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🔑 Key Takeaways

  1. The breakdown of global supply chains and increased energy prices are leading to a surge in inflation. Jim Rickards' 'Sold Out' highlights the need for sound money, understanding the velocity of money, and the changing power dynamics of China.
  2. Inflation can come from both supply and demand, but the Federal Reserve's tools may not be effective in controlling supply-side bottlenecks. Businesses like Boeing must brace for potential disruption in their supply chains due to geopolitical tensions.
  3. A severe recession could occur due to the Federal Reserve's mistake of raising interest rates too high too quickly, causing disinflation and deflation. The Fed's limited tools may not be effective in stopping deflation, which could have a significant impact on the economy.
  4. To combat deflation, devaluing the dollar against gold and raising the price of gold may break the cycle. Hoarding money during low or negative interest rates may be common sense. A pivot by the Fed may cause severe damage to the economy, making the right strategy crucial.
  5. While devaluing the dollar may combat deflation, it's not a long-term solution. Inflation can halve its value in just 12 years. Gold is a perfect hedge against currency devaluation, but diversifying assets is crucial for investors' protection.
  6. Gold is a valuable asset for investors during inflation and deflation cycles, while velocity of money is crucial for economic growth. Without velocity, the economy cannot exist.
  7. Balancing money supply with inflation and velocity is crucial for achieving monetary Nirvana. However, reduced spending and hoarding have caused a decrease in velocity which has prevented inflation despite money printing. The Fed's current tightening measures may cause a recession, and de-globalization could lead to unknown risks and ramifications.
  8. The supply chain is a complex network of global connections and inputs that can be managed with understanding of Supply Chain 1.0 and 2.0, risk mitigation, and resilience building in disruptions.
  9. Supply chains have evolved to become more efficient but also more complex and interconnected, making them fragile. It's crucial to consider hidden costs to avoid passing on the cost of breakdowns to consumers.
  10. Shortening and simplifying supply chain through onshoring may increase costs in the short run, but it acts as insurance against catastrophic outcomes and ensures survival of companies during conflicts. However, it may also affect margins of companies.
  11. The notion of democratic liberal societies forming exclusive trading clubs is gaining popularity, with China not being part of the group due to their human rights abuses. The idea challenges the common belief that China is set to dominate the 21st century.
  12. China must address water scarcity, real estate collapse, and massive defaults, while also facing the world's largest demographic decline. Advancement in technology and production is critical to becoming a high-income country.
  13. China's declining population due to low birth rates and cognitive decline in aging population could cause economic implications such as smaller workforce, inflation, and higher wages. China's investment in AI and robotics may also affect its economy and national security.
  14. China needs to act now as their strength is at a peak, and while dislodging the US dollar as a reserve currency might be difficult, the competition for a payment currency is ongoing between gold and SDRs. Sound money is needed for a global economy to thrive.
  15. Sanctions on Russia have led to the formation of new payment currencies by BRICK Plus countries and the Eurasian Economic Union, leading to significant consequences for the United States and Western Europe, including an energy crisis. The sanctions have not affected Russia's strength, as the targeted oligarchs are not part of Putin's regime.
  16. As countries such as Russia, Turkey, China and Saudi Arabia turn to gold to bypass US sanctions, individuals should consider the precious metal as a reliable alternative to avoid government surveillance and protect against uncertain economic conditions.
  17. While Central Bank digital currency may enable political surveillance and enforcement, it could also ignite innovation and the creation of new forms of money. In times of crisis, communities have historically found ways to create alternative forms of currency.

📝 Podcast Summary

Exploring the factors behind current inflation and its impact on the global economy.

Inflation and deflation are two sources of inflation, but the current inflation stems from the supply side due to cost-push inflation. The breakdown in global supply chains is a major cause of this inflation, with energy shortages and higher prices due to the war in Ukraine leading to higher prices for goods on the shelf. The book 'Sold Out' by Jim Rickards deals with this issue, exploring how broken supply chains, surging inflation, and political instability will sink the global economy. Rickards, an economist and author, spent 35 years on Wall Street and advised the US Intelligence community, the Department of Defense, and countless hedge funds. He also discusses the importance of sound money, the velocity of money, and China's changing power dynamics.

Boeing's Titanium Imports from Russia and Inflation Caused by Supply-Side Dynamics

Boeing heavily relies on titanium imports from Russia, which could slow down their assembly line if export or sanctions are imposed. Inflation is currently caused by supply-side dynamics, but it could also come from demand-side if consumers pull their demand forward due to the anticipation of future price hikes. This was witnessed in the 70s when the Arab-Israeli War and Arab oil embargo caused oil prices to skyrocket and result in inflation. However, the Federal Reserve cannot do anything about the supply-side bottlenecks but raise interest rates to crush demand, which could result in an economic downturn. This approach may not be effective in controlling inflation caused by the supply-side dynamics.

