August 25, 2021
Yesterday, we shared with you the first part of Dan Ferris’ conversation with Lawrence Lindsey, former member of the Federal Reserve’s Board of Governors.
They discussed Lindsey’s new book about the U.S.-China power struggle, Currency War, and exactly what’s happening with the dollar in America today… If you missed it, or need a refresher, you can read that here.
Today, we’re sharing the riveting conclusion to their interview. In it, Lindsey shares how he would invest in today’s volatile market. And why, with our country’s rising destructive inflation, the next decade will literally be a “scramble for survival.”
Here’s Dan and Lindsey…
Dan Ferris: I want to talk more directly about Currency War. I know you don’t want to give away the book, but we can talk about the real stuff, right? What can people expect over the next 10 years, from 2020 to 2030? Will inflation be a big part of this? What does an investor, just a regular person – not an economist – look for? What are the hallmarks where we say, “Oh, now, Larry Lindsey, he warned me about this”?
Larry Lindsey: Well, you can just check this morning’s Consumer Price Index (“CPI”) release, or the CPI for the last few months. It’s interesting… Since we had a change in government, we’ve had inflation accelerating constantly. We now have had inflation of almost 4% in the first seven months of this year. So we’re going to be ending the year with more than 6% inflation. That’s what history tells us, unless they suddenly crack down on it (which they’re not going to). So investors should plan on this being the Fed’s strategy, the government’s strategy, and there are things you can do to get around it.
It’s not a “secret of the temple,” but it’s a secret of history… You mentioned what empires do, and while we’re technically not an empire, the dynamic is the same. When they get in trouble, there are three things they can do: inflation, taxation, and confiscation. And in the end, they’re going to try a little bit of all three, but inflation is generally the path of least resistance.
As you’ve noticed, they are raising taxes. And what I found most interesting about the plan is they’re trying to double down on inflation and taxation. So, let’s say you make an investment, and it goes up with inflation. Well, that’s nice, except, they’ll just raise the capital – or they’re proposing to raise the capital gains tax rate to 39.6%. So, you keep up with inflation and they keep 40% of your so-called “keeping up with it,” or gain, and so therefore, once again, you’re behind the game. And that makes it a real challenge.
DF: And that provides a massive incentive to speculate, right? The less of that gain you keep, the more gain you need.
LL: Correct. And so the dynamic of the market is driven by fear and greed. When you’re faced with the odds stacked against you, people do tend to get greedy in order to try and beat it. Now the Securities and Exchange Commission (“SEC”) won’t let me give investment advice, but I can tell you how I do it with my own portfolio. The best asset to avoid or minimize inflation, taxation, and confiscation probably is residential real estate. And you want to borrow long term at current low rates, because that way you’re on the same side as the government. When the inflation rate goes up, you’re going to be paying back your mortgage in confetti, as opposed to what you borrowed it in.
Second, housing, in general, tends to rise along with inflation, so it gives you inflation protection. And it’s so widely owned that, as long as we continue to have elections, the taxation and the confiscation pieces are going to be very difficult for the government. I guess you could say I’m overweighed in residential real estate. One other investing option is miners – anybody who has stuff in the ground and takes it out. Now, this is a double whammy. First of all, their profit margins go up when the price of the commodity goes up with inflation. So, that’s good for profits, but it’s even better for the balance sheet because the value of all that stuff in the ground goes up, too. So, I tend to invest more in miners than in commodities directly.
And finally, there are good solid companies out there that, by and large, through equity participation, will probably at least keep up with inflation. You want to sort of buy and hold them. You don’t want to turn them over and give Uncle Sam 40%of your keeping-up-with- inflation gain, but that would be a third leg of the stool. The only thing that is not in my portfolio, and I’m as short in it as I possibly can be, is long-term bonds. Long-term bonds are only going to go one way… down in price, up in yield.
DF: And that, as we sit here with interest rates at what James Grant has called “near 5,000-year lows,” is a really controversial position, is it not? Bonds are only going to go one way, generally speaking. That’s why we have these teeny-tiny and negative yields, even in sovereign, European, and Japanese debt. So that’s a controversial viewpoint. Plus, the other bit of evidence, there, that most folks would cite is the Fed can’t tighten, it can’t taper. I’m pointing this out more to our listener and asking you to reply, because it is such a controversial viewpoint. How do you answer that?
LL: First of all, you’re 100% correct. Basically, by betting against long-term bonds, particularly long-term government bonds, you’re betting against the government. And as we talked about earlier, the government holds most of the cards, and it’s going to be fighting you. So, most of the time, you don’t want to fight the government… But every now and then, once in a generation, the government boxes itself into a corner that it can’t get out of. The best historic parallel is what George Soros and Stanley Druckenmiller did to the Bank of England and Her Majesty’s Treasury back in the ’80s. There, the British government was trying to defend the indefensible, which was the peg they had established against the euro.
So Soros and Druckenmiller went in and bet against them. Well, they didn’t like it, so what did they do? They took their reserves and threw them in the battle against Soros and Druckenmiller. But these guys knew that when they spent their gunpowder, they were depleting their ammunition, so they simply went in and doubled down, forcing them to expend more ammunition. That process went on for quite a while, and then finally, the Bank of England and Her Majesty’s Treasury ran out of ammunition, capitulated, and devalued the pound. And that’s how Soros and Druckenmiller made their first billion. In fact, they made substantially more than a billion on that trade.
