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Image | Gold & the Dollar are Less Correlated than Everyone Thinks

Gold & the Dollar are Less Correlated than Everyone Thinks

by charleshughsmith

Whenever I make the case for a stronger U.S. dollar (USD), the feedback can be sorted into three basic reasons why the dollar will continue declining in value:

The USD may gain relative to other currencies, but since all fiat currencies are declining against gold, it doesn’t mean that the USD is actually gaining value; in fact, all paper money is losing value.
When the global financial system finally crashes, won’t that include the dollar?
The Federal Reserve is “printing” (creating) money, and that will continue eroding the purchasing power of the USD. Lowering interest rates to zero has dropped the yield paid on Treasury bonds, which also weakens the dollar.

The general notion here is that, given the root causes of our economic distemper – rampant financialization, over-leverage and over-indebtedness, a politically dominant parasitic banking sector, an aging population, overpromised entitlements, a financial business model based on fraud, Federal Reserve monetizing of debt, and a dysfunctional political system, to mention only the top of the list – how can the USD appreciate in real terms?

Gold & the Dollar are Less Correlated than Everyone Thinks

by charleshughsmith

Whenever I make the case for a stronger U.S. dollar (USD), the feedback can be sorted into three basic reasons why the dollar will continue declining in value:

The USD may gain relative to other currencies, but since all fiat currencies are declining against gold, it doesn’t mean that the USD is actually gaining value; in fact, all paper money is losing value.
When the global financial system finally crashes, won’t that include the dollar?
The Federal Reserve is “printing” (creating) money, and that will continue eroding the purchasing power of the USD. Lowering interest rates to zero has dropped the yield paid on Treasury bonds, which also weakens the dollar.

The general notion here is that, given the root causes of our economic distemper – rampant financialization, over-leverage and over-indebtedness, a politically dominant parasitic banking sector, an aging population, overpromised entitlements, a financial business model based on fraud, Federal Reserve monetizing of debt, and a dysfunctional political system, to mention only the top of the list – how can the USD appreciate in real terms?

Image | Understanding the Economic Impact of Peak Government

Understanding the Economic Impact of Peak Government

PREVIEW

by charleshughsmith

Executive Summary

The U.S. is less prepared for contraction than the U.S.S.R. was
The pressure to print money and the spectre of runaway inflation
What we must learn from the Japan example (the U.S. is unlikely to tread a similar path)
Why you must expect and prepare for the rules to change

If you have not yet read Part I: Anticipating the Devolution of Big Government, available free to all readers, please click here to read it first.

In Part I, we surveyed the four critical dynamics that will lead to the devolution of Peak Government: massive borrowing, institutionalized mal-investment, erosion of trust in government, and diminishing returns on public debt. In Part II, we consider how the devolution of Peak Government may play out in the real world.

We are indebted to author Dmitry Orlov for examining how apparently stable global empires can suddenly destabilize, much to the surprise of everyone involved. Orlov experienced the collapse of the Soviet Union first hand, and in his book Reinventing Collapse, he contends that America is actually less prepared than the former U.S.S.R. to weather the collapse of Central State institutions.

As I noted in my first series on Peak Government, this does not mean government ceases to exist; what it does mean is that government shrinks and assumes a different role in society and the economy.

Though there are many obvious differences between the former U.S.S.R. and the U.S., Orlov’s primary point is that complex, apparently stable governments can destabilize rather quickly once invisible “tipping points” are reached…

Understanding the Economic Impact of Peak Government

PREVIEW by charleshughsmith

Executive Summary

The U.S. is less prepared for contraction than the U.S.S.R. was
The pressure to print money and the spectre of runaway inflation
What we must learn from the Japan example (the U.S. is unlikely to tread a similar path)
Why you must expect and prepare for the rules to change

If you have not yet read Part I: Anticipating the Devolution of Big Government, available free to all readers, please click here to read it first.

