Weekly Market Update by Retirement Lifestyle Advocates

          Debt has consequences.  As does currency creation to temporarily mask the economic effects of excessive debt.

          While an entire book could be written on how the consequences of debt and high levels of currency creation will manifest in the months and years ahead, in this issue of “Portfolio Watch”, I will examine two of these outcomes.

          First, let’s discuss debt, in particular, student loan debt.

          While there are many with student loan debt who were hopefully anticipating that their loans would be forgiven, it now seems that is not likely.  That said, if you have defaulted on student loan debt, don’t think you are off the hook; that unpaid debt will follow you into retirement.  This from “Insurance News Net”:

While the promise of student loan debt relief seems to slip further out of reach, the prospects of the debt coming back to bite people in their retirement grows.

That is because student loan debt delinquencies can be deducted from Social Security benefits to the tune of thousands of dollars per year. The number of debtors is rising, along with delinquencies, according to a recent study by Boston College’s Center for Retirement Research. In fact, student loan delinquency rates have surpassed all other types of consumer debt delinquencies between 2012 and early 2020.

That trend is accelerating, meaning more Americans will see their Social Security benefits shrink. The withholding amount is the lessor of 15% of the Social Security monthly benefit or the amount by which the benefit exceeds $750 per month. The deduction is an average of $2,500 annually, a 4% to 6% decrease in benefits, according to the study.

“While these amounts are relatively small, for households that are just making ends meet, even a small decline in income can have significant consequences,” according to the study. “Putting these numbers into context, the amount of withheld benefits could roughly pay off the average per capita credit card balance. Since delinquency rates are higher among younger borrowers, student loans may pose a bigger risk for this group’s future retirement security.”

          While this may not be a huge economic headwind now, as time passes, it will become more of a problem, pulling discretionary income out of the consumer spending-dependent US economy.   

          Currency creation causes the wealth gap to widen.  History teaches us this unequivocally.  This time around is no exception.  This from CNBC:

Over the last two years, the richest 1% of people have accumulated close to two-thirds of all new wealth created around the world, a new report from Oxfam says.

A total of $42 trillion in new wealth has been created since 2020, with $26 trillion, or 63%, of that being amassed by the top 1% of the ultra-rich, according to the report. The remaining 99% of the global population collected just $16 trillion of new wealth, the global poverty charity says.

“A billionaire gained roughly $1.7 million for every $1 of new global wealth earned by a person in the bottom 90 percent,” the report, released as the World Economic Forum kicks off in Davos, Switzerland, reads.

It suggests that the pace at which wealth is being created has sped up, as the world’s richest 1% amassed around half of all new wealth over the past 10 years.

Oxfam’s report analyzed data on global wealth creation from Credit Suisse, as well figures from the Forbes Billionaire’s List and the Forbes Real-Time Billionaire’s list to assess changes to the wealth of the ultra-rich.

          While the Federal Reserve is ostensibly holding the line on more currency creation, as I have often stated in this publication, it will be impossible for the Fed to totally cease currency creation until the Washington politicians balance the Federal budget.

          The prospect of this seems highly improbable.  Instead, I fully expect that there will be more currency creation in the future.  Perhaps this currency creation will not take the form of quantitative easing as it has in the past, but I am forecasting that there will be some scheme put forth by the politicians and central bankers to subsidize the bad fiscal behavior of the collective group of Washington politicians.

          One such scheme that has been discussed is the minting of a trillion-dollar coin.

          Michael Maharrey, writing for Schiff Gold, recently commented on the scheme.

Policy wonks and government people come up with some really dumb ideas. And a lot of those dumb ideas just won’t go away.

Now that we’re in the early stages of the fake debt ceiling fight, a really dumb idea has been resurrected from the dead – the trillion-dollar coin.

Last week, the federal government ran up against the debt ceiling. That means it either has to come to some kind of agreement to raise the borrowing limit or it will default.

Now, we all know how this will end. After months of political theater and hand-wringing, Congress will raise the debt limit. But that just kicks the can down the road. Because before long, the government will run up against the debt ceiling again, and we’ll have to watch another awful sequel to this awful movie.

The debt ceiling drama completely ignores the real issue — the US government has a spending problem. The current administration is blowing through about half a trillion dollars every single month and running massive budget deficits. The solution is simple. The federal government could stop spending so much money. Or it could raise taxes. Or, why not both?

But these are politically non-viable solutions. Nobody in Washington DC is willing to seriously contemplate spending cuts. Sure, Republicans will talk about it, but that’s nothing but hot air. And nobody in Washington DC is willing to seriously contemplate raising taxes. Sure, Democrats will happily tax “the rich,” but tax increases would have to go much deeper into the poor and middle class to actually address the spending problem. So, Democrats are full of hot air too.

But there are some people out there who think they have a simple, politically viable solution — a panacea if you will. It wouldn’t require raising the debt ceiling. It wouldn’t require spending cuts. And it wouldn’t require raising taxes. (Except that it would — I’ll get to that in a minute.)

All the US Treasury needs to do is mint a $ 1 trillion dollar coin.

Viola! Problem solved!

The government could mint the coin, deposit it at the Federal Reserve, and then it could write checks against that asset.

Now, that may sound a little bit like the government is just creating money out of thin air. And that’s because it is. But hey, it’s legal, they argue. So, why not!

You do realize this is dumb, right?

This is a monetary disaster waiting to happen. It would put inflation on hyperdrive.

We just saw what happens when the Fed prints trillions of dollars out of thin air and injects it into the economy. The price of everything goes up. We’re paying for pandemic stimulus every time we go to the grocery store.

I mentioned earlier that this scheme would raise taxes. This is how. It would jack up the inflation tax even higher. Minting a coin and pretending it is worth $1 trillion doesn’t change the dynamics. When you boil it all down, it would do nothing but increase the money supply. That is, by definition, inflation.

          They can call it whatever they want, but currency creation is still currency creation, and inflation is still inflation.

          I expect that although the acceleration of inflation has slowed, there is once again more intense inflation in the relatively near future unless the Washington politicians change their spending habits.

          Fat chance of that.

          That means that there will have to be some kind of currency creation in the future.  Whether it is more quantitative easing, a trillion-dollar coin, or some other mechanism, the outcome will be the same.

          An even heavier inflation tax and a further widening of the wealth gap.

          The radio program this week features an interview with market analyst Dr. Bob McHugh.   I get Dr. McHugh’s forecast for all markets, including stocks, bonds, and precious metals. You can listen to the show now by clicking on the "Podcast" tab at the top of this page.

“The greatest obstacle to discovery is not ignorance – it is the illusion of knowledge.”

                                                        -Daniel J. Boorstin