that seat in your pocket and spend time and effort on other races where you can flip a seat from the other party or defend an endangered incumbent.

Why the challenge for Engel?

The answer is that Jamaal Brown is a radical progressive and will fit in nicely with “The Squad” of radicals led by Alexandria Ocasio-Cortez (AOC). By the way, AOC got her seat in New York’s 14th District in 2018 by defeating another long-time incumbent, Joe Crowley, who had been in Congress for twenty years and was being mentioned as a possible Speaker of the House.

What’s happening is that Democrats in safe seats are not being challenged by Republicans but are being challenged in primary elections by radicals in their own party.

These challenges are funded by far-left groups such as the George Soros’s Open Society Foundation (through hundreds of sub-accounts) and other outside money. This serves a dual purpose.

When the radicals win, the ranks of The Squad are expanded and AOC’s power grows. Even where no challenge is underway, regular Democrats kowtow to Soros and The Squad to avoid attracting primary opponents themselves.

So, whether by direct challenge or passive subservience, the radicals are taking over the Democratic Party from the inside and The Squad’s agenda is becoming the Party’s agenda.

Keep an eye on these internal party challenges. Once the radicals have enough power they will come for your portfolio in the form of tax increases, regulatory burdens and social justice agendas.

But getting back to Biden’s solid lead in polling, should we just cede the election to him — and his VP candidate who’d probably be in power within a year?

Not so fast. For over 80 years, pollsters have asked two key questions in election polling. The first is, “Who are you voting for?”

That’s the intention question. The second question is, “Who do you expect to win?” That’s the expectation question.

The answer to the intention question gets all the headlines. Those are the polling results we describe above. The answer to the expectation question gets buried and is scarcely discussed.

But guess what? In cases where the intention and expectation questions have different answers, (in effect, “I’m voting for A, but I expect B to win”), the expectation answer had the correct result 78% of the time.

The intention question had the correct result only 22% of the time.

And, Trump is leading the expectation question right now 55% to 45% for Biden. So, Trump actually is ahead in the polls. You just have to be looking at the right polls. That’s key. So don’t write Trump off just yet.

But let’s say for now that Biden does win. Does that mean that the riots we’ve been seeing across the country would end?

It would be nice to think that the violence would wind down. But that probably won’t be the case. It’s true that there is less violence now than in early June. That’s partly due to Biden signing on to the radical agenda and his big lead in the polls.

The radicals see that they may get what they want (including a radical VP selection) and reason that there’s no need for violence if they can advance their agenda through a Biden White House.

But that’s at best a truce. If Biden wins, the demands will ratchet up. They always do when you’re dealing with ideologues and revolutionaries.

If Trump wins, the radicals will conclude they have nothing left to lose (and won’t wait four more years) and will unleash a new wave of violence almost immediately.

The Trump-bashing has been a steady, never-ending 24/7 spectacle for the past four years. There’s no reason why the media, the Resistance and the Democrats in Congress can’t keep it up for another four years.

The Antifa crowd will use a Trump victory as evidence that “democracy doesn’t work,” which will validate their violent tactics at least in their own minds. They’ll find plenty of supporters.

Either way, there’s more violence on the way. It might not be as immediate if Biden wins, but it would still follow.

Are markets ready for this? Is your portfolio ready? Investors should get ready; the chaos is not ending anytime soon, regardless of the election’s outcome.

Physical gold bullion is a good way to preserve your wealth and profit as it all unfolds.

Regards,

Jim Rickards
for The Daily Reckoning

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“Don’t Fight the Narrative”

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It’s widely believed that the stock market looks ahead and discounts the future. But consider this November’s presidential election…

Joe Biden has a substantial lead over President Trump in the polls. But Biden’s platform is not what you would call market friendly. For example, it calls for a 39.6% tax rate on dividends and capital gains.

But the stock market is near all-time highs again, with the Dow Jones Industrial Average nearing 27,000, the S&P over 3,200 and the Nasdaq actually at record highs.

What more proof do you need that stock markets are clueless when it comes to discounting future outcomes?

Now, it’s true you can’t always trust the polls. I know it well since I was one of very few analysts who predicted a Trump victory in 2016, even though he was behind in the polls.

But the same analytical tools that led me to predict a Trump win last time are showing me his chances are poorer this time.

OK, a true believer might say, but maybe the market’s anticipating a robust economic recovery. That’s why it’s rebounded so strongly.

But that argument just doesn’t hold much water.

Yes, unemployment dropped from over 13% to just over 11% last month, but that’s still the highest level since the end of World War II.

And there’s good reason to believe the unemployment rate will surge again heading into August as Payroll Protection Plan loans run out, lockdowns resume and states catch up with a backlog of claims that have not been processed yet.

Big business may be doing fine because it’s crowded into technology, finance and telecommunications, which are relatively unaffected by the pandemic.

But almost half the economy and half of all jobs are the domain of small-and-medium sized enterprises that have been decimated.

These restaurants, salons, dry cleaners, boutiques and other mainstays of neighborhoods across America are operating at half-capacity (at best) or have shut their doors permanently (at worst).

Meanwhile, a wave of bankruptcies is sweeping across the nation.