In Part I, we surveyed the four critical dynamics that will lead to the devolution of Peak Government: massive borrowing, institutionalized mal-investment, erosion of trust in government, and diminishing returns on public debt. In Part II, we consider how the devolution of Peak Government may play out in the real world.

We are indebted to author Dmitry Orlov for examining how apparently stable global empires can suddenly destabilize, much to the surprise of everyone involved. Orlov experienced the collapse of the Soviet Union first hand, and in his book Reinventing Collapse, he contends that America is actually less prepared than the former U.S.S.R. to weather the collapse of Central State institutions.

As I noted in my first series on Peak Government, this does not mean government ceases to exist; what it does mean is that government shrinks and assumes a different role in society and the economy.

Though there are many obvious differences between the former U.S.S.R. and the U.S., Orlov’s primary point is that complex, apparently stable governments can destabilize rather quickly once invisible “tipping points” are reached…

Image | Anticipating the Devolution of Big Government

Anticipating the Devolution of Big Government

by charleshughsmith

With the US elections approaching next week, as well as the threat of another fiscal cliff showdown looming, we asked contributing editor Charles Hugh Smith to revisit his eariler work on how the expansive Central State has come to dominate both private society (i.e., the community) and the marketplace, to the detriment of the nation’s social and economic stability.

Anticipating the Devolution of Big Government

by charleshughsmith

With the US elections approaching next week, as well as the threat of another fiscal cliff showdown looming, we asked contributing editor Charles Hugh Smith to revisit his eariler work on how the expansive Central State has come to dominate both private society (i.e., the community) and the marketplace, to the detriment of the nation’s social and economic stability.

Image | Finding Authentic Happiness

Finding Authentic Happiness

PREVIEW

by charleshughsmith

Executive Summary

Why buying into the Status Quo undermines personal empowerment
Echew debt and consumerism. Instead, focus on cultivating resilience and social capital
The importance of differentiating hedonia vs eudaimonia
The key roles of Expectation, Narrative, and Challenge
The foundations of happiness

If you have not yet read Part I: The Pursuit of Happiness, available free to all readers, please click here to read it first.

In Part I, we challenged the assumption that the successful pursuit of happiness is based on material prosperity and what we might call the psychology of the atomized individual.

If material prosperity is necessary but insufficient, and our social and financial order is sociopathological, what does an authentic pursuit of happiness entail?

For answers, we can survey recent research into human happiness, and consider “powering down” participation in a deranging social and financial order.

Pondering Power

The primacy of power in human society is omnipresent. Humans scramble for power in all its forms to improve social status and the odds of mating, living a long life, and acquiring comforts. What is remarkable about the current American social order is the powerlessness of the vast majority of people who have “bought into” the Status Quo.

When the public vehemently disapproves of a policy, such as bailing out the “too big to fail” banks, they are routinely ignored, and for good reason: They keep re-electing incumbents. Most have little control over their employment status, workflow, or income, and most devote the majority of their productive effort servicing private debt and paying taxes that service public debt.

The one “power” they are encouraged to flex is the momentary empowerment offered by purchasing something; i.e., consuming. The corporate marketing machine glorifies acquisition as not just empowering but as the renewal of identity and the staking of a claim to higher social status – everything that is otherwise out of the control of the average person.

The dominant social control myth of our consumerist Status Quo is that wealth is power because you can buy more things with it. But the power of consumption is one-dimensional and therefore illusory. The only meaningful power is not what you can buy – a good, service, or experience – but what you control – your health, choice of work, income, surroundings, level of risk, and your circle of colleagues and friends.

The “wealthy” who own an abundance of things but who are trapped in debt are not powerful. Their choices in life are limited by the need to service the debt, and their pursuit of happiness is equally constrained.

The kind of wealth that enriches the pursuit of happiness is control over the meaningful aspects of life. It is no coincidence that studies of workplace stress have found that those jobs in which the worker has almost no control over their work or surroundings generate far more stress than jobs that allow the worker some autonomy and control.

