RANCHO SANTANA, NICARAGUA – “This area is going to grow for a long time,” said a real estate agent yesterday.
We’ve been looking at property for sale. We like it down here in Nicaragua. And we have a feeling the agent is right. This could be like Florida in the 1920s – bubbly, but still with a long period of growth ahead.
“We were selling those lots on the beach for just $50,000. That was ten years ago. Maybe a bit more. Now, they’re selling for $500,000.”
Up and down the beach, there are new houses… new condos… new restaurants. Property here may or may not be a good investment. It could go up… or not. But it’s not likely to go away.
In the worst case, we can build a beach shack and enjoy it.
After all, it is “real.”
This week, we have been looking at real money… and real prosperity.
We’ve seen that you only know if something is real money or not ex post facto.
We’ve seen, too, that today’s dollar is fundamentally different from the dollar the world trusted as “real money” before 1971 (when President Nixon severed the dollar’s last ties to gold).
Few realize how it has changed; fewer still realize what it means.
But the change is fundamental: Today’s dollar anticipates wealth that may or may not come in the future, rather than wealth that was already earned in the past.
In a properly functioning stock market, prices are “discovered.”
No one ever knows in advance exactly what stocks are worth. But they find out… every minute that markets are open.
Investors look at what corporations earn… and what they expect them to earn… and find a mutually agreed price by bidding against each other.
This process used to be based on what people thought the stock was really worth, that is, on how much the company would earn. The stock market tethered the stock to the financial world. And the discovered price tethered it to money. And gold anchored money to the real world of energy, resources, labor, time, skill, luck… and profits.
But then… the anchor began to float.
The new money, no longer connected to the real world by gold and silver, was set adrift.
So far in the 21st century, central banks have added some $20 trillion to the world’s monetary base.
This would have been impossible before 1971. There was not enough new gold; miners have added only about $1.8 trillion worth of gold during the same 17-year period.
With some exceptions, central banks bought government bonds from large financial institutions (via “quantitative easing” or QE). This left these institutions with more cash.
But what to do with it?
Invest in competitive, risky, low-return businesses? Or buy more financial assets?
And here is where it gets interesting…
Markets don’t discover stock and bond prices in the vacuum of space. They are found on Earth… taking into account how much real money (wealth) is available to buy them.
Interest rates – the cost of borrowing money – are discovered, too.
When money is “tight” (in short supply) interest rates rise… and financial asset prices fall. If you could earn 20% a year on your bank balance for example, why would you want a stock with a 2% dividend yield?
When money is “loose,” on the other hand, interest rates fall… and asset prices rise.
Interest rates affect everything – asset prices as well as the economy itself. If interest rates can’t be trusted, neither can any other price.
Since 1987… and even more so since the 2009 panic… the feds have diddled interest rates. Now, their ultra-low interest rates (often below zero!) have distorted almost every price in capitalism.
Prices floated on a once-in-a-lifetime ebb tide of fake money and phony interest rates.
Prices rose, not because the real economy justified them, but because the water underneath them buoyed them up. Meanwhile, the economy slowed…
Corporate profits can be finagled – which became more and more popular as the fake boom gathered force. But it is hard to flimflam sales revenues.
They’ve been growing at about 4% a year for this entire century. But adjust for inflation and they come down to about 2% – only about half the rate of the 1980s.
Here’s another thing that’s hard to fake: the number of hours worked.
In 1979, the average employee worked almost 39 hours a week. Today, he works 33 hours a week.
Or how about this?
According to Ronald Reagan’s budget advisor David Stockman, there were 72,729,000 jobs in manufacturing, finance, insurance, real estate, transportation, information, or trade paying $45,000 or better during the cyclical peak in 2001.
Today, after 17 years of “growth,” there are just 72,800,000.
Since the 2008 financial crisis, the only job categories to see significant increases are those in low-pay service jobs – bartenders, car parkers, hotel and restaurant workers, and nursing home staff.
And the number of people with jobs compared to the population has gone down.
There are about 250 million adults of working age in the U.S. In 1987, 65% of them had jobs. Today, that’s fallen to 61%.
That four-percentage-point swing represents 10 million people who have slipped out of the productive economy.
That also helps explain why household income, too, has flatlined.
When you account for inflation, the average U.S. household had 1.1% more income at the turn of the millennium than it has today.
What kind of boom is it where stock and bond prices roughly double… but incomes, sales, and jobs go nowhere?
Oh, dear reader, ask us something harder! It’s a financial, not an economic, boom.
How will it end?
Oh, c’mon! Another softball question…
The difference between the financial economy and the real economy is like the difference between bitcoin and a beachfront house. The price of bitcoin can be cut in half in seconds.