In other words, the V-shaped recovery that many analysts have been touting simply isn’t in the cards.

My own estimate is that this year may be even worse than the Great Depression.

We’re probably in for an L-shaped recovery, where the economy goes down steeply and is followed by low growth for an indefinite period of time.

But it’s full speed ahead for the stock market.

The market dip in March was the shortest bear market in history. Someone who just looked at stock charts could not be blamed for believing that the pandemic had never really happened.

So, why the strong stock market in a weak economy?

The simplest answer is that the stock market doesn’t have much to do with the economy. It’s just a casino driven by fear, greed, momentum, robots and indexation. There’s certainly something to that.

A more sophisticated answer is given by Nobel Prize-winning economist Robert Shiller.

Shiller writes that stock markets are driven by “narratives” or stories market participants tell each other.

From January to mid-February, even as the coronavirus was spreading out of control, the narrative was that the virus was contained to China. Markets reached new highs.

In March and April, the narrative changed to panic as Italy shut down and the U.S. did likewise. This is when the market fell over 30% ending the record bull market of 2009-2019.

The third phase started in late April as the market rallied 40% based on massive Fed money printing and $5 trillion of new government spending. The narrative was that easy money would rescue the market.

All of these narratives were wrong in the sense that the virus was not under control in February, it did not necessitate a lockdown in April, and the money printing and spending won’t solve the problem today.

Still, the narratives prevailed. “Don’t fight the Fed” is one of the oldest sayings on Wall Street.

The new conventional wisdom might be, “Don’t fight the narrative.”

Regards,

Jim Rickards
for The Daily Reckoning

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Americans Are Getting Out of Dodge

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I want to discuss some of the permanent changes that the national economy is going through. It has to do with what you might call the Great American Exodus. There’s a massive migration out of the big cities. Millions of Americans are fleeing the cities for the suburbs or the country from coast to coast.

There’s hard data to support that claim.

For example, let’s say you want to rent a U-Haul trailer from New York City to the Catskill Mountains, which are not that far away. Or you want to rent a U-Haul trailer from Los Angeles to, maybe Sedona, Arizona.

It’ll cost you much, much more than if you were going the other way. If you went from Sedona to LA, or the Catskills to New York, the price is only about one quarter as much. In other words, you have to pay a 400% premium to get the trailer going out of town, but U-Haul will practically pay you to bring it back in.

And there are shortages. If you’re moving out of your apartment to a house or another apartment outside of the city, try getting movers. I’ve done this recently myself, and know others who have. It was very hard to book moving companies or something as simple as a U-Haul trailer.

So the mass exodus out of cities is a real phenomenon, backed by solid evidence.

This is a shift we probably haven’t seen since the 1930s, when people left the Dust Bowl and moved out to California, looking for jobs in the agricultural industry. That was a mass migration. We’re seeing another one now, except this one’s going in the opposite direction.

And that’s a big problem for the economy because cities are centers of economic activity that contribute a lot to GDP. There are three primary reasons for the exodus.

The first is simple demographics. People talk about millennials as if they’re kids just out of college. But, the oldest millennial is turning 40 in two years. So they’re not kids anymore.  They’re often adults with jobs and families, and a lot of obligations.

Many of them have been living in cities since cities are generally interesting places to live and offer the greatest opportunity. But there’s a natural tendency for people in that demographic, who might have enjoyed the city in their twenties and thirties, to say it’s time to move out to the suburbs when they reach a certain age.

And that’s happening now. So that’s the first factor contributing to the mass migration from cities. The others are far more serious…

The most obvious is the pandemic. Look at New York City. Clearly it was ground zero for the pandemic in the United States. Something like one-third of all U.S. coronavirus fatalities took place in New York City or its immediate surroundings. That’s a highly compressed area.

And people realize that the density of the population, living on top of each other in crowded apartment buildings and offices, taking crowded public transportation, going to concerts and Broadway shows, etc., is like living in a Petri dish.

It’s obviously a lot easier to catch a virus in a crowded subway car than on a country road. So people are saying, “Give me space, and I think my health prospects are a lot better,” and that’s actually correct.

The third factor driving Americans out of cities is the riots.

Do not understate the damage of these riots. I don’t want to veer off into the social aspects or politics of the riots. Everyone’s got their own opinions. And peaceful protest is our constitutional right, which should be supported. If you’re peaceful, you have every right to protest against injustice.

But no one has a right to loot stores and start fires. We shouldn’t have to debate that.

But that’s what happened in large cities throughout America. Minneapolis obviously saw a lot of violence. But New York, Los Angeles, Chicago, Philadelphia, Atlanta, St. Louis, Denver, Portland, Oregon and many other cities suffered similar damage.

And with many calls to defund the police, people who might enjoy city life can see the writing on the wall. Crime rates are already spiking in New York, for example, which will probably get worse. And the NYPD has seen a 400% increase in retirement applications since the riots.

Cities have always been a trade-off. You had high taxes, lots of city noise, crowded conditions and certain levels of crime. But many put up with all those costs and annoyances in exchange for a very lively cultural and intellectual environment, more interesting jobs, interesting people, museums, great restaurants, movies, live shows, Broadway in the case of New York, etc.

