“The economic system experiences cyclical fluctuations, where periods of prosperity are inevitably followed by downturns. This recurring cycle stems from repeated attempts to reduce the overall market interest rate through credit expansion. A boom fueled by such expansion will ultimately lead to a collapse; the choice lies only in whether the crisis occurs sooner due to a conscious effort to curb credit growth or later as a complete financial disaster.”
– Ludwig von Mises, Human Action
Prepare for Change
Anticipate cuts in Federal Reserve rates. If you think that this will boost your stock portfolio, prepare for a reality check.
The impending downturn on Wall Street is plainly visible, but only to those aware of the signs.
Sky-high stock valuations combined with an AI bubble that seems to be losing momentum, all against a backdrop of a contracting economy, are clear indicators of trouble ahead.
These elements, paired with an overwhelming government debt issue, hint at a scenario far worse than a typical bear market. Our projections suggest a minimum 50 percent decline from peak to trough in the S&P 500. A point worth noting: if the market falls by 50 percent and then rises by the same percentage, you’re still not at break-even.
As the economy struggles and stock values plummet, expect a response from the Treasury and the Federal Reserve to revive the printing presses. In fact, the Fed is already gearing up for a 25-basis point rate cut soon.
However, the devaluation of the dollar has its limits. According to the Bureau of Labor Statistics, using their inflation calculator, a dollar today has the same purchasing power as three cents did in 1913—the year the Federal Reserve was established. Over the past 111 years, we’ve nearly obliterated the dollar’s value, and this inflation tax has burdened both workers and savers alike.
The anticipated recession and market downturn may be succeeded by a debt and currency crisis, setting the stage for rampant inflation that could debase both the dollar and societal structures.
The Inflationary Cycle
History has shown us this repetitive narrative: overly indebted governments that excessively print money ultimately destroy both their currencies and economies. Think Revolutionary France, Weimar Germany, or modern Zimbabwe.
Excessive money printing results in dysfunctional currency, pushing relative prices upwards until inflation spirals into hyperinflation, where monthly rates exceed 50 percent, leading to societal chaos and widespread suffering.
Unfortunately, the U.S. finds itself on a similar trajectory as nations that have faced dire inflationary consequences. With reckless spending, an authoritarian government, stark wealth disparities, and rising social unrest, the U.S. is not immune to experiencing its own inflation crisis; history seldom favors those who think “this time is different.”
Some aspects will differ, though. Instead of issuing increasingly large denominations of currency—like in previous hyperinflation events—the Treasury and the Fed may simply inundate the market with cheap credit. The implications of devaluation will render cash increasingly impractical.
We’re likely to see an increase in zeros attached to both consumer prices and credit limits. Subsequently, as a remedy for the very inflation they create, the Fed may introduce a digital federal reserve note, leading to greater governmental oversight over all private transactions.
For Americans striving to work, save, invest, and secure their families’ futures, we’ve entered precarious times. To avert the descent into inflationary chaos, Congress needs to undertake a straightforward strategy: cease unnecessary spending, balance the budget, run surpluses, and tackle debt, even if it means enduring a prolonged economic depression.
Given the historical precedent, we strongly doubt this will happen. The U.S. government’s track record since the Great Depression reveals a continuous pattern of inflation. The repercussions of this tendency are likely to become evident in the forthcoming presidential term.
Germany’s Lesson
Hyperinflation fundamentally renders currency nearly worthless. In Weimar Germany, countless individuals suffered devastating losses due to hyperinflation, particularly punishing those who exercised fiscal responsibility.
Wage earners were compensated with nearly worthless currency, to the point that by the end, bundles of cash were used as kindling for fires.
Yet, not everyone fell victim; some individuals prospered during this tumultuous period.
Hugo Stinnes, a notable figure, experienced extraordinary wealth expansion during hyperinflation, eventually becoming Germany’s richest man and earning the title ‘inflation king’ and the infamous label of Germany’s evil genius.
It’s crucial to realize that Stinnes’ vast wealth originated not from actions taken during hyperinflation but from decisions made just before it struck.
Born in Germany in 1870, Stinnes had established wealth prior to the 1920s, thanks to his family’s coal mine and various industrial ventures.
Stinnes was astute and well-versed in international trade. Recognizing the potential fallout from the excessive money printing by Reichsbank President Rudolf von Havenstein after World War I, he invested heavily in steel, shipping, and railroad assets, borrowing extensively to finance his acquisitions.
While the Papermark lost value gradually post-WWI, it took until 1921 for its depreciation to become pronounced. Stinnes capitalized on this initial phase to make his preparations.
Taking Notes from History
Stinnes’ approach to hyperinflation was straightforward: he used debt to acquire tangible assets before the onset of hyperinflation. After the crisis, these assets maintained their real value while their prices skyrocketed in nominal terms.
This situation meant the debts he incurred in Papermark diminished significantly in terms of their worth. Subsequently, he paid off those debts for mere pennies while retaining his valuable assets and achieving immense wealth.
When hyperinflation hit, the worth of the Papermark debts he incurred plummeted, while his tangible assets appreciated in value compared to the depreciating currency. The lesson here is clear: hard assets do not depreciate in hyperinflation as currencies do.
Stinnes’ hard assets increased in value while producing tangible economic output. At the same time, the Papermark’s hyperinflation diminished the worth of his debts. By 1924, he efficiently settled his debts with nearly worthless Papermarks, while his assets soared in nominal value. This sequence of events solidified Stinnes’ status as the wealthiest man in Germany.
Tragically, Stinnes’ fortune was cut short when he died unexpectedly on April 10, 1924, following a gallbladder operation.
As we approach September 2024 in the U.S., ominous signs suggest that government-induced hyperinflation could be on the horizon, and dark clouds loom in the interim.
What Would Hugo Do?
After maintaining federal funds rates between 5.25 to 5.5 percent since July 27, 2023, the Fed has temporarily pulled back on its monetary stimulus. The impact of previous policy shifts on the economy is becoming evident; it seems to be slowing down.
As rate cuts are anticipated later this month, we should again expect a delay before their inflationary signs emerge, likely manifesting as a recession and a declining stock market. Given this context, one must ponder: if Hugo Stinnes were alive today, what actions would he take?
We might guess he would emulate what billionaire Warren Buffett is currently doing.
Buffett, similar to Stinnes, owns various enterprises, including railroads that provide substantial returns on tangible capital. However, in contrast to Stinnes, Buffett is not burdened with debt.
Specifically, through Berkshire Hathaway, Buffett has been divesting stocks and stockpiling cash. As of June 30, he held an impressive $277 billion in cash reserves.
This highlights a key distinction between today’s Fed Chair Jerome Powell and Reichsbank President Rudolf von Havenstein of the early 1920s. Powell recognizes that a slowdown is necessary before embarking on the next expansive wave of money printing, while Havenstein failed to grasp that necessity.
While potential inflation looms in the United States, investors and speculators seeking to replicate Stinnes’ success over a century ago by incurring debt to acquire assets could be treading perilously. Much like Buffett, we predict a shakeout lies ahead.
This is not the moment to leverage stock purchases. Doing so could lead to financial ruin.
Instead, for smaller investors aiming to safeguard their investments, the focus should be on acquiring tangible assets and shares in robust companies that yield high returns on capital. Additionally, maintaining some cash reserves is essential to be poised to act strategically when opportunities arise during market downturns, particularly during chaotic moments in the market.
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Sincerely,
MN Gordon
for Economic Prism
