“The wave-like movements that affect the economic system, the recurring booms and recessions, are the inevitable result of repeated attempts to lower the aggregate market interest rate by credit expansion. There is no way to avoid the final collapse of the boom brought about by credit expansion. The only alternatives are either an early crisis as a result of a voluntary abandonment of further credit expansion, or a later and complete catastrophe of the monetary system concerned.”
– Ludwig von Mises, human behavior
crank up the printer
A federal interest rate cut is coming. If you believe this will boost your stock portfolio, you are in for a big disappointment.
The coming collapse of Wall Street can be seen from afar, but only to those with their eyes open.
Extreme stock market valuations. Sky-high prices. AI bubble bursting as bigger fools run out. Meanwhile, the economy is sinking into recession.
These factors, combined with the massive government debt problem, suggest something much bigger than a normal bear market is happening. Our estimate is that a 50% drop in the S&P 500 would be the bare minimum. In fact, if the stock market were to fall 50% and then rise 50%, it would not break even.
If the economy really starts to slow down and stocks start to slide and fall, the Treasury, in partnership with the Federal Reserve, will get the printing presses rolling again. In fact, the Fed is already oiling its gears in preparation for a 25 basis point rate cut later this month.
But the dollar’s decline can only go so far, according to the Bureau of Labor Statistics. inflation calculatorToday, a dollar has the purchasing power of $0.03 when the Federal Reserve was established in 1913. The value of the dollar has been almost completely destroyed over the past 111 years. Workers and savers have been responsible for this through inflation taxes.
So the coming recession and stock market crash could lead to a debt crisis and a dollar crisis, at which point inflation would run wild and devalue the dollar and society as a whole.
Money Supply Inflation
This is a story that is repeated time and time again. Over-indebted governments relying on excessive money and credit printing destroy their currencies and economies. Revolutionary France. Weimar Germany. 21st century Zimbabwe. And everything in between.
Intense money printing destroys the currency, which drives up relative prices. Ultimately, inflation becomes hyper, with monthly inflation rates exceeding 50%. Then, social chaos and human suffering follow a similar trajectory.
Unfortunately, the United States is following a similar path that has brought disaster to other countries: uncontrolled spending. Authoritarian government. Extreme wealth inequality. Soaring social discord and discontent. The United States is not somehow immune to similar inflationary disasters. This time it will be no different.
Of course, some aspects will be different. Instead of issuing ever-higher denominations of banknotes, as happened during past hyperinflation periods, the Treasury and the Federal Reserve will simply flood the system with cheap credit. Devaluation will make it impractical to hold cash. It already has.
Add zero to both consumer prices and credit card limits. Then the Fed launches digital Federal Reserve notes as a solution to its own inflation. And then all private transactions are subject to government oversight.
For Americans who work, save, invest, and improve the lives and security of their families, we are in dangerous territory. To prevent the fate of inflationary madness, Congress must do one thing: stop spending, balance the budget, run a surplus, pay down the debt, and suffer the consequences of decades of depression as the debt is paid or forgiven.
We do not believe that the odds of this happening are as big as a snowball in hell. The US government’s performance since the end of the Great Depression has been money supply inflation. The consequences of this will peak during the next presidential term.
Germany’s evil genius
In the simplest sense, hyperinflation results in the currency becoming virtually worthless. For example, in Weimar Germany, most people were completely ruined by hyperinflation. Responsible people were punished for saving money.
Wage workers received worthless paper money for their labor. Before hyperinflation, the only redeemable value of the pile was to use it to start a fire.
But the Weimar hyperinflation did not ruin everyone. Some people prospered greatly.
One of those people was a man named Hugo Stinnes. The interesting thing about Hugo Stinnes is that while most people were ruined by hyperinflation, his wealth continued to grow. So much so that he became the richest man in Germany and earned the nickname of the ‘Inflation King’. He also Germany’s evil genius.
