Another Central Banker Admits The Truth About The US Dollar

Another Central Banker Admits The Truth About The US Dollar

Notes From the Field By Simon Black  November 28, 2023 

On March 20, 1602, after a few years of painstaking negotiations, a deal was struck amid the cobblestone streets and legendary waterways of Amsterdam that changed the world of finance forever.

The Dutch Republic (as it was known back then) was already a major economic power in the early 1600s; Dutch merchants boasted enormous fleets of thousands of ships and lucrative trading posts around the world. Money was pouring in to the economy.

But at the same time, competition was fierce. England, Spain, Portugal, etc. all wanted in on the vast wealth that Dutch merchants were minting from the spice trade.

So in an effort to fend off international competition, Dutch traders unified their operations; merchants in Amsterdam merged in 1601. And, the following March, the remainder of the country’s prominent merchants joined.

They called their new venture the Verenigde Oostindische Compagnie (VOC); it is known to history as the Dutch East India Company.

What made VOC so innovative is that investors could buy shares in the company, and hence enjoy a piece of the profits proportionate to the number of shares they owned.

But on top of that, they also launched a stock exchange… creating a secondary market where investors could buy or sell shares of VOC.

This was game changing.

These innovations by themselves were not new; other ‘joint-stock’ companies had been formed in the past. And other rudimentary financial exchanges had already been in existence.

But the Dutch put the two together, combining a major business enterprise with a formalized stock exchange. It had never been done before… and the idea marked the beginning of the country’s economic dominance, known as the Dutch Golden Age.

Naturally, as the Dutch Republic became Europe’s most powerful economy, its currency-- a gold coin known as the guilder-- became the unofficial reserve currency around the world.

From Eastern Europe to Japan, Indonesia, and parts of India, traders often exchanged goods and services for Dutch guilders because they had confidence that the coins would be universally accepted.

And the guilder’s status as a de facto reserve currency lasted for centuries.

But history is very clear that no empire, and no reserve currency, lasts forever.

Eventually the dominance of the Dutch republic was displaced by the British Empire, and the guilder by the British pound. Britain, in turn, was eventually displaced by the United States and the US dollar.

But only someone willfully ignorant of history would believe that America’s and the dollar’s dominance will last forever.

And this should hardly be a controversial assertion anymore.

Politicians within US government have routinely demonstrated an outrageous level of pettiness, incompetence, and the inability to solve even the most basic problems.

They have absolutely no control over abhorrent deficit spending. They go into debt to pay people to NOT work. They ignore downgrades of their sovereign credit rating. And they actually cheer themselves when the deficit is “only” $2 trillion.

America’s central bankers, meanwhile, conjured trillions of dollars out of thin air without any clue of the repercussions. They failed to predict inflation. They failed to diagnose it. They failed to do anything about it.

And when they finally did take action, they failed to anticipate any negative consequences of raising interest rates so quickly.

Literally two days before Silicon Valley Bank went bust earlier this year, the Chairman of the Fed told Congress that “nothing about the data suggests we’ve tightened [raised interest rates] too much.”

These people are clueless. And everyone has noticed.

Confidence in the dollar is waning, and foreigners are starting to diversify to other assets. Data from the IMF showed that the US dollar’s share of foreign exchange reserves had fallen to a multi-decade low.

Similarly, foreigners’ appetite to own US government bonds is dropping rapidly. A decade ago, foreigners happily owned 43% of all US government bonds. Today foreigners’ share is 30%, and falling.

These trends show very clearly that the dollar is simply not as dominant as it used to be.

In a recent interview, Aerdt Houben, a senior official at the Dutch central bank, said the quiet part out loud, and explained that the Netherlands was already preparing for a world in which gold (and NOT the US dollar) is the primary global reserve currency.

“The beauty of gold is that it’s stable in value, it retains its value. That's one of the reasons why central banks hold gold... Gold is like solidified confidence for the central bank... If we ever unexpectedly have to create a new currency or a systemic risk arises, the public can have confidence in [the Dutch central bank] because whatever money we issue, we can back it with the same value in gold.”

The Dutch understand this concept very well; after all, they once held the world’s #1 reserve currency position… and then lost it. So they know the same thing will happen to the dollar. It’s inevitable.

I agree entirely with this view and have written about it extensively: I believe there is a very high likelihood that the dollar loses its reserve dominance within the next 10-years, and probably sooner.

