Lux Lucet

One example of this is what is commonly called “inflation” in the mainstream press.  Inflation, we are told, is rising prices. 

But this is not the correct definition of inflation.  What is usually called “inflation” in common parlance isn’t inflation at all, but rather the effect of inflation that’s already taken place. 

Perhaps the simplest correct definition I’ve heard of inflation is “the abnormal growth in the supply of money.”  This is where the government, or more accurately, the central bank – the central bank of the United States is known as the Federal Reserve System (henceforth “the Fed”) – creates dollars at a very rapid pace.   

If we sharpen our definition of inflation a bit, we can put it this way:  Inflation is the growth of the money supply over and above the rate of growth in the wealth output of the economy. 

When the Fed creates dollars at a faster pace than the economy grows, you end up with a situation where there are too many dollars chasing too few goods and services.  You and I experience this situation as rising prices, which is commonly and incorrectly called “inflation.” It is the abnormal growth in the money supply that proceeds the rising prices that is the inflation.  The rising prices are the effect of inflation.

So back to our illustration from the Wizard of Oz.  When you watch the evening news or read financial commentary in the mainstream press, you’ll hear reports about measures of “inflation” – by “inflation” these reports always mean rising prices – such as the Consumer Price Index (CPI) or Producer Price Index (PPI). 

Here’s an example from just last week: “Wholesale inflation climbed 0.8% in February, lower than estimate but still up 10% from last year.”  If you read through the piece, you’ll find statements such as, “Another surge in energy prices pushed wholesale goods prices to their biggest one-month jump on record in February according to Labor Department data released Tuesday.”  Although it is not formally defined, the implication is that inflation is rising prices.

What does defining inflation as rising prices have to do with the Wizard of Oz? By defining inflation as rising prices, the media puts our focus on the effect of inflation, rising prices, and not on the cause of inflation, the Fed. 

By getting us to look at the effect and not the cause, the media manages to put up a “curtain” to keep us from seeing what’s really going on: massive dollar creation by the Fed to fund the massive federal government deficits. 

Have you ever wondered how the government was able to impose economy-crushing Covid lockdowns, and spend trillions of dollars on the CARES Act to keep everyone from going bankrupt while not having to raise taxes?  

They were able to do this because the Fed created trillions of new dollars.

How many new dollars did the Fed create?  More than you want to think about.

To give you some idea, a blog post from 2020 written by an honest financial advisor named of Mish Shedlock has this headline:  “23.6% of All US Dollars Were Created in the Last Year.”    According to one chart Shedlock provided, the 23.6% increase in the supply of US Dollars took place between March 9, 2020, and September 28, 2020.

Think about that.  In just six months the Fed managed to bring into existence almost 25% of all dollars on record.   

Such a feat could reasonably be considered “abnormal growth of the supply of money.” 

By any measure, the U.S. economy certainly didn’t grow by 23.6% in 2020.  In fact, according to one article, it shrank by 3.5% in that year.   

If we look at how much the supply of dollars increased in 2020, 23.6%, and the amount of economic growth in that year, -3.5%, this implies an inflation rate of 27.1%. 

And really, it’s worse than that, since the 23.6% growth in the money supply was only for the six-month period of March through September.

With such a huge amount of dollar creation in 2020, it should come as no surprise that prices are rising at their fastest pace in decades here in 2022. 

First comes the abnormally large creation of currency units (dollars), then comes the rising prices.

But massive inflation by the Fed in 2020 and beyond is not the only threat to how far our dollars go at the grocery store and the gas pump.

There’s this thing called the petrodollar, which, if it unravels, will cause prices to rise even faster than they currently are.

What’s the petrodollar? The term “petrodollar” is used to describe an agreement that was arranged by then-President Richard Nixon and Secretary of State Henry Kissinger in 1973.  The petrodollar agreement stipulated, “that the U.S. would agree to military sales and defence of Saudi Arabia in return for all oil trade being denominated in U.S. Dollars. By 1975, all OPEC nations agreed to price their oil supplies exclusively in U.S. Dollars and to hold their oil proceeds in U.S. government debt securities.”

Up until that time, OPEC nations sold oil, the world’s most important commodity, a commodity which all nations needed and still need, in any number of currencies.  After that Petrodollar Agreement, Saudi Arabia and other OPEC nations would sell oil only in dollars.  That meant if China wanted to buy oil from an OPEC nation, they would first have to convert their yuan – the yuan is the national currency of China – into dollars and then use those dollars to buy the oil. 

This benefitted the U.S. by creating a demand for dollars that otherwise wouldn’t be there.  This additional demand for dollars had the effect of making the U.S. dollar more valuable than it otherwise would have been.  As Americans, we experienced this more valuable dollar as lower prices at the grocery store and the gas pump. 

But what would happen if the Petrodollar Agreement were to go away?  The effects would be just the opposite of what was just described.  Instead of there being more demand for U.S. dollars resulting in the U.S. dollar being worth more, there would be less demand for dollars meaning U.S. dollars resulting in them being worth less.  Americans would experience the drop in the value of the dollar as rising prices.  Probably rapidly rising prices. 

