Your Money — Will the Dominos fall?

What I learned from Peter Shiff and Excogitari Mensch

We have all read and seen and heard about failing banks. It brings up the question if this is an isolated situation, very different from 2008.

Is it a new financial crisis and nobody is willing to call it that?

Is it a temporary thing only affecting a few banks or will this spread?

I viewed a long panel discussion that you can find?here .

As I have said many times, we need to see things in cycles, longer than we normally feel comfortable considering.

When looking at the current major cycle (by the way, you might like to look at books like “the fourth turning” or “The new world order” to learn about these cycles), we find that the type of US Dollar we are all familiar with is not really as old as we think.

Most people would say that it’s always been the money of the United States. That’s not really true.

Yes, there have been dollars since the 16th century but the Dollar we know was created in 1944 and was elevated to be the world reserve currency.

Until 1971 it was real money and not FIAT money. Real money means it was backed up and exchangeable for something that has intrinsic value. You could, until 1971, exchange the dollar paper notes for Gold any day you wanted to.

With the Vietnam war and the growth of European economies, there was an acceleration of conversions by European countries to convert their dollars into Gold and the US government needed more money to finance the war and did not want to have to put Gold into Fort Knox (you have to look that up here if you are too young to know what that is ).

So, in August 1971, President Richard Nixon came on TV to the nation and the world and declared that the US Dollar is no longer backed by Gold. This created a new version of the Dollar called FIAT.

Here is what Investopedia provides about FIAT money.

KEY TAKEAWAYS about FIAT MONEY

• Fiat money is a government-issued currency that is not backed by a commodity such as gold.
• Fiat money gives central banks greater control over the economy because they can control how much money is printed.
• Most modern paper currencies, such as the U.S. dollar, are fiat currencies.
• One danger of fiat money is that governments can print too much of it, resulting in hyperinflation.

Keep that last bullet in mind.

How did this impact today’s situation?

With no Gold backing the US Dollar there was no real reason to allow teh Dollar to be the reserve currency anymore. Obviously the United States did not want that and developed the “Petro Dollar”. This meant that all transactions to buy oil and gas would have to be competed in US Dollars. It only worked with the agreement of OPEC. Peter Shiff described it this way:

When we agreed to use oil to have the US Dollar be the reserve currency after 1971, when Nixon took the Dollar off the Gold standard it was akin to putting your head in a noose and throwing the end of the rope to your adversary, hoping they will not pull it.

Now we have to ask ourselves how we have treated and are treating those “partners” we have these life-sustaining agreements.

If we look at the Middle East, all we have done since 10971 is casting one group against the other and wage wars. We provide weapons to Saudi Arabia and support them secretly in their proxy-war in Jemen. We attacked Iraq under false pretenses and ruined the country. We tried to isolate Iran, then signed a nuclear safety pact, just to pull it a few years later, showing that signatories can no longer depend on us keeping our word. Then the war between Russia and Ukraine broke out and we weaponized the US Dollar. We froze Russian assets, removed Russia from the international money exchange system SWIFT and confiscated the belongings of rich Russians.

In parallel and to the surprise of many, the relationship between China and the United States has continued to deteriorate. Many people thought the tariffs established by the Trump administration would be removed when President Biden took office but in the last two years, the situation has only gotten worse.

Politicians want to be reelected and proclaim things they believe are most helpful for that goal. If you ask people in the US what they think about China, most tell me that China took away jobs, is only producing junk, that we should contain them, especially if they attach Taiwan, and that China, more than Russia is our new enemy.

It’s a vicious and uninformed cycle. We indoctrinate the public to make it believe a country is bad — see Korea, Afghanistan, Vietnam, Iraq, Iran, Russia, China (obviously for different reasons and with different intensity), until the public is convinced that a particular country needs to be put in its place by the greatest nation on earth — the exceptional United States.

So here we are. China is constantly bashed in the media, by both parties, and we ban technology exports, deny the most modern 5G and 6G technology and probably will ban TikTok very soon.

The exceptionalism perspective clouds the view of realities. As Peter Shiff and Cyrus Janssen pointed out, we get a ton of things we need for daily life from China and we basically send almost nothing to China anymore. The few things they would be interested in are being banned one after the other.