Financial and material wealth beyond the basics of creature comfort is only meaningful if it “buys” autonomy and choice.

We all want power over our own lives. Once we free ourselves from social control myths, we find that becoming powerful and “wealthy” in terms of control does not require a financial fortune. It does, however, require sustained effort and a coherent long-term plan…

Finding Authentic Happiness

PREVIEW by charleshughsmith

Executive Summary

Why buying into the Status Quo undermines personal empowerment
Echew debt and consumerism. Instead, focus on cultivating resilience and social capital
The importance of differentiating hedonia vs eudaimonia
The key roles of Expectation, Narrative, and Challenge
The foundations of happiness

If you have not yet read Part I: The Pursuit of Happiness, available free to all readers, please click here to read it first.

In Part I, we challenged the assumption that the successful pursuit of happiness is based on material prosperity and what we might call the psychology of the atomized individual.

If material prosperity is necessary but insufficient, and our social and financial order is sociopathological, what does an authentic pursuit of happiness entail?

For answers, we can survey recent research into human happiness, and consider “powering down” participation in a deranging social and financial order.

Pondering Power

The primacy of power in human society is omnipresent. Humans scramble for power in all its forms to improve social status and the odds of mating, living a long life, and acquiring comforts. What is remarkable about the current American social order is the powerlessness of the vast majority of people who have “bought into” the Status Quo.

When the public vehemently disapproves of a policy, such as bailing out the “too big to fail” banks, they are routinely ignored, and for good reason: They keep re-electing incumbents. Most have little control over their employment status, workflow, or income, and most devote the majority of their productive effort servicing private debt and paying taxes that service public debt.

The one “power” they are encouraged to flex is the momentary empowerment offered by purchasing something; i.e., consuming. The corporate marketing machine glorifies acquisition as not just empowering but as the renewal of identity and the staking of a claim to higher social status – everything that is otherwise out of the control of the average person.

The dominant social control myth of our consumerist Status Quo is that wealth is power because you can buy more things with it. But the power of consumption is one-dimensional and therefore illusory. The only meaningful power is not what you can buy – a good, service, or experience – but what you control – your health, choice of work, income, surroundings, level of risk, and your circle of colleagues and friends.

The “wealthy” who own an abundance of things but who are trapped in debt are not powerful. Their choices in life are limited by the need to service the debt, and their pursuit of happiness is equally constrained.

The kind of wealth that enriches the pursuit of happiness is control over the meaningful aspects of life. It is no coincidence that studies of workplace stress have found that those jobs in which the worker has almost no control over their work or surroundings generate far more stress than jobs that allow the worker some autonomy and control.

Financial and material wealth beyond the basics of creature comfort is only meaningful if it “buys” autonomy and choice.

We all want power over our own lives. Once we free ourselves from social control myths, we find that becoming powerful and “wealthy” in terms of control does not require a financial fortune. It does, however, require sustained effort and a coherent long-term plan…

Image | The Pursuit of Happiness

The Pursuit of Happiness

by charleshughsmith

What is the point of prosperity?

Though few people ever voice this question openly, the general assumption is that prosperity and wealth increase happiness. The pursuit of happiness (famously grouped with “life” and “liberty” in the Declaration of Independence as an inalienable right) has become the pursuit of prosperity and wealth.

That physical comfort and security grease the skids of happiness is self-evident; living a hand-to-mouth existence inside a cardboard box is not as conducive to human happiness as having a comfortable home and secure income.

But it is equally self-evident that a secure dwelling and income do not guarantee happiness; rather, they provide the physical foundation for the much more elusive qualities of happiness. We can make the same distinction between the civil liberties that underpin the pursuit of happiness and the actual pursuit of happiness.

The Pursuit of Happiness

by charleshughsmith

What is the point of prosperity?