But now the trade-offs don’t seem worth it for many. The cultural aspects are gone. Museums are closed. Restaurants are closed. Movie theaters are closed, etc. And crime is going up. So you’ve got all the costs and then some, but none of the benefits. And that’s why people are leaving.

So when you combine demographics, a pandemic that makes city living unattractive and riots, you get a major generational shift that we haven’t seen since the 1930s.

Now, you cannot underestimate the economic impact of this. The cities are where most 80% or more of the population, economic output, job creation, and R&D are centered. And who’s leaving the cities?

It’s the people who can have the option to leave. It’s the talent. It’s the money. It’s the energy. It’s the people that you most want in your cities who have the ability to leave.

And of course, now we have this whole work from home model. So a lot of corporations are saying, we don’t need 10 floors on 53rd and Park Avenue. We can do two floors of shared conference facilities, with a shared receptionist. So the commercial real estate market faces some strong headwinds.

The bottom line is, we’re looking at a substantial drag on economic recovery based on this migration out of the cities. It’s a big story that’s not getting nearly enough coverage.

And this is going to continue. This is something that only happens every two or three generations. You probably have to go back to the baby boom in the late 1940s and early 1950s for something comparable.

But there’s one sector of the economy that is doing well. That’s residential housing because it’s getting hard to find a house in many places. People are even bidding on houses without ever having seen the property.

If you’re looking to invest, you might want to look at suburban real estate and housing.

Regards,

Jim Rickards
for The Daily Reckoning

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Brown Weeds, Not Green Shoots

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Remember “green shoots?”

That was the ubiquitous phrase used by White House officials and TV talking heads in 2009 to describe how the U.S. economy was coming back to life after the 2008 global financial crisis.

The problem was we did not get green shoots, we got brown weeds.

The economy did recover but it was the slowest recovery in U.S. history. After the green shoots theory had been discredited, Treasury Secretary Tim Geithner promised a “recovery summer” in 2010.

That didn’t happen either.

The recovery did continue, but it took years for the stock market to return to the 2017 highs and even longer for unemployment to come down to levels that could be regarded as close to full employment.

Now, in the aftermath of the 2020 pandemic and market crash, the same voices are at it again.

The White House is talking about “pent-up demand” as the economy reopens and consumers flock to stores and restaurants to make up for the lost spending during the March to July pandemic lockdown.

But, the data shows that the “pent-up demand” theory is just as much of a mirage as the green shoots.

Many of the businesses that closed have failed in the meantime. They will never reopen and those lost jobs are never coming back. Even people who kept their jobs are not spending like it’s 2019.

Instead they’re saving at record levels.

Even the “reopening” of the economy is now in doubt. In some cities, the reopening was derailed by riots that left shopping districts in ruins.

In other cities, the reopening was stopped in its tracks by new outbreaks of the virus that led to new lockdowns and strict application of rules on wearing masks and social distancing.

There was a pick-up in retail sales in May, but it has disappeared as fast as it arrived because of the new outbreaks and the extension of the lockdown.

Meanwhile, if you’re trying to understand the economy, pay no attention to the stock market. The stock market is almost completely disconnected from the economy.

That’s partly because of the massive distortions caused by the Fed. But it’s also because the stock market is heavily weighted toward finance and technology.

Both sectors have been relatively unaffected by the pandemic and the resulting economic shock.

The industries that have been hurt are small-and-medium sized businesses in food, travel, resorts, bars, hotels, salons and other bricks-and-mortar or personal service establishments. Pain was also felt in mining, manufacturing and some other sectors.

These are important businesses in the economy, but they’re not nearly as important to major stock market indices as Amazon, Apple, Facebook, Google, Netflix, Microsoft and other mainly digital companies.

If you want to understand the economy, look around your own community to see how many stores are still closed, how many are never reopening, and how much sales are down among the relatively few survivors.

It’s not a pretty picture, and based on the dynamics of the virus it won’t get better anytime soon.

But there’s another primary reason why the economy won’t recover anytime soon. It’s not getting much coverage in the mainstream press, but it should.

It involves a major population shift that only happens once every two or three generations. And it’s happening now.

Regards,

Jim Rickards
for The Daily Reckoning

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Inflation

This post Inflation appeared first on Daily Reckoning.

Remember all those “green shoots?”

That was the ubiquitous phrase used by White House officials and TV talking heads in 2009 to describe how the U.S. economy was coming back to life after the 2008 global financial crisis.

The problem was we did not get green shoots, we got more like brown weeds.

The economy did recover, yes, but it was the slowest recovery in U.S. history.

After the green shoots theory had been discredited, Treasury Secretary Tim Geithner promised a “recovery summer” in 2010.

That didn’t happen either.

The recovery did continue, but it took years for the stock market to return to its previous highs and even longer for unemployment to come down to levels that could be regarded as close to full employment.

Now, in the aftermath of the 2020 pandemic and market crash, we’re getting the same happy talk.

Green Shoots, or Brown Weeds?

The White House is talking about “pent-up demand” as the economy reopens and consumers flock to stores and restaurants to make up for the lost spending during the March to July pandemic lockdown.

