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In 2018, we moved $1T closer to US government bankruptcy from runaway entitlement spending

Posted by John T. Reed on

Happy New Year. We have now moved closer to the U.S. government being crushed by runaway entitlement promises. Trump just added $1T of debt, a record previously held by Obama. The Dems are almost all pushing the biggest entitlements of all time like Medicare for all, free college for all. The U.S. government is doomed fiscally.
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When they can no longer borrow from real people who can buy US bonds with real money, they will “borrow” from the Federal Reserve as they did during Quantitative Easing I, II , and III from 2009 until 2014. The Federal Reserve has no such money. Rather, they write checks drawn on a bank account with no money. But the checks do not bounce. This is well known as “printing money” in quotation marks because they do not use printing presses as in Germany and Austria in the early 1920s. Rather, they just pretend the Fed’s bond buying checks are real and make fake deposit entries in the books of the U.S. Treasury.
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The effect on purchasing power, however, is exactly the same as the effect of actual printing press money supply in Germany and Austria in the early 1920s: wheelbarrows full of money that is worth so little that thieves stole the wheelbarrow rather than the money. Actually happened.
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Hyperinflation makes all dollar denominated assets become worthless. That’s worthless, not worth less. Examples of those are cash, bank accounts, certificates of deposits, pensions, social security, corporate and government bonds denominated in dollars, insurance policies, accounts receivable.
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All of the above are probably NOT going to lose purchasing power in USD hyperinflation if they are denominated in a currency other than USD. I have hundreds of thousands of USD worth of AUS, CAD, CHF, DKK, and NZD and they are located OUTSIDE OF THE U.S. as they must be to prevent 100% certain confiscation by the US government. Whenever hyperinflation hits, governments enact five bad laws: price controls, capital controls, rationing, anti-hoarding laws, and financial repressions laws. Capital controls prohibit owning foreign currency or gold in the U.S. That is why my foreign currency and gold are located OUTSIDE of the U.S. Yours must be, too.
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Assets that HOLD THEIR PURCHASING POWER are those that are NON-DOLLAR DENOMINATED: real estate, stocks (although they often own dollar-denominated assets and thereby lose purchasing power on a fundamental basis), commodities like precious metals, inventory, supplies like paper or toothpaste, vehicles, equipment. Owning these things does not make you better off in hyperinflation, just enables you to roughly stay even on purchasing power.
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But if you own only non-dollar assets other than foreign currency, you are likely to have a LIQUIDITY problem when it comes to making routine purchases like food, fuel, and medicine and paying for things that rise in price during inflation like rent or tuition or to escaping the country. You need to pay the air fare to get out of the U.S. Or the gas to drive to Canada.
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During hyperinflation in the US dollar, America will become like Venezuela today. That means you need to leave the country and stay out until it ends which I figure will be about six to 24 months. It generally cannot last longer than that because hyperinflation is just intolerable as Venezuela has demonstrated. HAs it lasted longer than 24 months there? Yes. Why? Because Venezuelans are a whole lot dumber than Americans. The US had hyperinflation during and after the Revolutionary War and the Civil War. It used to be that only wars spent so much money that the government turned to hyperinflation as a “solution.” Now entitlements spend even more, and, unlike wars, entitlements never end.
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Is there anything that makes you better off in hyperinflation? Yes. Owing USD debt. People or entities who owe large amounts of USD debt, like mortgages or business debts or bonds make out like bandits. What entity owes the most? The US government.
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Is the light bulb going on? Governments make their own currency worthless so they can make their debts, like entitlements and government bonds they have issued, easy to pay. The entitlement recipients cannot use the money they receive to buy anything, nor can the bond owners buy anything with the interest, but the government will blame the hyperinflation in greedy price gougers like Amazon and Wal-Mart and landlords.
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But in the process of making its debt and entitlement payments worthless, the federal government makes your debts worthless as well. So if you owe mortgages or car loans or education loans, those debts will become as easy to pay off, like for the equivalent of buying a candy bar today. The people who got rich in German hyperinflation in the 1920s were companies and individuals who owed Deutschmark-denominated mortgages and notes and bonds.
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U.S. pennies and nickels are a special case. Inthe case of inflation, they become commodities that rise in dollar value. But in the event of deflation (depression), they do not drop in value because they are dollar-denominated. In DEflation, the best assets are those that ARE dollar-denominated. They actually GAIN in purchasing power. That is what happened in the Great Depression. The number of dollars that bought you a house before the Depression bought you ten of them at the bottom of the Depression.
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By the same token, the worst situation to have during deflation is to owe money. Pennies and nickels give you the best of both worlds. In inflation, they become commodities (nickel, copper, and zinc), In deflation, they are dollar denominated. You can win, but you cannot lose, with pennies and nickels. Gold, in contrast, wins in inflation, but loses horribly in deflation.
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Of course, you can snort that America is not Germany in the 1920s or Venezuela today and ignore all of the above. I will snort back that America today has a 105% debt-to-GDP ratio. In 1933, that ratio was 17%. The New Deal was made possible by the 17% debt-to-GDP ratio. Either a depression or a hyperinflation will bankrupt the US government overnight today. And there is no alternative to one of those or the other because of the runaway entitlement spending.
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You can protect yourself from these. Or you can snort America is not Venezuela in which case the dollar-denominated assets and dollar-denominated fixed income on your financial statements will go to zero when the US government has to resort to hyperinflation to send out the Medicare, Medicaid, and Social Security deposits.
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Will indexing save you, like with social security? Nope. During hyperinflation it will move infinitely slower than the hyperinflation so you will get no benefit from it. In theory, when hyperinflation ends, the indexing will catch you up. But it will not because they will renege on the indexing. They must, because there is not enough money to pay the entitlements and although hyperinflation saves the government from having to pay the entitlements and bond interest, indexation nullifies the hyperinflation “solution” to the entitlement explosion. So although there may be insignificant indexing during hyperinflation, there will be no post-hyperinflation indexation because it would be mathematically impossible.
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All the talk on TV and radio about all the government issues of the day is insignificant compared to the runaway entitlement spending. Defense, border, health care, who’s president, which party controls Congress, etc. will all disappear off the news when the ’flation hits the fan. See my article The Day the Dollar Dies.
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https://www.johntreed.com/blogs/john-t-reed-s-hyperinflation-deflation-blog/65672771-the-day-the-dollar-dies
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There is still time to protect yourself. On the Day the Dollar Dies, your time will have run out.
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https://www.johntreed.com/collections/john-t-reed-s-book-on-hyperinflation-and-depression
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Have a nice 2019.

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