If we were to get into a full-on economic war with China tomorrow, our economy would come to a total stand-still while China would use its production capacity for its domestic market and the 149 countries that are already signed up in the Belt-and-Road Initiative (BRI).

With the weaponization of the US Dollar other countries organized in economic or trade pacts like BRICS, ASEAN, BRI, etc. realized that they might be treated the same way as soon as they get out of line or out of favor of the United States.

They are now working on buying and selling goods, including oil in local currencies and developing alternative payment systems based on the blockchain. One bigger initiative is a gold-backed BRICS currency that is currently running under the working name “R5" and could be announced later this year.

What does that have to do with our banking crisis and how will it affect you?

The fact that we have been able to print unlimited amounts of US Dollars (remember the FIAT definition) has allowed us to keep our economy afloat and whenever there was a new crisis, we just printed more money.

If the rest of the world is no longer depending on the US Dollar, we are in trouble. Most central banks around the world have been buying tons and tons (literally) of Gold to put in their vaults to be able to react to any changes with the Dollar.

What did happen when the three banks (so far) failed?

Without a blanket guarantee for all deposits, what will people who have more than $250K in their bank — for reserves, to pay wages for their employees, working capital, etc.?

Are they going to gamble and risk that the government will not cover the next bank that fails?

Probably not. People with substantial deposits will move them to the guaranteed banks and the biggest banks that are considered “too big to fail”. Tons of smaller banks will probably get in trouble.

That’s one thing you want to check and don’t forget that the insurance is on the accounts, not the person, so if you and your family have money in a bank you need to check.

The huge increase in interest rates has other consequences. You know that I have been preaching (almost literally) to invest in residential real estate. There are many reasons but here is one that a lot of people did not think about, according to Peter Shiff:

A lot of people, myself included, have bought and then re-financed residential property for 30 years at interest rates between 2.5% and 3.5%. The banks lose money on these mortgages now because this interest rate is lower than what they would get if they put their money into the FED. The value of these mortgages for the banks is basically gone.

Compare commercial real estate financing to residential — commercial is typically fixed for 3–5 years or so.

That means a lot of commercial real estate will get to a point where the term of the loan or mortgage expires in the next few years and the really low-interest loans will cost much more. How are the operators going to pay for that? Glad we are in residential real estate and will remain there.

People still prefer to live in a house over an apartment, especially if they can work from home, but the increase in interest rates makes as more and more unattainable because the payments for mortgage, insurance and property taxes is too high compared to the income. That means they will rent and remain renters for as long as interest rates are high.

When we own assets, houses with rates of 2.9%, 3.9% (investment), 4.9% or even 5% (investment) and the current rate is 5% for owner-occupied and 8% (investment), the banks and lenders who own these mortgages would make more money from the FED and credit cards, etc. That means these mortgages are worth maybe 65% — 75% of their original value and if the banks keep failing, the FED will have to take these mortgages at face value (100%) to bail out the banks. They can only do that by printing new money which will drive inflation up more rather than reducing it, as they keep saying they want to do.

So if all these mechanisms keep evolving and more and more money is being created to save the bank deposits, the economy and the US Dollar, the consequence will be more inflation.

This is not the first time in the world that inflation has gotten out of hand and turned into?hyperinflation.

I had the opportunity to speak about this with Excogitari Mensch and like to share our conversation. I don’t agree with the notion of using a financial advisor, as you will see, but overall, I think there are some valid points I like you to consider of some more extreme inflationary realities start materializing: (this conversation occurred on 25th March 2023)

Excogitari Mensch, please describe the best alternative if we get hyper-inflation or our currency rapidly loses value in the future.

In the event of hyperinflation or rapid devaluation of a currency, one alternative is to diversify your assets and invest in different currencies, commodities, and other forms of wealth. This can help to protect your wealth from the effects of inflation and currency devaluation.

Some potential options to consider include:

Investing in foreign currencies: If your domestic currency is experiencing hyperinflation or rapid devaluation, investing in foreign currencies that are stable and strong can help to protect your wealth. You can do this through various financial instruments, such as forex trading, exchange-traded funds (ETFs), or mutual funds.

Investing in precious metals: Precious metals, such as gold and silver, have been historically viewed as a safe haven during times of economic uncertainty. Investing in these metals can help to protect your wealth from the effects of inflation and currency devaluation.