Though few people ever voice this question openly, the general assumption is that prosperity and wealth increase happiness. The pursuit of happiness (famously grouped with “life” and “liberty” in the Declaration of Independence as an inalienable right) has become the pursuit of prosperity and wealth.

That physical comfort and security grease the skids of happiness is self-evident; living a hand-to-mouth existence inside a cardboard box is not as conducive to human happiness as having a comfortable home and secure income.

But it is equally self-evident that a secure dwelling and income do not guarantee happiness; rather, they provide the physical foundation for the much more elusive qualities of happiness. We can make the same distinction between the civil liberties that underpin the pursuit of happiness and the actual pursuit of happiness.

Image | Welcome to the Era of ‘Ugly’ Inflation

Welcome to the Era of ‘Ugly’ Inflation

by charleshughsmith

A year ago, in the wake of then-announced additional monetary easing measures by the Federal Reserve (which since sent stock prices on a rocket ride for the next nine months), many of our readers feared a major decline in the dollar was imminent. To add some balance to our site content, we asked Peak Prosperity contributing editor Charles Hugh Smith to argue the case for a strengthening dollar. He graciously accepted, and in the year since writing Heresy and the US Dollar, America's currency has strengthened notably vs. its fiat counterparts. Now, after the Fed's announcement of QE3 (plus), many of us are girding once again for dollar weakness. So we've invited Charles to once again play devil's advocate.

The Siren Song of 'Beautiful Deleveraging'

In a world of rising sovereign debts and an overleveraged, over-indebted private sector, history suggests there are only three possible ways out: gradual deleveraging, defaulting on the debt, or printing enough money to inflate away the debt.

Welcome to the Era of ‘Ugly’ Inflation

by charleshughsmith

A year ago, in the wake of then-announced additional monetary easing measures by the Federal Reserve (which since sent stock prices on a rocket ride for the next nine months), many of our readers feared a major decline in the dollar was imminent. To add some balance to our site content, we asked Peak Prosperity contributing editor Charles Hugh Smith to argue the case for a strengthening dollar. He graciously accepted, and in the year since writing Heresy and the US Dollar, America's currency has strengthened notably vs. its fiat counterparts. Now, after the Fed's announcement of QE3 (plus), many of us are girding once again for dollar weakness. So we've invited Charles to once again play devil's advocate.

The Siren Song of 'Beautiful Deleveraging'

In a world of rising sovereign debts and an overleveraged, over-indebted private sector, history suggests there are only three possible ways out: gradual deleveraging, defaulting on the debt, or printing enough money to inflate away the debt.

Image | Why the U.S. Dollar, Counterintuitively, May Strengthen from Here

Why the U.S. Dollar, Counterintuitively, May Strengthen from Here

PREVIEW

by charleshughsmith

Executive Summary

Why to expect household income will continue to decline (in real terms)
The ceiling that the price of oil may place on central bankers' ability to print money
Why money printing does not always result in inflation
The argument for a stable and/or strengthening U.S. dollar

A year ago, in the wake of the then-announced additional monetary easing measures by the Federal Reserve (which since sent stock prices on a rocket ride for the next nine months), many of our readers feared a major decline in the dollar was imminent. To add some balance to our site content, we asked Peak Prosperity contributing editor Charles Hugh Smith to argue the case for a strengthening dollar. He graciously accepted, and in the year since writing Heresy and the US Dollar, America's currency did indeed strengthen notably vs. its fiat counterparts. Now, after the Fed's announcement of QE3 (plus), many of us are girding once again for dollar weakness. So we've invited Charles to once again play devil's advocate.

If you have not yet read Part I: Welcome to the Era of 'Ugly' Inflation, available free to all readers, please click here to read it first.

In Part I, we covered “beautiful deleveraging,” the goal of which is to systemically distribute the financial pain so the Status Quo is left intact, and the threat to this strategy posed by “ugly inflation.” The critical difference between “beautiful” and “ugly” inflation is that incomes keep pace with the rising cost of goods and services in the former and are stagnant in the latter. In ugly inflation, households’ discretionary income declines, reducing consumption, slowing investment, and crippling future borrowing. Defaults rise; consumption, tax revenues, and lending decline; and the economy enters a self-reinforcing feedback loop of contraction.