But, the data shows that the “pent-up demand” theory is just as much of a mirage as the green shoots we heard about a decade ago..

Many of the businesses that closed have failed in the meantime. They will never reopen and those lost jobs are never coming back. Even people who kept their jobs are not spending like it’s 2019, they’re saving at record levels.

Meanwhile, the “reopening” of the economy is now in doubt.

In some cities, the reopening was derailed by riots that left shopping districts in ruins. In other cities, the reopening was stopped in its tracks by new outbreaks of the virus that led to new lockdowns and strict application of rules on wearing masks and social distancing.

There was a pick-up in retail sales in May, but it has disappeared as fast as it arrived because of the new outbreaks and the extension of the lockdown.

If you’re trying to understand the economy, pay no attention to the stock market.

Instead, look around your own community to see how many stores are still closed, how many are never reopening, and how much sales are down among the relatively few survivors.

It’s not a pretty picture, and based on the dynamics of the virus it won’t get better anytime soon.

Do you know what’s also not getting better anytime soon?

Debt and deficits.

From $1 Trillion to $5 Trillion

The annual deficit for Fiscal 2020 was originally forecast by the Congressional Budget Office at about $900 billion.

My estimate issued last year was that the 2020 deficit would be a bit over $1 trillion. But we were both wrong…

The pandemic came along the pandemic and new market panic in late winter and spring. The subsequent deficit spending and money printing broke all records.

Unlike the CBO’s estimate and my own forecast, the deficit this year will be at least $5 trillion. That means $5 trillion is the lowest number you can expect.

Meanwhile, the Fed’s money printing will more than double the size of its balance sheet from $3.8 trillion to $8 trillion or higher.

And the U.S. debt-to-GDP ratio is on its way to 130% after starting the crisis at an already high 106%.

With all this money creation, does this mean that inflation is finally on the way?

The Inflation Question

The answer’s more complicated than many think. Let’s look back to the last financial crisis for some guidance…

Between 2008 and 2014, the Fed created trillions of dollars through quantitative easing (which actually seems like small potatoes compared to what we’re seeing now).

Many analysts sounded the alarm about “inflation” as the inevitable consequence of all that excessive money printing by the Fed. It seemed like a perfectly reasonable warning at the time.

But despite all the fears, nothing bad happened.

Inflation actually fell; there was no serious inflation threat. Interest rates fell. There was no “bond bubble” or rout in the bond market.

As a result, politicians and voters in both parties became complacent. It seemed that debt didn’t matter after all.

That’s why there’s so little resistance to all the monetary programs we’re seeing now.

It’s like the boy who cried wolf. Analysts cried wolf about inflation during the last crisis, but the wolf never materialized. Why should we listen to them now?

It’s the Velocity, Stupid

As I’ve argued before, and can’t state strongly enough because it’s that important to understand:

Inflation is not caused by money printing alone. It’s caused by the velocity, or turnover of money.

Velocity is a psychological phenomenon that has nothing to do with the Fed, (in fact, the Fed doesn’t even understand how it works).

The Fed can “print” all the money in the world. But if people don’t actually spend it but save it instead, it won’t create inflation because there’s no velocity.

And now, because of high unemployment and failing businesses, people are not spending money even when the economy reopens. They’re saving instead.

Now, savings in general is positive. And a high savings rate can be good in the long-run. But it kills consumption in the short-run.

It might make individual sense to pay down credit card debt and save money in uncertain times. But it also means little money velocity. It means that not much money is turning over.

And since consumption is 70% of the U.S. economy, the immediate aftermath of the pandemic will be slow growth, disinflation and even deflation (disinflation and deflation aren’t the same).

So we’re looking at disinflation and deflation for now, despite all the money creation we’re seeing now.

But that doesn’t mean inflation is dead. Not at all. The inflation will arrive, just not yet…

When You’ll See Inflation

Inflation will come when people lose confidence in the dollar and suddenly dump dollars for any hard assets they can find.

Money velocity will accelerate but it won’t be into consumer goods. It’ll be into hard assets that hold their value over time, gold in particular.

In other words, the best leading indicator of inflation won’t be found in the grocery store or at the gas pump.

It’ll be found in the dollar price of gold.

Of course higher gold prices means higher consumer prices since higher gold prices mean a weaker dollar. More dollars will be required to buy the same amount of goods.

When gold pushes past $2,000 per ounce toward $3,000 per ounce, that’s your signal that inflation in the price of everything else is not far behind.

Don’t wait until that happens. Buy your (physical) gold now while it’s still affordable.

Regards,

Jim Rickards
for The Daily Reckoning

The post Inflation appeared first on Daily Reckoning.

Monetary and Fiscal Policy Won’t Help

This post Monetary and Fiscal Policy Won’t Help appeared first on Daily Reckoning.

Monetary and fiscal policy won’t lift us out of the new depression. Let’s first take a look at monetary policy.

Fed money printing is an exhibition of monetarism, an economic theory most closely associated with Milton Friedman, winner of the Nobel Memorial Prize in economics in 1976. Its basic idea is that changes in money supply are the most important cause of changes in GDP.