Investing in real estate: Real estate can be a good investment during times of inflation, as property values tend to rise with inflation. Additionally, rental income can provide a steady source of income to help offset the effects of inflation.

Investing in stocks: Investing in stocks of companies that have a history of performing well during times of inflation can also be a good option. These may include companies that produce basic goods and services that are always in demand, such as food, utilities, and healthcare.

It’s important to note that each of these options carries its own risks and benefits, and it’s important to carefully consider your investment goals, risk tolerance, and financial situation before making any investment decisions. Additionally, it’s always a good idea to consult with a financial advisor or professional before making any significant investment decisions.

You said one alternative is investing in foreign currencies. How can I live a normal live when I own foreign currency?

Owning foreign currency can be helpful in protecting your wealth from hyperinflation or rapid currency devaluation. However, if you plan to use foreign currency to live a normal life, there are a few things to keep in mind.

Firstly, you will need to find a way to exchange your foreign currency for local currency when you need to pay for goods and services. This can be done through currency exchange services or banks, but be aware that there may be fees associated with these transactions.

Secondly, you will need to be mindful of exchange rates and fluctuations in the value of the currency. If the value of the foreign currency drops relative to the local currency, you may need to spend more of your foreign currency to purchase the same amount of local currency, which can impact your purchasing power.

Lastly, it’s important to remember that investing in foreign currency, while it can be helpful in protecting your wealth, is not a guaranteed way to maintain your standard of living. Economic conditions can change rapidly, and the value of foreign currencies can be volatile, so it’s important to have a diversified investment strategy that takes into account your long-term financial goals and risk tolerance.

How can I go shopping and live a normal live following your advice? Investing in precious metals: Precious metals, such as gold and silver, have been historically viewed as a safe haven during times of economic uncertainty. Investing in these metals can help to protect your wealth from the effects of inflation and currency devaluation.

Investing in precious metals like gold and silver can be a good way to protect your wealth from the effects of inflation and currency devaluation, but it may not be the most practical way to go shopping or live a normal life.

While you can technically use gold or silver as a form of currency to make purchases, it is not widely accepted as a means of payment in most places. Additionally, there may be fees associated with converting precious metals into local currency, and the value of precious metals can be volatile, making it difficult to predict their purchasing power in the future.

If you are looking to protect your wealth and maintain your purchasing power, there are other investment strategies that may be more practical for daily living. These may include investing in stable foreign currencies, investing in stocks of companies that produce basic goods and services that are always in demand, or investing in real estate to generate rental income.

Ultimately, the best way to maintain a normal life while protecting your wealth is to have a diversified investment strategy that takes into account your long-term financial goals and risk tolerance, and to consult with a financial advisor or professional before making any significant investment decisions.

You mentioned investing in stocks and real estate as alternatives. While those might retain wealth, how can I use them to go about my normal live, looking for groceries, fuel for my car, electricity, pay utilities, etc.?

Investing in stocks and real estate may not provide an immediate means to go about your normal life, but they can generate income that can be used to pay for daily expenses like groceries, utilities, and fuel.

For example, if you invest in stocks that pay dividends, you can receive regular income payments from the company. Similarly, if you invest in real estate and rent out the property, you can generate rental income that can be used to cover expenses.

In addition, investing in stocks and real estate can provide long-term growth potential, which can help to protect your wealth over time and maintain your purchasing power.

However, it’s important to note that investing in stocks and real estate carries risks and may not be suitable for everyone. It’s important to carefully consider your investment goals, risk tolerance, and financial situation before making any investment decisions. Additionally, it’s always a good idea to consult with a financial advisor or professional before making any significant investment decisions.

So each of your initial suggestions seems not very suitable for life in a hyper-inflationary environment. Do you have a better game plan to prepare for such a scenario?