The Congressional Budget Office has already forecast (rather optimistically) that interest on the debt, plus mandatory entitlements like Social Security, will consume 100% of US federal tax revenue by 2031.

This means that everything else, including the military, will have to be financed by debt.

Two years later in 2033, Social Security’s primary trust fund will run out of money, according to the program’s annual trustee report.

These are not conspiracy theories; rather, these are the government’s own forecasts. And I believe that either event could trigger a reset of the global financial system in which the US loses its dominance over the rest of the world.

Personally I don’t think that anyone trusts China enough to anoint its yuan as the new global reserve currency.

But gold is an asset that has a 5,000+ year history of trust and confidence.

And if gold does become the global reserve once again, you can likely bet that gold prices will go to the moon.

Simon Black, Founder  Sovereign Man

https://www.sovereignman.com/international-diversification-strategies/another-central-banker-admits-the-truth-about-the-us-dollar-148479/

Response To America’s Latest Downgrade Really Proves The Point

Response To America’s Latest Downgrade Really Proves The Point

Notes From the Field By Simon Black  November 13, 2023

On the evening of June 18, 1815, in the Belgian hamlet of Mont-Saint-Jean, nearly 70,000 troops under the command of the Duke of Wellington, alongside 50,000 allied Prussian soldiers, fought against the French forces of Napoleon Bonaparte in the historic Battle of Waterloo.

Waterloo was a bloody affair, with heavy casualties on both sides. But the Anglo-Prussian alliance won the fight, and Napoleon was forced to abdicate his throne just a few days later.

The Napoleonic Wars-- more than 12 years of constant conflict-- were over, and Europe was finally at peace.

Now, legend has it that famed banker Nathan Mayer Rothschild was present at Waterloo and witnessed the battle himself. He then braved a massive storm over the English Channel to reach London as quickly as possible where he bought up all the government bonds before news of the victory had reached Britain.

In another version of the story, Rothschild was in London during the battle. But his private intelligence network quickly passed the news of Napoleon’s defeat, giving Rothschild the opportunity to buy up British government bonds on the cheap before anyone else heard the news.

And in yet another version of the story-- personally endorsed in 1940 by Nazi Propaganda Minister Joseph Goebbels-- Rothschild bribed a French general to deliberately lose the battle so that he could make a fortune on British government bonds.

None of these stories is remotely true. In fact, most people don’t realize that Rothschild almost lost his fortune because of Waterloo… and that he personally played a vital role that helped Britain win the war.

Rothschild was essentially given a secret mission in January 1814 by the Chancellor of the Exchequer, who commissioned Rothschild to smuggle gold to British generals in Europe.

Britain didn’t have the gold; fighting against Napoleon for so long was extremely expensive and had drained the British treasury. So, government had to issue tons of debt to pay for the conflict.

Rothschild’s job was to turn those government bonds-- which were just pieces of paper-- into real money, i.e., gold, that British generals could use to pay and feed their troops.

This was an enormous challenge; Rothschild not only had to procure vast sums of gold, but he had to transport it all through French blockades and checkpoints.

Fortunately for Britain, Rothschild was incredibly good at his job. And both the Duke of Wellington as well as one of the most senior officials at the British Treasury praised him for his skill and discretion.

But Rothschild did make one huge mistake: he assumed the war would drag on for years.

And in anticipation of the British government having to go deeper into debt to pay for it all, Rothschild used all his profits to buy more gold that he could then send to the troops.

By the summer of 1815, Rothschild was sitting on a mountain of gold.

But then came Napoleon’s defeat at Waterloo… and Rothschild knew instantly that the price of gold would plummet because of the peace. He also knew the losses he would suffer would potentially wipe out his entire fortune.

So, Rothschild made a risky bet and used his gold to buy up British government bonds, which were still quite cheap. He believed that, with Napoleon defeated, Britain’s economy would grow dramatically, and the bonds would increase in value.

He was right. And over the next two years, Rothschild realized a 40% return on the bonds, minting him a profit of roughly $1 billion in today’s money.

What’s interesting about this story is that, on July 20, 1815, the evening edition of the London Courier newspaper reported that Rothschild had made “great purchases” of British government bonds.

While Rothschild didn’t formally intend to ‘rate’ the quality of the bonds, news of Rothschild’s investment was received as almost an endorsement... or even a recommendation.

People thought that if someone as sophisticated as Rothschild saw value in the bonds, then they must be worth buying.