A monetarist attempting to fine-tune monetary policy says that if real growth is capped at 4%, the ideal policy is one in which money supply grows at 4%, velocity is constant and the price level is constant. This produces maximum real growth and zero inflation. It’s all fairly simple as long as the velocity of money is constant.

It turns out that money velocity is not constant, contrary to Friedman’s thesis. Velocity is like a joker in the deck. It’s the factor the Fed cannot control.

Velocity is psychological: It depends on how an individual feels about her economic prospects. It cannot be controlled by the Fed’s printing press. It measures how much money gets spent from people to businesses.

Think of when you tip a waiter. That waiter might use that tip to pay for an Uber. And that Uber driver might pay for fuel with that money. This velocity of money stimulates the economy.

Well, velocity has been crashing for the past 20 years. From its peak of 2.2 in 1997 (each dollar supported $2.20 of nominal GDP), it fell to 2.0 in 2006 just before the global financial crisis and then crashed to 1.7 in mid-2009 as the crisis hit bottom.

The velocity crash did not stop with the market crash. It continued to fall to 1.43 by late 2017 despite the Fed’s money printing and zero rate policy (2008–15).

Even before the new pandemic-related crash, it fell to 1.37 in early 2020. It can be expected to fall even further as the new depression drags on.

As velocity approaches zero, the economy approaches zero. Money printing is impotent. $7 trillion times zero = zero. There is no economy without velocity.

The factors the Fed can control, such as base money, are not growing fast enough to revive the economy and decrease unemployment.

Spending is driven by the psychology of lenders and consumers, essentially a behavioral phenomenon. The Fed has forgotten (if it ever knew) the art of changing expectations about inflation, which is the key to changing consumer behavior and driving growth. It has nothing to do with money supply.

The bottom line is, monetary policy can do very little to stimulate the economy unless the velocity of money increases. And the prospects of that happening aren’t great right now.

But what about fiscal policy? Can that help get the economy out of depression?

Let’s take a look…

Congress is far along in authorizing more deficit spending in 2020 than the last eight years combined. The government will add more to the national debt this year than all presidents combined from George Washington to Bill Clinton.

This spending explosion includes $26 billion for virus testing, $126 billion for administrative costs of programs, $217 billion direct aid to state and local governments, $312 billion for public health, $513 billion in tax breaks for business, $532 billion to bail out major corporations, $784 billion in aid to individuals as unemployment benefits, paid leave, direct cash payments and $810 billion for small businesses under the Paycheck Protection Program.

This comes on top of a baseline budget deficit of $1 trillion.

Moreover, Congress is expected to pass an additional spending bill of at least $1 trillion by late July, mostly consisting of assistance to states and cities. Combining the baseline deficit, approved spending and expected additional spending brings the total deficit for 2020 to $5.3 trillion.

That added debt will increase the U.S. debt-to-GDP ratio to 130%. That’s the highest in U.S. history and puts the U.S. in the same super-debtor’s league as Japan, Greece, Italy and Lebanon.

The idea that deficit spending can stimulate an otherwise stalled economy dates to John Maynard Keynes and his classic work The General Theory of Employment, Interest and Money (1936).

Keynes’ idea was straightforward.

He said that each dollar of government spending could produce more than $1 of growth. When the government spent money (or gave it away), the recipient would spend it on goods or services. Those providers of goods and services would in turn pay their wholesalers and suppliers.

This would increase the velocity of money. Depending on the exact economic conditions, it might be possible to generate $1.30 of nominal GDP for each $1.00 of deficit spending. This was the famous Keynesian multiplier. To some extent the deficit would pay for itself in increased output and increased tax revenues.

Here’s the problem:

There is strong evidence that the Keynesian multiplier does not exist when debt levels are already too high.

In fact, America and the world are inching closer to what economists Carmen Reinhart and Ken Rogoff describe as an indeterminate yet real point where an ever-increasing debt burden triggers creditor revulsion, forcing a debtor nation into austerity, outright default or sky-high interest rates.

Reinhart and Rogoff’s research reveals that a 90% debt-to-GDP ratio or higher is not just more of the same debt stimulus. Rather it’s what physicists call a critical threshold.

The first effect is the Keynesian multiplier falls below 1. A dollar of debt and spending produces less than a dollar of growth. Creditors grow anxious while continuing to buy more debt in a vain hope that policymakers reverse course or growth spontaneously emerges to lower the ratio. This doesn’t happen. Society is addicted to debt and the addiction consumes the addict.

The end point is a rapid collapse of confidence in U.S. debt and the U.S. dollar. This means higher interest rates to attract investor dollars to continue financing the deficits. Of course, higher interest rates mean larger deficits, which makes the debt situation worse. Or the Fed could monetize the debt, yet that’s just another path to lost confidence.

The result is another 20 years of slow growth, austerity, financial repression (where interest rates are held below the rate of inflation to gradually extinguish the real value of debt) and an expanding wealth gap.

The next two decades of U.S. growth would look like the last two decades in Japan. Not a collapse, just a slow, prolonged stagnation. This is the economic reality we are facing.

And neither monetary policy nor fiscal policy will change that.

