Our column last week prompted so many questions from new readers that we decided to start from scratch. Long-time readers will recognize much of what we’re about to say, but we ask that you take the time regardless since we’re adding in valuable context that has been provided over time. Just looking at the world today, your first thought might be: crazy! However, compared with even a few years ago, things are much clearer. So, without further ado…

Fiat Monetary Systems

This is the first thing people need to understand. Most have heard the term, but don’t really understand what exactly a fiat monetary system is or how it works. This is not the fault of the general public. Any fiat monetary regime (system) is based on confidence. Confidence in the monetary unit. While we’re going to focus on the dollar, please keep in mind that every major economy on Earth uses a similar system and as such, what we’re saying here applies across the board. What will differ, however, is the stage of decay your particular system is at.

The fiat monetary system is one where the value (used loosely) is dictated to a certain degree by government or state ‘fiat’, hence the term and the rest of the value is dictated by the market. The market being all the economic actors who use that particular currency for any of their activities.

We’re not sure, even in 2024, that most people really understand the absolute destruction of the USDollar that has taken place already. People become acutely aware of price inflation starting in 2020. Previously most didn’t notice the 4-5% per annum decay in the purchasing power of their dollars. We’ll use a $20 gold piece from 1913 – the year the not-so-USFed was created to illustrate. Back then, the dollar had a redeemability feature – you could take your paper notes to a bank and exchange them for gold. Silver was used too, more as a currency, rather than a pure monetary metal. So we’ll focus on gold for now. In those days a $20 gold coin, weighing 1oz would buy a very nice suit of clothes. Think about that. Go to a tailor, get a suit cut, pay with $20. What will $20 buy you now? Not even a decent tie. BUT if you have a 1 oz gold coin – not a 1913 coin as that’s a whole different ballgame – you can redeem it for around $2,500 and STILL get yourself a very nice suit of clothes.

What changed? An ounce of gold is still an ounce of gold, right? The dollar is what changed. More specifically, the dollar, one of which used to purchase 1/20 oz. of gold now only purchases 1/2500 oz. The dollar’s purchasing power has been absolutely DESTROYED over time by the institution who had only two mandates – price stability (maintain the currency’s purchasing power) and maximum employment. Since this is about personal finance and defensive measures, we’ll save the maximum employment mandate for another time.

This went on for decades. It didn’t happen all at once otherwise people would have noticed. The two biggest flare-ups of price inflation were in the 1970s period after the US abandoned the gold standard and the current period since around 2020. There were other periods in there too, but for most readers, these are the ones you’ll remember – the most recent of which is still ongoing. “But the dollar still purchases things!”. Of course it does – and it will continue to do so until the cycle ends. That’s the rub – fiat monetary systems are doomed to failure because there’s nothing tangible backing the currency. It’s a confidence game. We could easily create a library of links to articles written for the sole purposes of maintaining that confidence just here in the US that it would dwarf all the books you’ve ever read.

Let’s get to business. The past four years (no, we don’t care about politics – this was inevitable regardless) have gotten people’s attention big time. Old, young, in between. We’ve all noticed. Confidence has been shaken. Bank failures are ongoing, but poorly publicized. It’s like 2008 without all the fanfare basically.

What to Do?

The first thing you need to do is have inflationary expectations. The rate of price increases will ebb and flow. Some goods will show it more than others because the value of the currency isn’t the only determinant in price. Supply/Demand, trade agreements, tariffs, weather, and myriad other factors play into price formation. What we’re talking about is the general price level. We’ve heard all this talk about US GDP (economic output) going up so much in recent years. Of course it did – people are paying more for things now than ever before and the dollar amount is what goes into GDP, NOT the number of items/units sold. It’s a huge flaw in measuring growth, but it’s part of the confidence game.

Having inflationary expectations means you expect that things will continue to increase in price and you adjust your spending accordingly. Capital expenditures like home improvements can be moved closer to the present instead of waiting. A friend of the authors had a new roof put on their house in 2019 and it cost around $9,000. Today, the same roof would cost almost exactly double that. The individual actually got a quote. Doubled in just 5 years. So, obviously this individual was very happy about the decision to do the roof in 2019, albeit a few years earlier than desired. With inflationary expectations, the bottom line is if you know you’re going to need something, plan on doing it sooner than later.