Rothschild had essentially put his gold seal of approval on Britain’s national debt. And his analysis proved to be true.

More than two centuries later, this business of analyzing and rating a sovereign government’s bonds has grown into a highly formalized industry. And it’s primarily controlled by three companies: S&P, Moody’s, and Fitch.

Similar to Rothschild’s unintentional endorsement back in 1815, these agencies formally grade the creditworthiness of governments, with the highest rating generally being ‘AAA’.

The United States government has long enjoyed this pristine AAA rating. Until, that is, S&P downgraded the federal government’s credit rating on August 5, 2011.

Back then, S&P said they were “pessimistic” that Congress would be able to “stabilize the government’s debt dynamics anytime soon”. And the agency projected the government’s debt burden would reach an unbelievable $20.1 trillion by 2021.

(It turns out that S&P was wildly optimistic; US government debt reached $20.1 trillion on September 8, 2017, more than four years ahead of their forecast.)

The Treasury Department was furious about the downgrade. And according to the Chairman of S&P’s parent company, then-Treasury Secretary Tim Geithner called to make threats against the company, claiming that he had just spoken to President Obama about the downgrade.

And to absolutely no one’s surprise, the Justice Department filed a lawsuit against S&P shortly after, alleging that the company engaged in fraud. (The case dragged on for years until S&P finally settled for a $1 billion fine.)

That was enough to scare the entire ratings industry into submission. No matter how high the debt burden became, how incompetent the Congress, how outrageous the budget, how ridiculous the legislation… the rating agencies refused to downgrade the US government.

Until this year.

A few months ago, Fitch made the first move and downgraded the United States; in their report, Fitch cited the government’s inability to solve problems and compromise, such as waiting until the last minute to fix the debt ceiling fiasco earlier this year.

(The Biden administration responded with genuine confusion, calling Fitch’s downgrade “strange” and “bizarre”.)

Now comes Moody’s, the last of the big three credit rating agencies, which on Friday downgraded the US outlook from ‘stable’ to ‘negative’.

Moody’s cited obvious risks like rising interest rates and the explosion in the national debt, which have “increased pre-existing pressure on US debt affordability.”

In other words, the US government won’t be able to afford to make payments on the national debt for much longer.

I’ve written about this before: the government’s own projections show that interest payments on the national debt, plus mandatory spending like Social Security, will consume 100% of tax revenue by 2031.

Then Social Security’s primary trust fund will run out of money two years later. It’s an enormous problem.

But it’s not just the fiscal mess. Moody’s also cited “continued political polarization” that prevents the government from tackling any of America’s big problems.

Ironically, almost as if to prove Moody’s point about political polarization, the White House blamed the downgrade on “Congressional Republican extremism and dysfunction”.

Unbelievable. These people really can’t solve problems. They can’t even acknowledge problems. They only know how to fight and argue and create more problems.

Almost fifteen years ago when I started this publication and making predictions about America’s fiscal ruin, my comments were considered extremely controversial.

Today this view is officially mainstream; all three major rating agencies cite these clear and obvious risks. They’re finally stating what everyone already knows to be true.

I’ve written before that, technically, America’s enormous fiscal challenges are still fixable. But there’s only a very narrow window of opportunity remaining to do so.

(I’ll walk you through the math of how this could happen in a future letter.)

Sadly, it’s pretty clear that the people in charge don’t seem to care in the slightest. They’re not moving in the direction of solutions… rather they’re creating more problems.

And this is really why it’s so important to have a Plan B-- to acknowledge obvious risks and take sensible steps to reduce their impact on your family.

There are countless permutations and no one-size-fits-all solution; a Plan B might include diversifying your finances, having another place to go, owning real assets, having a second passport, taking legal steps to reduce your taxes, protecting your assets, and more.

Having a Plan B doesn’t make you unpatriotic. It doesn’t make you a pessimist. And it doesn’t make you a conspiracy theorist.

It means you are a rational, independent-minded person who takes obvious risks seriously; essentially, it’s what we hope our politicians would be.

To your freedom,  Simon Black, Founder  Sovereign Man

https://www.sovereignman.com/trends/bidens-response-to-americas-latest-downgrade-really-proves-the-point-148438/

Gold Vs. Silver: Which Is Better Right Now?

Gold Vs. Silver: Which Is Better Right Now?