The Dangers of Raising Interest Rates Too High Too Quickly

The Fed's mistake of raising interest rates too high too quickly will throw the economy into a severe recession. The inflation, which is already there, will come down more quickly than people expect. This will be followed by disinflation and deflation. The Fed is against deflation as it increases the real value of debt, which is a nightmare for bankers. The US government doesn't want the real value of the US debt to go up in a deflationary environment. However, the Fed won't be able to stop deflation as they don't have any tools for it except QE, which is not very effective. Therefore, a big bout of deflation can be expected sooner than people expect.

The Ineffectiveness of the Fed's Monetary Policies and the Necessity of a New Strategy

The Fed's monetary policies of increasing excess reserves and lowering interest rates may not necessarily stimulate the economy or create jobs. Negative interest rates have not been effective in combatting deflation in other countries. To break the back of deflation, one way is to follow FDR's strategy of devaluing the dollar against gold and raising the price of gold. Hoarding money instead of spending it when interest rates are low or negative may be more common sense for everyday citizens. The economists who lack common sense fail to understand the economy. The Fed may pivot too late, causing severe damage to the economy and a 30% decrease in stocks. The right strategy is crucial to break the deflation cycle and have sustainable economic growth.

Devaluing the Dollar, Inflation, and the Role of Gold in Hedging

Devaluing the dollar is a way to combat deflation, but it is not a long-term solution. Inflation can cut the value of the dollar in half in as little as 12 years. Central bankers often target low rates of inflation hoping to diminish the value of the dollar and ease the national debt. The danger is that they may go too far and create too much inflation. Gold is unique in that it cannot push back against devaluation, making it a perfect hedge against currency devaluation. However, without a gold standard, it is challenging to play the gold card. The best way for investors to protect themselves is to diversify their assets, including precious metals like gold.

The importance of gold and velocity in a fluctuating economy.

Gold holds its value in a world without a gold standard where there are blundering central bankers. Though having a gold standard technically would mean a more stable economy, it will also mean that the price of gold will be pegged and may not yield profit. Gold holds its own in inflation and deflation cycles. Inflation is a pendulum that can swing either way, and gold would serve investors well through those cycles. The velocity of money is an important variable, and its decline since the late nineties could impact economic growth. The Monetarists calculate GDP through the M times V equals P times Q equation, and velocity is the turnover of money. An economy cannot exist without velocity.

The Importance of Balancing Money Supply with Inflation and Velocity

The key to achieving monetary Nirvana is balancing the money supply with inflation and velocity. Velocity is not constant and has plummeted over the past decade due to reduced spending and hoarding. This has prevented inflation despite trillion-dollar money printing. The Fed is now tightening money supply by reducing M zero and selling bonds which is likely to worsen velocity. This tightening will cause the expected recession. The book 'The New Great Depression' also delves into the meta supply chain that defines our current global economy. De-globalization could unwind the meta supply chain leading to risks and ramifications that are unknown.

Understanding the Complexity and Management of the Supply Chain

The supply chain is not just a linear process from producer to consumer, but a complex network of global connections and inputs that make up the entire economy. The extended supply chain includes all the intermediate inputs required to produce a final product, while the meta supply chain is the vertically and horizontally expanded supply chain of supply chains. The complexity of the supply chain makes it impossible to be modeled completely due to the large amount of data and computing power required. However, companies can manage the supply chain by understanding Supply Chain 1.0 and Supply Chain 2.0, and taking steps to mitigate risks and build resilience in the face of disruptions.

The Evolution and Fragility of Supply Chains

Supply chains have been around for centuries and were made more efficient in 1989 with the help of supply chain science, which combines increased computing power, algorithms, applied mathematics, artificial intelligence, and better data collection. This helped make processes such as just in time delivery and reducing transport lanes and warehouses, more efficient. Walmart invented cross docking, which also proved to be efficient. However, with the increase in globalization, supply chains are now more complex and interconnected, making them fragile. If one aspect breaks, the whole chain collapses. The hidden costs of these breakdowns are passed on to consumers. Therefore, it is important to consider the hidden costs before reaping the benefits of the low prices offered by these supply chains.