This is the position the U.S. economy is in, as real household income has declined 8% since 2007 and inflation officially bubbles along at 2-3% (and at a higher rate for many essentials).

The Status Quo attempt to painlessly inflate our way out of over-leveraged indebtedness has run up against limits that are not apparent in a strictly financial model like Ray Dalio’s “beautiful deleveraging.” If we understand these other forces and tipping points, we will understand why central-bank deleveraging will fail.

Why the U.S. Dollar, Counterintuitively, May Strengthen from Here

PREVIEW by charleshughsmith

Executive Summary

Why to expect household income will continue to decline (in real terms)
The ceiling that the price of oil may place on central bankers' ability to print money
Why money printing does not always result in inflation
The argument for a stable and/or strengthening U.S. dollar

A year ago, in the wake of the then-announced additional monetary easing measures by the Federal Reserve (which since sent stock prices on a rocket ride for the next nine months), many of our readers feared a major decline in the dollar was imminent. To add some balance to our site content, we asked Peak Prosperity contributing editor Charles Hugh Smith to argue the case for a strengthening dollar. He graciously accepted, and in the year since writing Heresy and the US Dollar, America's currency did indeed strengthen notably vs. its fiat counterparts. Now, after the Fed's announcement of QE3 (plus), many of us are girding once again for dollar weakness. So we've invited Charles to once again play devil's advocate.

If you have not yet read Part I: Welcome to the Era of 'Ugly' Inflation, available free to all readers, please click here to read it first.

In Part I, we covered “beautiful deleveraging,” the goal of which is to systemically distribute the financial pain so the Status Quo is left intact, and the threat to this strategy posed by “ugly inflation.” The critical difference between “beautiful” and “ugly” inflation is that incomes keep pace with the rising cost of goods and services in the former and are stagnant in the latter. In ugly inflation, households’ discretionary income declines, reducing consumption, slowing investment, and crippling future borrowing. Defaults rise; consumption, tax revenues, and lending decline; and the economy enters a self-reinforcing feedback loop of contraction.

This is the position the U.S. economy is in, as real household income has declined 8% since 2007 and inflation officially bubbles along at 2-3% (and at a higher rate for many essentials).

The Status Quo attempt to painlessly inflate our way out of over-leveraged indebtedness has run up against limits that are not apparent in a strictly financial model like Ray Dalio’s “beautiful deleveraging.” If we understand these other forces and tipping points, we will understand why central-bank deleveraging will fail.

Image | The New Endangered Species: Liquidity & Reliable Income Streams

The New Endangered Species: Liquidity & Reliable Income Streams

by charleshughsmith

The causal relationship between scarcity, demand, and price is intuitive. Whatever is scarce and in demand will rise in price to its cost basis; whatever is abundant and in low demand will decline in price.

The corollary is somewhat less intuitive, but still solidly sensible: the cure for high prices is high prices, meaning that as the price of a commodity or service reaches a threshold of affordability/pain, suppliers and consumers will seek out alternatives or modify their behaviors to lower consumption.

The New Endangered Species: Liquidity & Reliable Income Streams

by charleshughsmith

The causal relationship between scarcity, demand, and price is intuitive. Whatever is scarce and in demand will rise in price to its cost basis; whatever is abundant and in low demand will decline in price.

The corollary is somewhat less intuitive, but still solidly sensible: the cure for high prices is high prices, meaning that as the price of a commodity or service reaches a threshold of affordability/pain, suppliers and consumers will seek out alternatives or modify their behaviors to lower consumption.