Our guess is that after the acute phase of the most recent price inflation, which according to our metrics is still ongoing, there will probably be a lull. The rate may slow a bit more, but things will still get more expensive. If our modeling is accurate, we’re looking at another shock (and we HATE doing this) sometime in the next 5 years. To provide a little background the modeling used for this ‘prediction’ has had 50 years’ worth of monetary and price data run through it and it held up; giving signals of previous shocks. Remember, this is consumer advice, NOT investment advice.

Put simply? Monetary inflation will continue. Price inflation will continue. Prepare accordingly. And ignore the mainstream news on these topics. There are hundreds of other analysts who will back us up on that score. The mainstream news is an unguent. A soothing ointment. Remember, it’s a confidence game.

The $35 trillion in national debt? That cannot be fixed at this point. That ship has sailed in our opinion. Even if it could be fixed, there’s absolutely zero will ANYWHERE to do it. The consumer insists on exacerbating the problem by excessive borrowing just like corporations, states, and the federal government. That’s another rub about a fiat money system – the consumer can be (and usually is) their own worst enemy.

The second thing you need to do is look at your personal balance sheet. Assets, liabilities, net worth. Figure out what your ‘stuff’ is worth. Your house, cars, any accounts, etc. Leave the household items out. Then look at your liabilities – what you OWE others. Mortgages, credit cards, student loans, auto loans, home equity loans, etc. Leave out the recurring monthly bills. We want a ballpark, not something that would survive an audit. Total up both columns: assets and liabilities. If your assets are greater than your liabilities, you have positive net worth. If it’s the opposite, then you’re underwater or upside down. Many American families are underwater. We call ourselves the richest country in the world because we only look at our assets. Nobody bothers much in terms of looking at what we owe on all those assets. When a business goes ‘net worth negative’ for any length of time, bankruptcy is generally in its future. However, thanks to irresponsible lending by banks, even the most upside-down candidates can STILL get loans. Again, it’s like the run-up to 2008 all over again.

What does your balance sheet look like?

If you’re on the positive side of the net worth spectrum, you can really apply inflationary expectations. Consider moving up necessary purchases (emphasis on necessary). The frivolous spending has gone on too long and our guess is that it will go on until people simply can’t do it anymore. The banking system will encourage this, by the way. The banking system is NOT your friend.

If you’re on the negative side, gather all your liabilities and find out what the interest rates are for each loan, line of credit, etc. Most people also know that interest rates have gone up tremendously over the past few years. This, after more than a decade of artificially low rates – to induce borrowing and spending across the board. Once you’ve got your liabilities and interest rates (everyone should do this), calculate how much each loan is costing you per year and attack with a vengeance your most expensive loans. They might not be the ones with the highest interest rate – keep that in mind. An 8% mortgage of $400,000 is costing you a lot more in interest than a 29.99% credit card with a $4,000 balance for example. And you’re not going to want to hear this, but you need a budget. Badly.

Safe Havens

Precious metals are an extremely popular safe haven and have been for millennia. Granted, the best time to get in was 25 years ago. The dollar has lost the majority of its purchasing power in those 25 years and this is reflected in the ‘price’ of metals. Remember, the metal hasn’t changed. Gold is still gold. An ounce is still an ounce. .9999 quality is still .9999 fine gold. It’s your dollars that have changed.

That said, we highly advice physical metal in your direct possession. Futures contracts, ETFs, etc. are not physical gold. While a futures contract can be ‘redeemed’ in a manner of speaking, ETFs do not generally have a redemption feature. Or if they do, there are ridiculous minimums. If you’re interested in purchasing physical precious metals, contact us through the blog and we’ll be happy to provide our recommendations, however, we’re not doing it here. As far as how much metal, well that’s up to the individual and their level of comfort. Bullion or numismatics? If you don’t know what these terms mean, contact us. We don’t buy or sell metals, but we can give you an overview. Depending on the feedback we may do a an addendum piece that goes into the differences between bullion and numismatic metals.