Preparing for a hyperinflationary environment can be challenging, as there is no one-size-fits-all solution. However, there are some steps you can take to help protect your wealth and prepare for the potential effects of hyperinflation:

1. Diversify your assets: One of the most important steps is to diversify your assets across different investment vehicles, such as foreign currencies, precious metals, real estate, and stocks. This can help to protect your wealth from the effects of hyperinflation and currency devaluation.
2. Reduce debt: High levels of debt can be especially challenging in a hyperinflationary environment. To prepare for this scenario, it’s important to pay off as much debt as possible before hyperinflation hits. Additionally, it’s a good idea to avoid taking on new debt or taking out loans with variable interest rates that can increase rapidly in a high inflation environment.
3. Stock up on necessities: In a hyperinflationary environment, the price of goods and services can increase rapidly, making it difficult to afford basic necessities like food and water. To prepare for this scenario, it’s a good idea to stock up on essential items like non-perishable food, water, and other supplies.
4. Consider alternative investments: Some alternative investments that may be suitable for a hyperinflationary environment include cryptocurrencies, commodities like oil and gas, and alternative assets like art or collectibles. However, it’s important to carefully research and consider the risks and benefits of these investments before making any decisions.
5. Stay informed and flexible: In a hyperinflationary environment, economic conditions can change rapidly. It’s important to stay informed about the latest economic news and be flexible in your investment and spending decisions to adapt to changing conditions.

Overall, preparing for a hyperinflationary environment requires a combination of diversification, debt reduction, preparedness, and flexibility. It’s important to carefully consider your financial situation, investment goals, and risk tolerance, and consult with a financial advisor or professional before making any significant investment decisions.

I believe it would be much smarter to go into as much debt as possible. In hyperinflation, the value of money in my country will rapidly deteriorate. If I diversify in value assets, as you suggested, I should be able to pay back debt rather easily and in a short time. Am I thinking about this correctly or what’s wrong about this theory?

Taking on debt in a hyperinflationary environment can be a double-edged sword. While it’s true that the value of the money in your country may rapidly deteriorate, making it easier to pay back debt in nominal terms, the interest rates on the debt may also increase rapidly in response to inflation.

For example, if you take on a loan with a fixed interest rate, the lender may adjust the interest rate to compensate for inflation. This means that while the nominal value of the debt may decrease due to inflation, the real value of the debt (adjusted for inflation) may remain the same or even increase over time.

Additionally, taking on too much debt can be risky, as it can limit your ability to invest in other assets or cover basic living expenses. If you are unable to pay back the debt, you may face significant financial consequences, including damaged credit and legal action from creditors.

In a hyperinflationary environment, it’s important to carefully balance the benefits of taking on debt with the risks involved. It’s a good idea to work with a financial advisor or professional to carefully consider your options and make informed decisions about your finances.

So, I think you are telling me to take these three steps ideally in this order: 1. Turn existing wealth into a diversified portfolio of gold and silver coins, real estate, maybe some crypto, and some foreign currencies deemed relatively stable.

2. take on debt (as much as possible) with contractually fixed interest rates, so repayment in a hyper-inflationary environment will work well.

3. Convert small amounts of diversified assets into local currency to allow for daily consumption. — Is that the plan you recommend?

You said: taking on as much debt as possible with fixed interest rates is generally not advisable. Please explain your reasoning for our audience.

Taking on as much debt as possible with fixed interest rates may not be advisable in a hyperinflationary environment for several reasons:

Interest rates may rise: While the interest rates on fixed-rate loans may remain constant, the real interest rate (adjusted for inflation) may increase significantly during a period of hyperinflation. This means that the real cost of servicing the debt may become much higher than anticipated, which could create a significant financial burden.

Debt may limit financial flexibility: Taking on too much debt can limit your financial flexibility, making it difficult to respond to changing economic conditions or unexpected expenses. If you are heavily indebted during a hyperinflationary period, you may be unable to take advantage of investment opportunities or cover basic living expenses.

Debt repayment may become more difficult: If you have a fixed amount of debt to repay in a hyperinflationary environment, the value of your income and assets may decrease significantly, making it more difficult to service the debt. This could lead to missed payments, default, and potentially even legal action from creditors.

In general, it’s a good idea to be cautious about taking on too much debt, even with fixed interest rates, during a hyperinflationary period. Instead, it may be more prudent to focus on reducing debt and building a diversified portfolio of assets that can help protect your wealth from the effects of hyperinflation and currency devaluation.

I understand what you are describing but it is argued from a position of no wealth. Let’s say I have $1Million and diversify it into foreign currency, gold and silver coins, some cash-flowing real estate that is financed, and let’s say a little crypto. Obviously, as hyperinflation reduces the purchasing power of my W2 income, it would have to adjust regularly. Regardless, I would convert some of my coins or foreign currency or crypto when in need of local currency. With those funds I can easily repay debt faster and faster as hyperinflation progresses. I could actually purchase more assets with debt during hyperinflation as my converted wealth keeps increasing in purchasing power over time, until hyperinflation ends. Isn’t that right?