Notes From the Field By Simon Black  November 8, 2023

Almost two decades ago, I walked into a coin shop in Florida to buy my very first piece of silver. I was in my mid-20s at the time and just starting to teach myself about financial history, the national debt, and central banking.  It was early in my education. But I had already determined that owning precious metals would be a good idea as a hedge against future uncertainty and rapidly increasing government debt. But I didn’t have much money at the time. So silver-- at just a few dollars per ounce-- was well within my budget.

The clerk behind the counter probably noticed my military haircut and seized the opportunity to make a joke at my expense.

“Well, we’re mostly out…” he said, grinning, “but I can offer you a dime bag.”

I assumed this was a marijuana reference and explained to the guy that I had a top-secret security clearance and didn’t go in for that sort of thing.

But he laughed and explained that he was actually referring to a bag that was literally filled with dimes.

I still didn’t get it.

But the clerk was kind enough to teach me that, prior to 1965, dimes in the United States were minted with a silver content of 90% (with the other 10% being copper). He then pulled out a sandwich bag full of dimes, weighed it, and showed me how to calculate the silver content based on the bag’s weight.

A one-pound bag, for example, contains 200 pre-1965 dimes, each with about 2 grams of silver content. That’s a bit more than 13 troy ounces of silver per one-pound ‘dime bag’.

I held onto that bag for several years, until 2011 when silver prices went through the roof. And I ended up going back to the very same dealer to trade the dime bag for a little bit of gold.

(I’ll explain why I did that in a moment-- it had to do with the gold/silver ratio.)

Precious metals in general have been excellent investments over the past twenty years. But I believe there’s a strong case to be made that gold and silver prices could go much, much higher from here.

Gold’s rise will be fundamentally driven by rapidly deteriorating US government finances. And I’ve written about this extensively.

The US national debt is now $33.7 trillion; the debt is so large that the Treasury Department spent nearly $900 BILLION on interest payments in the last fiscal year (FY23), which ended about six weeks ago.

That number alone-- $900 billion in interest payments-- is astonishing.

But even more astonishing is that FY23’s interest bill was 22% MORE than the previous fiscal year, and 56% more than the interest bill from the year before that!

Think about that: a 56% increase in interest expense in just two years?

One reason, obviously, is out of control spending. I mean… these people always find an excuse to overspend by trillions of dollars. First it was COVID. Then it was inflation. Then it was Ukraine. Now the Treasury Secretary insists that America can “certainly” afford to fund two wars at the same time.

All of these expenditures result in insane increases to the national debt, which drives up annual interest expenses.

The second issue is the rapid increase in interest rates.

Two years ago the government could borrow (and refinance) at practically 0%. Today they have to pay around 5%.

Now, remember that almost the entire US public debt will have to be refinanced over the next few years.

So if rates remain at 5%, and the debt keeps rising, this means that the annual interest bill could reach $2 trillion over the next few years.

Don’t take my word for it. The Congressional Budget Office’s most recent forecast show that annual interest payments, plus mandatory entitlement spending (i.e. Social Security and Medicare) will consume over 100% of federal tax revenue… by 2031.

Then Social Security’s primary trust fund will run out of money two years later, in 2033.

The consequences of this mess mean that, most likely, the Federal Reserve will slash interest rates and start printing trillions of dollars again in order to bail out the government.

And this will most likely result in inflation… as well as a severe loss of confidence in the US dollar around the world.

The dollar has been THE dominant reserve currency since the end of World War II. But history tells us that reserve currencies CAN and DO change. This time is not different.

So it’s very likely that the dollar could lose its dominant reserve status... and be replaced by a universally accepted asset like gold.

Gold is already an informal reserve asset; it’s why central banks and sovereign governments around the world stockpile it by the metric ton. So it wouldn’t be much of a paradigm shift for gold to become THE formal reserve asset.

In this scenario, gold would likely skyrocket to $10,000 or more.

Then there’s silver… which also has upside potential for the same reasons as gold. Silver is a precious metal too and tends to perform well in an inflationary environment.

And should gold become a formal reserve asset, silver prices will likely soar as well.

But I explained on Monday that there are other forces to drive silver higher. Greta Thunberg and John Kerry are among them.

Climate fanatics who insist on transitioning to 100% clean energy like solar completely miss the fact that producing near infinite solar panels will require unfathomable quantities of key minerals… including silver.