Image | Middle Class? Here’s What’s Destroying Your Future

Middle Class? Here’s What’s Destroying Your Future

by charleshughsmith

According to the conventional account, the Great American Middle Class has been eroded by rising energy costs, globalization, and the declining purchasing power of the U.S. dollar in the four decades since 1973. While these trends have certainly undermined middle-class wealth and income, there are five other less politically acceptable dynamics at work:

The divergence of State/private vested interests and the interests of the middle class
The emergence of financialization as the key driver of profits and political power
The neofeudal “colonization” of the “home market” by ascendant financial Elites
The increasing burden of indirect “taxes” as productive enterprises and people involuntarily subsidize unproductive, parasitic, corrupt, but politically dominant vested interests
The emergence of crony capitalism as the lowest-risk, highest-profit business model in the U.S. economy

Middle Class? Here’s What’s Destroying Your Future

by charleshughsmith

According to the conventional account, the Great American Middle Class has been eroded by rising energy costs, globalization, and the declining purchasing power of the U.S. dollar in the four decades since 1973. While these trends have certainly undermined middle-class wealth and income, there are five other less politically acceptable dynamics at work:

The divergence of State/private vested interests and the interests of the middle class
The emergence of financialization as the key driver of profits and political power
The neofeudal “colonization” of the “home market” by ascendant financial Elites
The increasing burden of indirect “taxes” as productive enterprises and people involuntarily subsidize unproductive, parasitic, corrupt, but politically dominant vested interests
The emergence of crony capitalism as the lowest-risk, highest-profit business model in the U.S. economy

Image | The Middle-Class Survival Guide

The Middle-Class Survival Guide

PREVIEW

by charleshughsmith

Executive Summary

Recognize the signs of serfdom
Calculate your income's vulnerability to the system
Don't count on high inflation to inflate away your debt obligations
10 strategies you can start implementing right now to defend against the forces trying to sap your quality of life

If you have not yet read Part I: Middle Class? Here's What's Destroying Your Future, available free to all readers, please click here to read it first.

In Part I, we surveyed the key dynamics that have eroded middle-class wealth and income over the past 30 years. Some of these were conventional (higher energy costs) and some were unconventional/politically unacceptable (financialization; neofeudalism).

Regardless of what you identify as the primary cause, that the middle class (and labor in general) has lost ground since the early 1980s is undeniable, as is the ultimate failure of debt-dependent “growth.”

What can we do about it? It seems to me there are two responses:

Avoid becoming a serf in the new financialized feudalism
Avoid becoming dependent on the Status Quo and avoid collaborating/supporting those elements of the Status Quo that subsidize and protect the parasitic, inefficient, and unproductive sectors of the economy.

Getting Real About Serfdom

I am going to cut to the chase here, and I expect many of you to disagree. Debt is serfdom, period.

I often illustrate this point by asking two simple questions…

The Middle-Class Survival Guide

PREVIEW by charleshughsmith

Executive Summary

Recognize the signs of serfdom
Calculate your income's vulnerability to the system
Don't count on high inflation to inflate away your debt obligations
10 strategies you can start implementing right now to defend against the forces trying to sap your quality of life

If you have not yet read Part I: Middle Class? Here's What's Destroying Your Future, available free to all readers, please click here to read it first.

In Part I, we surveyed the key dynamics that have eroded middle-class wealth and income over the past 30 years. Some of these were conventional (higher energy costs) and some were unconventional/politically unacceptable (financialization; neofeudalism).

Regardless of what you identify as the primary cause, that the middle class (and labor in general) has lost ground since the early 1980s is undeniable, as is the ultimate failure of debt-dependent “growth.”

What can we do about it? It seems to me there are two responses:

Avoid becoming a serf in the new financialized feudalism
Avoid becoming dependent on the Status Quo and avoid collaborating/supporting those elements of the Status Quo that subsidize and protect the parasitic, inefficient, and unproductive sectors of the economy.

Getting Real About Serfdom

I am going to cut to the chase here, and I expect many of you to disagree. Debt is serfdom, period.

I often illustrate this point by asking two simple questions…

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