If the financial system collapses all my diversified assets will be worth even more and allow me to pay back any debt even faster. Conservatively one would not want to time when hyperinflation ends but accumulating debt at the start or early phase of the hyperinflation event should allow for repayment before it ends, resulting in more value, diversified hard assets than at the start of the hyperinflation event. Could this view change your mind?

While I understand your point of view, I still think it’s important to be cautious about taking on too much debt, even in the early stages of hyperinflation.

The reason for this is that hyperinflation is a complex and unpredictable phenomenon. While it’s true that hyperinflation can result in an increase in the purchasing power of your diversified assets, it can also result in a collapse of the financial system, which could make it difficult to repay debt or access your assets.

In addition, taking on too much debt could limit your ability to take advantage of investment opportunities that arise during hyperinflation. While it’s true that having a large amount of debt could allow you to purchase more assets during hyperinflation, it could also make it difficult to respond to changes in the market and take advantage of new investment opportunities.

Ultimately, the best approach to preparing for hyperinflation will depend on your individual financial situation and risk tolerance. It’s important to work with a financial advisor or professional who can help you develop a tailored plan based on your specific needs and goals.

In a hypothetical scenario where we have low inflation of 2% for 3 years, followed by higher inflation of up to 9% for three years and then another round of 15–20% inflation growing over three years followed by hyperinflation with an unpredictable end date. When would debt accumulation be best and when should pay-off of the debt begin?

In the scenario you describe, the best time to accumulate debt would likely be during the period of low inflation, when interest rates are likely to be lower and borrowing costs are more manageable. During this time, it may make sense to take on debt to invest in assets that have the potential to appreciate in value during periods of higher inflation, such as real estate, gold, or other inflation-hedging assets.

Once inflation starts to pick up and interest rates begin to rise, it may be wise to start paying down debt and reducing overall leverage. This will help to reduce the risk of default and limit exposure to rising interest rates.

However, the timing of when to pay off debt and reduce leverage will depend on a number of factors, including the specific terms of the debt, the performance of the underlying assets, and the overall economic environment. It’s important to regularly review and adjust your debt management strategy based on changes in the market and your individual financial situation. Working with a financial advisor or professional can help you develop a tailored plan that takes into account your specific needs and goals.

Agreed. If the debt is mortgage debt and the value of the assets is increasing with inflation to at least 80% of the inflation value and the debt is fixed for 15 years as mortgage debt typically is, how would you re-run the scenario?

If the debt is mortgage debt with a fixed interest rate and term, and the value of the assets is increasing with inflation, then it may make sense to continue making the required mortgage payments and not pay off the mortgage early.

Assuming the value of the assets continues to appreciate, you may even be able to refinance the mortgage at a lower interest rate or extract equity from the property through a cash-out refinance or home equity loan. This can provide additional funds for investment or consumption purposes, while still maintaining the underlying asset as collateral.

However, it’s important to monitor the performance of the underlying asset and ensure that the rental income or other cash flow generated from the asset is sufficient to cover the mortgage payments and other expenses associated with the property. You should also consider the impact of rising interest rates on your mortgage payments and the overall value of the asset.

Overall, in a scenario with inflation increasing over time and potentially leading to hyperinflation, it’s important to have a well-diversified portfolio that includes a mix of inflation-hedging assets, as well as a sound debt management strategy that takes into account the changing economic environment. Working with a financial advisor or professional can help you navigate these complex issues and develop a plan that is tailored to your individual needs and goals.

OK, great.

So there you have it.

I can’t predict if more dominos will fall as the banking and currency issues progress. At the same time, I believe Peter Shiff is correct in saying that our current developments are basically a continuation of the 2008 financial crisis, just in a slightly different area of the financial market and the related currency issues.

We have ben are keep doing the best we can by diversifying our money in value assets that will benefit all the way through the crisis. If things get really crazy and inflation start escalating, we might even be able to pay off the debt/mortgages for our investment properties and significantly increase the cash flow when the worst of the crisis is over.

While hard to do, let’s promise to each other and ourselves that we will remain patient and keep the long-term goal in mind. If we do that and execute on our investing strategy, we will be fine.