Because silver is an essential ingredient in the production of solar panels, these climate fanatics are creating massive, artificial demand that could drive silver prices much, much higher.

And this takes me back to the gold/silver ratio.

There’s a strong case to be made that both gold and silver could achieve significantly higher prices in the future. And each metal has its merits-- it’s not really a competition.

But at the moment, silver is priced more attractively.

Traditionally, the price of gold relative to the price of silver has been about 50:1 to 60:1; but this gold/silver ratio often fluctuates. When I traded my silver for gold back in 2011, the ratio was less than 40… meaning that gold was cheap relative to silver.

In the early days of COVID back in March and April 2020, the ratio shot up to 120:1, meaning that silver was very cheap relative to gold.

(We also published an alert to our premium members back then about how to capitalize on silver’s cheapness and nearly double their money in a matter of months.)

Right now the gold/silver ratio is hovering just below 90. That’s fairly high… suggesting that silver is pretty cheap relative to gold.

So, while there are strong cases to buy either one, at the moment, silver has a more attractive entry price. It’s worth considering.

To your freedom,  Simon Black, Founder  Sovereign Man

https://www.sovereignman.com/international-diversification-strategies/gold-vs-silver-which-is-better-right-now-148430/

Here’s An Obvious Reason To Own Silver

Here’s An Obvious Reason To Own Silver

Notes From the Field by Simon Black  November 6, 2023

By the summer of 1812, Napoleon still thought of himself as nearly invincible. He had conquered nearly all of Europe with relative ease and brought the continent’s remaining rulers under his control. He had personally lost just a single battle.  And his chief nemesis, Great Britain, had just been dragged into a new war with its former colony, the United States.

In short, things were really going his way. And the summer of 1812 would have been a great time for Napoleon to take a break, consolidate his gains, and focus on quelling internal rebellions and intrigue from within his vast, new empire.

So naturally he decided to invade Russia instead… something that no one had successfully done since Genghis Khan.

Yet Napoleon was convinced he would once again cruise to an easy victory, writing to his Foreign Minister on June 27th, “I have an army to which no modern army can be compared. . . I am in good hopes.”

Now, Napoleon was obviously a brilliant military commander, so his optimism wasn’t unjustified. He had studied other failed invasions of Russia-- like Swedish King Charles XII’s futile attempt in 1708-- so Napoleon knew that keeping his army well-supplied would be essential for victory.

That’s why he spent months preparing for his invasion of Russia. His generals stocked up on food, ammunition, clothing, medicine, etc., and staged them at key resupply points in eastern Europe.

But despite such intense preparations, they simply weren’t sufficient. Even someone as experienced as Napoleon managed to vastly underestimate the logistics and resource challenges to be successful.

And the end result was that Napoleon’s armies ran out of food. In fact hundreds of thousands of his soldiers died, many from disease and starvation. Morale plummeted. Confidence was shattered. And Napoleon’s enemies seized on the opportunity to unite against him.

It was a total disaster… and a major reason for it was failing to grasp just how difficult it would be to find enough resources-- particularly food-- to keep the operation going.

Napoleon’s ill-fated invasion of Russia is just one example of this timeless lesson from history: leaders often come up with grandiose plans and bold ideas without the slightest understanding of the resource challenges.

And one modern incarnation of this folly is the fanatical green agenda that aims to completely replace fossil fuels with renewable energy.

For argument’s sake, let’s just pretend for a moment that this is a great idea and totally worth the $100+ trillion cost, i.e. let’s assume money is no object… which is basically what the greenies believe anyhow.

Money doesn’t solve the most basic challenge of the green fantasy: where will they get all the raw materials?

Solar panels and wind turbines require a lot of resources, including basics like iron, copper, and steel. They also need some really nasty minerals, like cobalt, which are typically extracted by child labor in Africa under appalling conditions.

Wind and solar also require a host of other obscure elements like indium, terbium, dysprosium, and praseodymium; and the quantities of these minerals that will be needed to achieve renewable energy goals are far, far greater than what’s possible.

For example, producing enough solar panels to have 100% renewable energy by 2050 will require production levels of indium that are over 10x greater than exist today.

Ramping up indium production by 10x is no small feat… especially when these same green fanatics simultaneously want to cancel the mining companies.

It’s ridiculous when you think about it. They want the world to be powered by solar panels. But they want to prevent the mining of the essential minerals needed to produce those solar panels. It’s progressive logic at its finest!