Another safe haven is something we already talked about. Basically, a safe haven is a place to store your currency. Storing it in things you’ll need down the road anyway is a safe haven. However, storing it in things you don’t really need is just plain consumption and that’s what got us into this mess to begin with. We don’t know everyone’s circumstances obviously, but we gave one example – a roof. Others would be a vehicle, essential work (emphasis on essential) around your property that you’ve been putting off, etc.

The bottom line is you don’t want to spend all your currency. There’s a philosophy going on there too – it won’t be worth anything later, might as well blow it now. We don’t know exactly how OR WHEN this whole thing is going to shake out. The 5 years is based on modeling, nothing more. The world has gotten a lot more volatile. It might be 3 years; it might be 10. In the meantime, your currency is going to continue losing purchasing power, so the longer you wait, the less you’ll get from it.

Signals and Signposts

In terms of looking at policies that might accelerate this cycle, the easiest one to spot is minimum wage increases. The feds haven’t been interested, but many states have already drastically increased their minimum wages. This is a short-term benefit for those workers. As the extra money pours into the system, it drives up prices for everything and after a year or so the knock-on effects of the minimum wage increase are exhausted. This is why it has to be raised regularly. This is easy for the average person to keep an eye. Think about why McDonalds and other fast food chains are replacing workers with ordering kiosks. They’re trying to cut their labor costs. And look at the price of a ‘value meal’ even with all this replacement going on. We’re not just picking on fast food here; it’s retail in general.

A second thing is your state and the federal budget situation, particularly the federal. While states borrow money too, the feds are by far the biggest offender (in terms of regularity and magnitude). Keep an eye on the national debt. See how long it takes to hit $36T and so forth. If you see the time to rack up an additional trillion compressing (which it is), know that your dollars are losing value even faster. There are a lot of moving parts between the national debt and your wallet, but we’re trying to give some simple things the average person can look at and get an idea of what is going on.

The easiest thing to do, however, is keep your store receipts when you purchase necessities. Especially the items you buy regularly. Everyone knows their grocery bills have gone way up. This is where a budget comes in really handy. You need to see where your money is going. Online subscriptions appear to be the latest black hole. Every app has extra ‘features’ which you pay for monthly. People are spending hundreds of dollars a month on this stuff and don’t even realize it, mostly because they’re not signing up for everything at once. Paying electronically makes it psychologically ‘easier’ to let go of your money too.

The Bottom Line

You need a plan. Now. Not tomorrow. Not next year. Now. Today. If you think you’re going to walk between the raindrops on this thing you’re wrong. Take a full financial inventory. Assets, liabilities, income, spending, all of it. Find out what’s coming in, what’s going out and where it’s going. If you have liquid assets consider using some of the mitigation steps we outlined above. Get yourself some metals. You don’t have to go crazy. There’s no one size fits all strategy for any of this. We’ve been yelling about this for almost 2 decades now and many have taken some of these steps and reported back very positive results – mostly better sleep at night and some peace of mind. Get out of debt if you possibly can. Interest will eat you alive. It is more insidious than inflation. Credit cards at 30%? The banks love you for sure. Get rid of it. Cut up the cards if you have to and pay them down. It was time to get serious decades ago, but there’s still time. So get serious now. This is not a ‘feel good’ article. If reading this has made you angry? Don’t be mad at us. Ask yourself why you’re angry. We will not, under any circumstances, given securities advice and as a reminder, nothing in this article should be taken as such. However, if you have consumer finance type questions or precious metals questions (they’re not securities), feel free to contact us through the blog and we’ll do our best to answer those for you in a timely manner. This column is a labor of love basically. We have jobs and responsibilities, but we’ll try to help as much as we can. One of the benefits of being a small publication is that we can try to tailor our pieces towards what our readers need and answer emails.

EOF – Sutton/Mehl

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