So that is a historic example… Where we are now is a little different but quite similar. How is the Fed going to try and keep interest rates low? It’s going to print money.
DF: And buy bonds.
LL: And buy bonds with it, exactly. You’re trying to sell bonds, and the Fed is going to buy them. But every time it prints money, it’s burning its anti-inflation ammunition. It’s basically pouring gasoline on the potential inflation fire. And so, at some point, the Fed too is going to “run out of ammunition.” The ammunition will be counterproductive, and that is when you will move in to clean up.
DF: So, one of the counterarguments to this idea of the Fed printing money and creating inflation by doing so is the fact that it buys bonds. That has the effect of raising bank reserves of the folks that they’re buying bonds from. But if those bank reserves don’t get lent, spent, and multiplied throughout the economy, which is not so much happening, we don’t get the sort of ’70s burning inflation that can really play havoc with people’s wages and the price of groceries and all those things. How do you respond to that?
LL: Well, this time, they have found a way of spending the money, so let’s go back to the original quantitative easings in the early part of the last decade. They were accompanied by very significant increases in the amount of reserves banks were expected to hold. First, they were short of reserves because they had just had loan losses, and then we passed legislation to raise the reserve requirement. So, most of that early round of money creation did go into bank reserves, and didn’t get spent because the banks had no choice. Now the banks are swimming in reserves… They are not going to raise the reserve requirements anymore, but we have now found a spender.
And that spender is Uncle Sam… We give the money to Uncle Sam, and he either spends it directly or gives it to a consumer, who then, in turn, spends it. So this time, the money is not going to go directly into bank reserves. It’s going to get at least one round of being spent. And depending on what share of that one round ends up in reserves, it’s actually probably going to get spent several times – fancy word for that is “the multiplier.” But finding a way around it, finding a spender is what’s going to make this time different than the last time.
Uncle Sam just this year gave families $2,000 each, for each person, so a four-person family just got checks worth $8,000. Now, the median income of a four-person family is just $70,000, so basically, Uncle Sam topped up that family’s income by an astonishing 11%.
So a household of four now has 11% more money to spend. That is a lot. Now, I have a sneaking suspicion – of course, as I mentioned, I do tend to be a little bit cynical – that because next year is a year divisible by two, which matters a lot in Washington, but not as much as years divisible by four – if they don’t send out another check next year, that family is going to have 11% less money than it had the year before.
If you’re considering buying a new phone, this shocking tale could change your mind. Get the full story now.
DF: Right, and, Larry, you mentioned the addiction paradigm, earlier. Eight grand isn’t going to cut it next time around, right?
LL: Well, right. Because you do have more employment and wages going up, you probably don’t need the full $2,000, but you probably need at least $1,000 to go out, just to break even. And then there’s another problem. We had virtually no inflation, under 2% inflation, coming into 2021, and we’re going to be going into 2022 with 6% inflation. So that means that $70,000 family is now $4,200 worse off in spending power. And you better help them out or they’re going to take it out on you at the polls next November.
DF: I see, the incentives are lining up…
LL: Right, institutional self-interest.
DF: So, you’ve outlined a pretty clear – and for investors and just regular folks trying to earn a living – unpleasant picture here. And you turned it into a sexy novel – we have to remind folks – called Currency War.
So I ask all my guests the same final question, and, man, I can’t wait to hear your answer. I’m usually interviewing asset managers and some other types of folks. Generally, we’re talking about investing, but you’re a little different. You’re an economist. You’re talking about much bigger trends that affect absolutely everyone, whether you are an active investor or not. So, I’m very curious to know how you respond to my simple question, which is: If you could leave our listeners with a single thought today, if you could plant a single thought in their minds to leave them with, what would it be, Larry Lindsey?
LL: The next decade is going to be a scramble for survival. You need to think about it that way, and you need to prepare in order to have a prosperous future. The way to start is to go out and buy Currency War.
DF: That’s the way to start, yes. Buy Larry Lindsey’s book Currency War and you’ll be fine for the next 10 years. But wow to your final idea,” a scramble for survival.” You don’t mince words, do you?
LL: Well, we’re going to probably still be around, but inflation always causes a fraying of the social fabric. And to be blunt, we already have a pretty frayed social fabric, let’s be honest. And so, I don’t think it’s only a matter of money. I think it’s also a matter of what’s going to be happening in society going forward, and that’s why I think it really is a scramble. And there are some things you can control, some things you can’t. But money helps you control as much as possible, and that’s why you need to protect your financial position.
DF: Wise words. Well, thank you very much for being here, Larry. I really enjoyed this a lot. We will hopefully be talking to you sooner rather than later again.
LL: Thank you very much.
P.S. Former Fed Governor Larry Lindsey says, “The next decade is going to be a scramble for survival.” He’s not the only one saying inflation is about to cause massive distortions in our economy…
And no one in America has done a better job of encapsulating this issue, explaining what it means for you and your money, and providing a detailed plan of the steps to move forward than former Goldman Sachs banker Dr. David “Doc” Eifrig.
Take a few minutes to check out Doc’s full analysis, which explains where we are today, where we are going, and the four steps he recommends you take right now.
We’ve posted Doc’s analysis, including his four recommended steps, on our website – you can access it free of charge. Click here to view it now.
Love us? Hate us? Let us know at [email protected].
Managing Editor, American Consequences
With Editorial Staff
August 25, 2021