The important thing to understand about Stinson’s enormous wealth is that it was not a result of what he did during the hyperinflation, but of what he did just before it.
Stinnes was born in Germany in 1870. He was wealthy long before 1920. His family owned coal mines and other industries.
Nevertheless, Steens was a keen economic observer and experienced in international trade. After World War I, he saw the excessive money printing by Reichsbank President Rudolf von Havenstein, who was already influencing the economy, and he poured money into steel, shipping, railroads, and freight lines. He also borrowed heavily to pay for everything.
After World War I, the value of the Papermark gradually eroded. It really began to fall in value in 1921. After that, the loss of value became exponential. Stinnes prepared for this by using gradual periods.
Lessons from the past
In general, Stinson’s hyperinflation playbook was fairly simple: he used debt to build tangible assets before the hyperinflation. Then, after the hyperinflation, his tangible assets held their value in real terms, but their prices soared in nominal terms (versus the currency).
What this means is that the amount he owes on the paper marks he borrowed is reduced to a negligible amount, so he can keep his assets and become incredibly wealthy while paying off his debts with virtually nothing.
When hyperinflation hit, the paper money he had borrowed was worthless, and all the tangible assets he owned were worth more than the depreciation of the German currency. The important lesson is that tangible assets do not lose value during hyperinflation in the same way as currency.
Meanwhile, Stinson’s tangible assets increased in value relative to the papermark, producing real value output. At the same time, the papermark’s hyperinflation reduced the value of his papermark liabilities.
By 1924, Steennes was able to pay off his debts with worthless paper marks. At the same time, his assets had increased in value relative to the paper marks. Thus, Steennes became the richest man in Germany.
Then, in a twist of fate, Stinnes died suddenly in Berlin on April 10, 1924, after gallbladder surgery.
Here in the US, signs of government-induced hyperinflation are on the horizon as early as September 2024. But there are dark clouds in the meantime.
What would Hugo do?
The Fed has temporarily taken the monetary gas out of the economy after raising and maintaining the federal funds rate in the range of 5.25% to 5.5% since July 27, 2023. The lag in the economy before policy adjustments are reflected is finally being realized. The economy is slowing down.
There will be a rate cut later this month, but there will be another lag before the inflationary effects kick in. This lag will come in the form of a recession and a stock market decline. Against this backdrop, what would Hugo Stinnes do if he were alive today?
We think he’ll do what billionaire investor Warren Buffett does.
Buffett, like Stearns, owns railroads and other businesses that provide high returns on tangible capital. But unlike Stearns, Buffett is not burdened with debt.
Conversely, Buffett has been selling stocks and accumulating cash through his company, Berkshire Hathaway, throughout the year. As of June 30, the most recent reporting period, Buffett had $277 billion in cash.
This contrast illustrates the difference between today’s Federal Reserve Chairman Jerome Powell and Rudolf von Havenstein, the Reichsbank president circa 1921. Powell knows that the economy needs to slow down before he can resume the next wave of massive money printing, something Havenstein failed to do.
Hyperinflation may be coming to the United States. But investors and speculators who want to play the game by borrowing money and buying assets like Stinson did 100 years ago are asking for trouble. Like Buffett, we expect the shakeout to come first.
Now is not the time to buy stocks on margin. You will lose your money.
Instead, small investors who want to protect their hard-earned money will want to own stocks of high-quality companies that provide high returns on tangible assets and capital.
You should also keep some cash on hand and prepare yourself psychologically so that you have the courage to use it when needed. blood in the street.
[Editor’s note: Have you ever heard of Henry Ford’s dream city of the South? Chances are you haven’t. That’s why I’ve recently published an important special report called, “Utility Payment Wealth – Profit from Henry Ford’s Dream City Business Model.” If discovering how this little-known aspect of American history can make you rich is of interest to you, then I encourage you to pick up a copy. It will cost you less than a penny.]
thank you,
MN Gordon
For Economic Prism
Back to the economic prism in What Will Hugo Do?