Regards,

Jim Rickards
for The Daily Reckoning

The post Monetary and Fiscal Policy Won’t Help appeared first on Daily Reckoning.

Economy Won’t Recover Until 2023

This post Economy Won’t Recover Until 2023 appeared first on Daily Reckoning.

I’ve argued that we’re in a new depression. The depth of the new depression is clear. What is unclear to most observers are the nature and timing of the recovery.

The answer is that high unemployment will persist for years, the U.S. will not regain 2019 output levels until 2022 and growth going forward will be even worse than the weakest-ever growth of the 2009–2020 recovery.

This may not be the end of the world, yet it is far worse than the most downbeat forecasts. Some sixth-grade math is a good place to begin the analysis.

Make 2019 economic output 100 (the actual figure is $21 trillion; “100” is 100% of that number, a convenient way to measure ups and downs).

Assume output drops 40% in the second and third quarters of 2020. (Many estimates project larger drops; 40% is a plausible if conservative estimate.)

A 40% drop for six months equals a 20% drop for the full year assuming the first and fourth quarters are flat on net.

A 20% drop from 100 = 80 (or $4.2 trillion of lost output).

Now let’s see what happens if we estimate back-to-back growth years of 10% in 2021 and 2022…

First, is 10% growth even a reality? Past history says no.

Since 1948, U.S. annual real growth in GDP has never exceeded 10%.

In fact, post-1980 recoveries averaged 3.2% growth. And since 1984, growth has never exceeded 5%. So 10% is a very optimistic forecast to begin with.

If our new base is 80 (compared with 100 in 2019) and we increase output by 10% in 2021, this brings total output to 88.

If we enter 2021 with a new base of 88 and add another 10% to that, we come to 96.8 in total output by the end of 2022.

Here’s the problem.

Using 100 as a yardstick for 2019 output and assuming an unrealistic back-to-back years of 10% real growth in 2021 and 2022, one still does not get back to 2019 output levels.

The hard truth is 96.8 is less than 100.

It would take the highest annual real growth in over 40 years, sustained for two consecutive years, to get close to 2019 output levels.

It’s far more realistic to assume real growth will be less than 10% per year. That puts the economy well into 2023 before reaching output levels last achieved in 2019.

This is the reality of this depression.

It’s not about continuously declining GDP. A depression is an initial collapse so large that even years of high growth won’t dig the economy out of its hole.

Analysts and talking heads debate the recovery’s strength using letters that mimic the shape of a growth curve as shown on a graph.

A V-shaped recovery goes down steeply and back up steeply to get output back where it started in a relatively brief time.

A U-shaped recovery goes down steeply, does not grow materially right away and then makes a sharp recovery.

An L-shaped recovery goes down steeply and is followed by low growth for an indefinite period of time.

Finally, the W-shaped recovery goes down steeply, bounces back quickly and then falters for a second time before finally recovering and getting back to earlier levels of output and growth.

The post-2009 recovery produced only 2.2% growth. It was an L-shaped recovery.

It was a real recovery, yet the output gap between the former trend and the new trend was never closed.

The U.S. economy suffered over $4 trillion of lost wealth based on the difference between the former strong trend and the new weaker trend.

That lost wealth was a serious problem for the U.S. before the New Great Depression.

Now the prospect is for even lower growth than the weak post-2009 recovery.

The new recovery, far from the 10% growth discussed in the example above, may only produce 1.8% growth, even worse than the 2.2% growth before the pandemic.

It’s another L-shaped recovery, the second in a row. Now the bottom of the L is even closer to a flat line and the output gap compared with the long-term trend is even greater.

There will be no V-shaped recovery. There are no green shoots despite what you hear on TV.

We’re in a new Great Depression and will remain so for years.

Regards,

Jim Rickards
for The Daily Reckoning

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Depression and the Great American Exodus

This post Depression and the Great American Exodus appeared first on Daily Reckoning.

Is the worst of the economic collapse over?

Not really. The economy is off the bottom, but that’s only to be expected after the historic collapse of March–May and the stock market crash in March and April.

The question now is not whether we’re growing again. We are. The questions are how fast is that growth, and how long will it be before we return to 2019 levels of output?

And this question applies not just to the U.S. but to the entire global economy, especially the large producers such as China, Japan and the EU.

Here, the news is not good at all.

Recent data suggests that we may not reach 2019 output levels until 2023 at the earliest, and that something close to full employment may not return until 2025.

A simple example will make the point.

Just Not Enough Growth

Assume 2019 GDP has a normalized level of 100. Now assume a 10% drop (that’s about how much the U.S. economy will decline for the full-year 2020 according to many estimates).

That moves the benchmark to 90 in 2020.

Now assume 5% growth in 2021 (that would also be the highest growth rate in decades).

That will move the benchmark back up to 94.5. Next assume growth in 2022 is 4% (that would also be near record annual growth for the past three decades).

That would move the benchmark up to 98.3. Here’s the problem…

An output level of 98.3 is still less than 100. In other words, back-to-back growth of 5% in 2021 and 4% in 2022 is not enough to recover the 2019 level after a 10% decline in 2020.

But the situation is even worse than I just described.