Fragility of Supply Chain and Trend of Onshoring

The supply chain is fragile and complex. Even a single plastic part not being available can lead to shutting down of entire assembly lines. The recent trend of onshoring and supply chain 2.0 is aimed at reducing supply chain length, compressing and simplifying it. The costs may go up in the short run, but it's like buying insurance against catastrophic outcomes. Moreover, it also ensures survival of companies in case of conflicts. Taiwan Semiconductor is building semiconductor fabrication plants in Phoenix as a defensive measure against possible Chinese invasion of Taiwan and as an example of onshoring. However, the new supply chain is going to be different and may affect margins.

The College of Nations: A Return to Restricted Trade

The idea of a College of Nations or Constellation of Nations is gaining traction, which involves democratic liberal societies with good rule of law and respect for human rights trading with each other within a club, but not with those outside the club. China would not be part of this group due to their human rights abuses. This multipolar world of clubs would be a return to a more restricted trade as seen during the Cold War. The conventional wisdom that the 21st century will be China's century is fundamentally flawed, as their turn towards totalitarianism is a sign of weakness, and their economy and military strength are not as strong as commonly believed.

China's Challenges on the Path to High-Income Status

China is facing numerous challenges including water shortage, poisoned water, real estate collapse, massive defaults, and a dollar shortage, making it difficult for them to move from middle-income to high-income. Moreover, they are facing the greatest demographic collapse in history, which will lead to a loss of approximately 600 million people in the next 50 to 60 years. While China seems to be doing well, scholars at Tufts University and Jim Rickards point out that it is as good as it gets for China right now. The country needs technological advancement, high value-added production, and to overcome their various challenges to move towards being a high-income country.

Challenges Faced by China's Aging Population

China's population is expected to decrease from 1.4 billion to about 800 million due to low birth rates and an aging population suffering from cognitive decline. This will result in a smaller workforce, making it difficult to maintain the economy. The key to maintaining a constant population is having a replacement rate of 2.1, but China's current rate is only 1.7. To counteract this, China is investing heavily in AI and robotics, which may be why they are interested in developing Taiwan. However, if China invades Taiwan, it could have economic implications. The decline in China's population also means a smaller number of productive working-age people. This could result in inflation and higher wages for workers due to increased demand. Overall, China's decline poses challenges for its economy and national security.

China's potential invasion and US Dollar's strength as a payment currency

China's relative strength is at a peak, making it a dangerous period. If they're going to invade or take action, it has to be now. Historical precedents show that waiting will only make them weaker. It's important to distinguish between a reserve currency and a payment currency. The US dollar's strength comes from its large, liquid securities market with good rule of law infrastructure. It would be difficult to dislodge the dollar as the reserve currency, but payment currency is a different story. Sound money is needed for the College of Nations to work, and while gold and SDRs are contenders, the race is still ongoing to see which one will come out on top.

Impact of US and EU Sanctions on Russia's Payment Currencies

The US sanctions and EU sanctions of Russia have led to the formation of new payment currencies in the world such as a new commodity backed currency being worked on by the BRICK Plus countries and a new payment currency being worked on by the Eurasian Economic Union and the Shanghai Cooperation Organization. These sanctions have failed to have a significant impact on Russia but have backfired and hurt the United States and Western Europe more. The oligarchs being targeted by these sanctions are not part of Putin's strength, so their takedowns have not affected Russia's strength in any way. Europe is also facing energy crisis due to these sanctions.

Gold Gains Traction as Countries Look for Ways out of US Dollar

Russia has been anticipating US sanctions on its reserves and has built up its gold reserves to circumvent the US dollar. Other countries such as Turkey, China, and Saudi Arabia are looking for ways out of the dollar and are also turning to gold. Meanwhile, Central Bank Digital Currencies (CBDs) are gaining traction and may become the last step in a totalitarian agenda as they eliminate the need for cash and allow for total surveillance. This means that people's financial transactions will be tracked, making it easy for governments to take action against dissenters. Therefore, gold remains a reliable alternative to the dollar and other currencies, especially in times of geopolitical uncertainty and rising inflation.

The Pros and Cons of Central Bank Digital Currency

The Central Bank digital currency can lead to political surveillance and enforcement – through seizures, withholdings, and weaponizing the FBI. However, people are innovative and will create new forms of money. During the Great Depression, communities made their own wood money when the Fed screwed up. They painted a logo on it and merchants accepted it as payment. The same could happen now. Despite the Central Bank's digital currency, people can use American silver dollars as a tool of exchange, as long as people accept it. Hence, the Central Bank digital currency is both good and bad. It can lead to political surveillance and enforcement, but it can also spark innovation and new forms of money.