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Coming Soon: Spending Orgy

Posted May 26, 2020

It was a fine Memorial Day weekend here in the United States. A holiday created after the Civil War to remember the dead has been transmogrified into a celebration of BBQs and beer.

Of course, with the quarantine, most BBQs were smallish affairs. Part of our family took the jon boat, as well as a fleet of kayaks, out on the reservoir. We were a regular redneck circus, which is how it should be on Memorial Day weekend.

I caught one of the biggest black crappies I’ve ever seen on an $8 ChatterBait lure. Now the crappie is a great eating fish, but I tossed it back to appease the soft hearts in the boat, who wouldn’t eat it if they watched it die. One must be more selective of one's fishing buddies.

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Last week, I was talking about the velocity of money and its role in inflation and gold. The problem is people aren't spending money. If they are anything like us, they’ve stopped going out. We cook at home, and the only expense besides food has been on small boats and fishing gear -– so barely anything at all.

It is no wonder that the velocity of money is the lowest in decades. In reality, there is nothing we need and no one to impress.

Still, the Fed prints and no one is there to stop it. The only difference between Republicans and Democrats is where the money goes and who gets the credit for it. Where did Newt Gingrich and the bond vigilantes go? Replaced by BlackRock and Jerome Powell at the Fed. 

The Fed printed another $2.3 trillion last week. That’s more money than I can conceive of. It stacks to the moon or fills the Grand Canyon... or covers three Rhode Islands.

The amount of money doesn't really matter. It's how much debt in terms of GDP does it take to ensure a default. At what point does it all fall apart? When do humans lose the full faith in the U.S. government?

And remember, debt from mortgages and student loans is tied to the 10-year Treasury Note. If rates go back up, many people will feel a lot of pain, not least of which will be the U.S. government.

And it’s not just the United States, the Economist says that rich country debt could run at $66 trillion this year or 122% of GDP. To put this in perspective, debt to GDP was 32% in 1980.

At some point it must be paid down. There are three ways a government can get out of debt. First, they can raise taxes to pay it back. Second, it can just not pay or give creditors a haircut. Third, it can attempt to grow out of it with the help of inflation.

The third option is politically viable.  

There is some thinking that once the economy reopens, and it looks like that will happen soon, there will be an orgy of spending as people are cut loose from their lockdown. Velocity will pick up and so will inflation.

Time will tell. If that happens, gold priced below $1,800 an ounce and silver at $17 will look very cheap by comparison.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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