Worse Than a Technical Recession

China PMI figures have recently been 50.9 (manufacturing) and 54.4 (services).

The Wall Street happy talk brigade is cheering these numbers because they “beat” expectations and they show growth (any number over 50 indicates growth in a PMI index series).

But growth is completely expected. The problem is that growth is so weak.

A strong bounce back from a collapse should produce PMI readings of 60 or 70 if a robust recovery were underway. It’s not.

Here’s the reality: What the U.S. economy is going through right now is far worse than a technical recession.

A recession is defined as two or more consecutive quarters of declining growth along with higher unemployment.

A recession beginning in February has already been declared by the National Bureau of Economic Research (NBER), which is the private arbiter of when recessions begin and end.

If we judge strictly by growth figures, the recession may already be over (although we won’t know for months to come, until quarterly growth figures are available and the NBER has time to evaluate them and make a call).

Most recessions don’t last that long, usually only about six–nine months. But that misses the fact that we’re really in a new depression.

The New Depression

“Wait a minute,” you say. “Growth may be weak, but it’s still growth. How can you say we’re in a depression?”

Well, as I’ve explained before, the starting place for understanding depression is to get the definition right.

Economists don’t like the word “depression” because it does not have an exact mathematical definition. For economists, anything that cannot be quantified does not exist. This view is one of the many failings of modern economics.

Many think of a depression as a continuous decline in GDP. The standard definition of a recession is two or more consecutive quarters of declining GDP and rising unemployment, as I just explained.

Since a depression is understood to be something worse then a recession, investors think it must mean an extra-long period of decline.

But that’s not the definition of depression.

Defining Depression

The best definition ever offered came from John Maynard Keynes in his 1936 classic The General Theory of Employment, Interest and Money.

Keynes said a depression is “a chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.”

Keynes did not refer to declining GDP; he talked about “subnormal” activity.

In other words, it’s entirely possible to have growth in a depression. The problem is that the growth is below trend. It is weak growth that does not do the job of providing enough jobs or staying ahead of the national debt.

That is exactly what the U.S. is experiencing today.

The key is a depression is not measured by declining growth but is measured by a combination of actual declines and a below-trend recovery. This happened during the Great Depression.

Depressions Leave Lasting Impressions

There was declining growth and a technical recession from 1929–1932. Then a recovery (from a low level) from 1933–36. Then a second technical recession in 1937–38 and then another recovery from 1939–1940.

The entire period 1929–1940 is known as the Great Depression in part because the stock market and commercial real estate never recovered their 1929 levels even by 1940 (they finally recovered in 1954).

Depressions are also categorized by large behavioral changes including higher savings rates, smaller family size and internal migration. These effects are intergenerational.

Many behavioral changes from the 1930s were still prevalent in the 1950s and early 1960s and lasted until the baby boomers came of age in the late 1960s.

This kind of profound change with lasting impact is happening again.

The Great American Exodus

Due to a combination of COVID-19 spreading in densely populated areas, business failures, urban riots and failing mayors and police departments, Americans are migrating from the big cities to suburban and country areas by the millions.

American families are leaving dysfunctional cities such as New York City, Seattle and San Francisco and heading for Montana, Colorado, Maine and upstate New York in the Catskill Mountains among other safe havens.

Big cities have always offered a trade-off between higher taxes and urban stress in exchange for entertainment, great restaurants, museums and intellectual buzz.

Today the venues and buzz are gone, the crime rates are soaring and all that is left is the stress and taxes. So people are getting out.

Changes like this are not temporary. Once people move out, they don’t return ever. Their children may return someday but that could be 15 or 20 years away.

And those who leave tend to have the most capital and the most talent. This leaves the cities as empty shells populated by oligarchs with personal bodyguards and the poor, who have to deal with the street-level violence.

This shift can be helpful for individuals who move, but it’s devastating for the economics of major cities. And that’s devastating for the U.S. economy as a whole.

It’s one more reason we will be in depression for years even if the technical recession is over soon.

Investors Will Learn the Hard Way

The best case is that it will take years to get back to 2019 levels of output. The worst case is that output will drop even lower as the recovery fails.

We’re not really in a recession right now. We’re in a depression and will remain there for years.

No one under the age of 90 has ever experienced a depression until now. Most investors have no working knowledge of what a depression is or how it affects asset values.

But they’re going to find out, and probably the hard way.

Regards,

Jim Rickards
for The Daily Reckoning

The post Depression and the Great American Exodus appeared first on Daily Reckoning.

The Election’s a Toss-up

This post The Election’s a Toss-up appeared first on Daily Reckoning.

Voters don’t change their minds in October despite the occasional “October surprise.” Evidence shows that the debates don’t change many minds either despite their high profile.

Most voters make up their minds sometime between Labor Day and Oct. 1 based on overall impressions of the candidates without getting too bogged down in policy details.

One of the primary rules of politics is “You can’t beat something with nothing.”

Biden isn’t much, but at least he’s something. Voters perceive him as steady, experienced and somewhat of a “regular guy.” (Never mind that the reality is quite different and Biden is in a state of cognitive decline; it’s the perception that counts, not the reality).