In a rising-interest-rate world, America’s investors could discover that their stocks and bonds aren’t worth half of what they paid for them. But you can still get a tan on your front deck.
More to come…
By Nick Giambruno, Editor, Crisis Investing
Editor’s Note: Casey Research’s globetrotting analyst Nick Giambruno has made it his mission to find profitable trades in overlooked corners of the globe. Today, he shares a development in China’s oil market that could have huge implications for gold… and the U.S. dollar.
I wrote to you recently to reveal something that very few people know or understand: the petrodollar system.
From 1972 to 1974, the U.S. government made a series of agreements with Saudi Arabia that created the petrodollar system.
In short, the system forces the world to conduct all OPEC oil transactions in U.S. dollars. Every country needs oil. And if foreign countries need U.S. dollars to buy oil, they have a very compelling reason to hold large dollar reserves.
This creates a huge artificial market for U.S. dollars.
But China could soon change that.
The Chinese government recently announced a new mechanism that will allow oil producers anywhere in the world to trade oil for gold.
China’s new mechanism will totally bypass the U.S. dollar and the U.S. financial system… along with any restrictions, regulations, or sanctions from Washington.
So for many oil producers, it will be much more attractive than the petrodollar system.
I call it China’s “golden alternative” to the petrodollar. Whatever you call it, though, it will allow for the large-scale trade of oil for gold instead of dollars.
Here’s how it will work…
The Shanghai International Energy Exchange is launching a crude-oil futures contract denominated in yuan, China’s currency. This will allow oil producers around the world to sell their oil for yuan.
Of course, the yuan is a fiat currency, just like the dollar. And most oil producers don’t want large stashes of yuan. The Chinese government knows this. That’s why it’s linked the crude-oil futures contract with the option to efficiently convert yuan into physical gold through gold exchanges in Shanghai and Hong Kong.
I spoke with officials at the Shanghai International Energy Exchange. They told me they plan to go live with it before the end of the year, or shortly thereafter.
The Saudis haven’t made a clean break with the U.S. and the petrodollar – yet.
But last August, Saudi Arabia announced it was willing to issue “Panda bonds” to finance its government spending deficit. These are yuan-denominated bonds from non-Chinese issuers that are sold in China.
This means that Saudi Arabia is drifting toward China financially.
If the Saudis start to use China’s “golden alternative,” it would kill the petrodollar overnight.
The increased demand for gold from China’s “golden alternative” to the petrodollar is going to shock the gold market. And this clearly hasn’t been priced into the gold market yet. Gold is still down significantly from its 2011 peak.
That’s why I am so bullish on gold right now. As the petrodollar dies, gold is going to replace it as the go-to currency for the oil trade. That makes the yellow metal the single best way to profit from this major shift in our monetary order.
– Nick Giambruno
P.S. I think it’s high time gold played a more central role in the global monetary system. The problem is that ditching the petrodollar would cripple the U.S. dollar’s global dominance and crater the American economy.
I’ve put together a brief presentation to show how it could unfold and what you can do to prepare today. Watch it here.
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In the mailbag, readers discuss how the fake boom will end…
A wise, old investor told me 40 years ago, “Shirtsleeves to shirtsleeves in two generations.” He was commenting on inherited wealth. We are about to learn the same in the investment market as well. We are overdue a massive correction.
– Carl M.
You are wrong on the economies and your ethics are wrong – please go get help!
– Joseph S.
Your recent essay is grossly inaccurate. By the time Richard Nixon became president, the backing of the U.S. dollar in gold had already dropped from 100% to 5%. All Richard Nixon did was remove the last 5% connection to gold. Mostly because we were being held hostage by overseas concerns that insisted on swapping their U.S. dollars for gold.
We simply did not have enough gold covering the dollar to comply. The error in your explanation of the transfer of 100% gold connection to 0% gold connection is so egregiously false, I didn’t bother reading any more of the article.
– Steve B.
Meanwhile, more kudos on the Diary…
I enjoy Bill’s writing – always thought provoking. Maybe add some photos of the Brazilian surfers?
– Mike W.
While your photo of the view from the cottage is nice, especially given that winter is upon us, you got my hopes up with the reference to bikini-clad Brazilian surfers… But no pictures! Nonetheless, the dots you connect together with each article help the world, such as it is, to slowly come into better focus as if looking through a cheap pair of binoculars. Plus, your daily musings are always good for a chuckle or two. Keep up the great writing.
– Brian P.
Last night, Doug Casey revealed an opportunity he’s calling “the biggest speculation in history.”
Thousands of readers tuned in to discover Doug’s new research. If you weren’t among them, don’t worry. There’s still time to catch Doug’s presentation before it’s taken down at midnight tonight. Watch it here.