Is the petrodollar under threat?  It appears that the answer is yes. 

On March 16, the Wall Street Journal (WSJ) ran a story noting that, “Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan.”

If this agreement were to take place – and it appears that it likely will sometime soon – what does that mean for the U.S. dollar?  Here’s one take on the likely effects,

One day after we reported that the “UK is asking Saudis for more oil even as MBS invites Xi Jinping to Riyadh to strengthen ties“, the WSJ is out with a blockbuster report, noting that “Saudi Arabia is in active talks with Beijing to price its some of its oil sales to China in yuan,” a move that could cripple not only the petrodollar’s dominance of the global petroleum market – something which Zoltan Pozsar predicted in his last note – and mark another shift by the world’s top crude exporter toward Asia, but also a move aimed squarely at the heart of the US financial system which has taken advantage of the dollar’s reserve status by printing as much dollars as needed to fund government spending for the past decade (emphasis mine).

Here’s a video on this same issue, Saudi Arabia’s change of policy to agree to sell oil to China in yuan.  The speaker goes beyond the comments above and argues that the deal is already done and that the announcement will come in the next four to eight weeks. 

If it’s true that the deal is already done for Saudi Arabia to sell oil to China in yuan, this implies a drop, maybe even a sudden drop, in the value of the dollar, which Americans will experience as rising prices. Based on the remarks in the video, this drop could be coming very soon.

The speaker on this video backs up his point by citing a recent and rather unusual comment from Jay Powell, the current Chairman of the Fed.  Testifying before Congress earlier this month, Powell remarked that, “there’s room for multiple reserve currencies.”  Powell’s remarks were a bit cryptic and seemed to refer to cryptocurrencies.  But could he also have had the Chinese yuan in mind as another reserve currency?  Maybe. 

If the Petrodollar Is in Danger, What Do I Do?

Considering the possible end, or at least partial end, of the petrodollar system, what should Christians do?

In a series on prepping I wrote a few years ago, I used as a theme verse Proverbs 22:3.  It reads, “The prudent man foresees evil and hides himself, but the simple pass on and are punished.”      

One application of this verse is that it is fitting for Christians to use lawful means to keep themselves out of danger (hide themselves).  In fact, you may even argue that this verse even requires that Christians do so.  After all, we have the Word of God at our fingertips and are commanded in various places, even by Christ himself, to take heed that we are not deceived. 

We live in a time of extraordinarily powerful deceptions.  The legacy media as well as internet search engines and big social media platforms, to say nothing of the government, schools and universities, actively attempt to shape our perception of the world in a way that is antithetical to the Scriptures. 

But the Lord has given believers his Word and his Spirit.  Thus equipped, it seems to me that it isn’t a big stretch to say that the Lord expects his people to be able to see through the lies and discern the truth of the circumstances in which we find ourselves.  Doing so is one way we show the fruit of the Spirit in our lives. 

Knowing that the U.S. dollar is at best a depreciating asset, and one that has already begun to depreciate more rapidly than in the past and which may well depreciate even faster in the not-too-distant future, what are we to do?  Some may even wonder if there is anything that we can do.

The short answer is yes, there are options for “hiding ourselves” from the destruction of the value of the dollar. 

One of the best ways to do this is to hold hard assets, which means physical things that hold their value over time or even increase in value.  There are various items that have traditionally been considered hard assets.  Land, artwork, and collectibles are certainly three major forms of hard assets.

But the category of hard assets that, in my opinion, is the most practical for most people is precious metals, that is, gold and silver. 

And when I say gold and silver, I mean physical gold and silver that you hold.  Not paper claims to gold and silver.  Actual, real, physical gold and silver that you can hold in your hand. 

Holding gold and silver gets your cash out of the depreciating dollar in into assets that have been considered money since the time of the Old Testament.  Gold and silver will never go to zero, at least not as long as this world exists.  Gold and silver have no titles attached to them, meaning they also provide you with financial privacy, an increasingly rare gem. 

Further, they are an anti-dollar trade.  That is, over time they will preserve your purchasing power.  Dollars you hold under your mattress will lose value every single day you hold them.  Putting them in the bank isn’t any better.  Banks pay almost no interest on savings.  In addition to this problem, you have to be concerned that during the next financial crisis your bank balance may be “bailed in.”  That is, the bank may steal part of your deposit to remain solvent. 

Gold and silver held outside the banking system, unlike dollar bills, will hold their purchasing power over time.  It’s possible that they may even buy more in the future than they do today.  If you hold gold and silver – and here I’m talking about gold and silver in the form of coins or bars – outside the banking system, they can’t be taken by the banks in the event of a financial crisis.

Now some may be asking at this point, how do I buy gold and silver, and what form should I buy it in?

These are good questions and are beyond the scope of today’s post. 

Lord willing, I shall write about this in a future post sometime soon.

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