Trump appears to be nothing. He has no program, no platform and no plan for the next four years.

Voters don’t blame him for COVID, but they will judge him by his response. Voters don’t blame him for the depression, but they will judge him by the recovery.

Right now, Trump is not responding well or showing leadership; he’s just blaming others and complaining about the Democrats.

We’ll learn a lot as Joe Biden picks a running mate and as the Democratic and Republican conventions approach in August. I won’t rule out a shock such as Democrats working behind closed doors to dump Biden in favor of someone they perceive as more electable, such as New York Gov. Andrew Cuomo, California Gov. Gavin Newsom, or popular favorite Michelle Obama.

But let’s consider the two different scenarios — a Trump win and a Biden win.

If Trump wins, the extent of Trump hatred and anti-Trump resistance will get worse, not better. The idea that the Trump-bashers will finally come to grips with reality and accept Trump as president (even one they don’t like) is fantasy.

The Trump-bashing has been a steady, never-ending 24/7 spectacle for the past four years. There’s no reason why the media, the Resistance and the Democrats in Congress can’t keep it up for another four years.

How about more impeachment hearings? (Don’t worry, those plans are already underway.)

The Antifa crowd will use a Trump victory as evidence that “democracy doesn’t work,” which will validate their violent tactics at least in their own minds. They’ll find plenty of supporters.

Get ready for more riots, urban looting and burning and “autonomous zones” in major cities by early next year if not sooner.

What about a Biden victory?

A Biden victory brings its own set of fiascoes waiting to happen. Biden’s cognitive capacity is clearly impaired at least to some extent. That can happen with age, sooner in some than others.

Supporters and the media have tried to cover up the Biden mental issues by saying he is “gaffe-prone” and that he has had a lifetime struggle with stuttering. Both statements are true and have been for decades.

But they don’t explain what we’re seeing now.

Biden can’t complete sentences, can’t remember well-known quotes, can’t construct a coherent argument and seems to drift off in the middle of answering a question. Those are all signs of a deteriorating mental capacity.

We’ll see how far this Biden-in-hiding can make it. The Democrats’ convention has already been turned into a “virtual” convention at which Biden can hide behind a teleprompter again.

The fall debates will be a huge challenge for Biden, except they may be rigged as to length, number and format to minimize the stress on Biden’s presence of mind.

Politics aside, the real problem is not the campaign but the election.

If Biden wins, his mental health issues won’t go away. We will have a cognitively disabled president with his finger on the nuclear war-fighting trigger.

Biden will pose a serious case for removal from office under the 25th Amendment. This was mooted for Trump, but it was based on animus, not health. In Biden’s case, the health threat is real.

This is why the vice presidential nomination is so important. When the vice presidential pick for Biden is announced (likely a far-left voice), investors should immediately think of that person as a de facto president now and actual president by 2022.

So there are your choices. Trump brings more social unrest, and Biden brings mental health issues that will lead to his removal. As they say in sports betting, “Pick ’em.”

I said earlier that if the election was held today, Trump would lose. But because so much can happen over the next four months, my forecast for the outcome of the presidential election is still a toss-up.

There are so many wild cards in the deck that will be played between now and Election Day. These wild cards include the strength of the economic recovery, the continuation of social unrest, a possible second wave of COVID-19, international hot spots, Trump’s petulance and Biden’s mental health.

Now, a toss-up is bad news for Trump because he had a 74% probability of winning as recently as January.

But that has gone by the boards as a result of the pandemic, the depression, the more recent riots and Trump’s inability to understand that a different type of leadership is required when the crisis is not strictly political.

The key takeaway is that the Trump-Biden contest is still basically 50-50.

The polls could simply be underestimating Trump’s support — a phenomenon sometimes referred to as the idea of the “hidden Trump voter.”

At the same time, Trump’s difficulties do not mean clear sailing for Biden. The biggest single variable in success or failure in electoral politics is not polling but turnout.

Even a candidate behind in the polls will win if his supporters turn out in force. Likewise, a candidate ahead in the polls will lose if his supporters stay home.

On that front, Biden will have great difficulty getting the “Bernie Bros” and other left-wing elements of the Democratic electorate to turn out on Election Day. There’s a noticeable lack of enthusiasm for Biden even among those who favor him in the polls.

These two trends — Trump’s lagging in the polls and Biden’s lag in enthusiasm — will help define the presidential race over the next four months.

In addition to the pandemic and the economy, which are the dominant factors, other campaign themes will include Trump blaming China for the pandemic and Biden attacking Trump’s handling of the pandemic.

Both candidates have a path to victory. For Biden, it’s keeping a low profile and hoping to coast to victory on the anti-Trump feeling in the country. For Trump, it’s getting past his petty feuds and laying out a vision for a second term.

In politics, something beats nothing every time.

The election will be close no matter what happens. That was always in the cards.

For investors, it’s important to know that the markets have not priced in a Biden victory. Biden has plans for higher taxes, more regulation and the Green New Deal.

It’s one more reason to lighten up on stocks and build cash reserves until we have more clarity on the election.

Regards,

Jim Rickards
for The Daily Reckoning

The post The Election’s a Toss-up appeared first on Daily Reckoning.