This is why I opened today’s article talking about Napoleon’s attempted invasion of Russia; he failed because he underestimated the vast quantities of raw materials that would be required to sustain his armies.

Similarly, today’s green fanatics will fail because they are underestimating the vast quantities of raw materials that will be required to achieve their dream.

But that doesn’t mean they won’t try. Fanatics never let ignorance get in the way of a bad idea.

And this is what leads me to silver.

Silver is an essential ingredient in the production of renewable energy technology; simply put, you can’t make the energy grid renewable (on wind and solar, at least) without massive quantities of silver.

Every MegaWatt of power produced by solar panels requires 1 kilogram of silver, or one metric ton per GigaWatt (GW). And those may be very conservative estimates.

My colleague Gregor Gregersen, founder of Silver Bullion in Singapore, told me over the weekend that a recent study estimated up to 21 metric tons of silver will be needed for every GW of power.

Either way, green energy requires substantially more silver than is being mined right now.

And remember that silver production is already in a deficit at the moment, i.e. industrial and investment demand for silver ALREADY exceeds annual mining output.

Yet on top of existing demand, these completely unrealistic renewable energy goals will easily increase silver demand by another 3-5x.

This is a pretty clear growth catalyst for future silver prices...

To your freedom,  Simon Black, Founder  Sovereign Man

https://www.sovereignman.com/international-diversification-strategies/heres-an-obvious-reason-to-own-silver-148425/

$2,000 Gold Is Just The Beginning. Here’s What Might Happen Next-

$2,000 Gold Is Just The Beginning. Here’s What Might Happen Next-

Notes From the Field By Simon Black  November 1, 2023

Public Law 93-373 was supposed to be so boring that Congress didn’t even bother to give it a name.

You know how most laws passed by Congress have some fancy name-- like the “Inflation Reduction Act” or the “USA PATRIOT Act” or some such nonsense?

Well, on November 7, 1973, US Senator James Fulbright introduced a very short bill-- it was only ONE page-- that didn’t even have a name. But Fulbright’s unnamed bill ended up being one of the most important pieces of legislation in US history.

By the time Fulbright introduced his bill, it had been two years since the legendary “Nixon Shock” of 1971. That was when US President Richard Nixon implemented wage and price controls, and canceled the US dollar’s convertibility into gold.

Nixon famously promised the American public that there wouldn’t be any negative consequences from his actions. Yet inflation hit 3% the following year, in 1972. Then 4.7% in 1973. Then 11.2% in 1974.

Simultaneously, gold prices around the world were surging… from $35/ounce before the Nixon Shock, to more than $170 in 1974.

But individual Americans weren’t allowed to benefit from those gains thanks to a forty year old executive order that had been signed in 1933 by then President Franklin Roosevelt.

Roosevelt’s Executive Order 6102 criminalized the private ownership of more than $100 worth of gold in the United States. Roosevelt also gave Americans just 25 days to turn over their gold to the Federal Reserve… or else face up to ten years in prison.

Naturally, plenty of Americans were outraged, and a number of lawsuits were filed claiming that Roosevelt’s order was unconstitutional.

Roosevelt was rightfully worried that the Supreme Court would overturn his order. And at a certain point he considered packing the court, i.e. appointing several sympathetic judges to the Supreme Court to ensure his victory. He also considered issuing another order which would make it illegal to sue the federal government.

Fortunately for Roosevelt, however, he didn’t have to implement any of those actions; the Supreme Court very narrowly ruled in his favor, and his Executive Order stood as law of the land for four decades… until Senator Fulbright’s no-name law was finally passed on August 14, 1974.

It went into effect the following year, and Americans were suddenly free once again to exchange their rapidly-depreciating US dollars for gold.

Unsurprisingly, gold prices started rising dramatically in the second half of the decade... from about $180 in 1975, to a whopping $850 in January 1980.

And the declining dollar was just one reason for gold’s popularity; remember, the United States suffered a deluge of troubles during the 1970s and early 1980s.

The world found out that the US President was a criminal during the Watergate scandal of 1974. Then there was the humiliating US withdrawal from Vietnam in 1975, complete with a helicopter evacuation of the American embassy in Saigon.

Iran seized 52 US citizens in 1979 and held them hostage for more than a year. Inflation raged, peaking at 13.6%. The economy stagnated and fell into recession. Troubles in the Middle East (including conflict with Israel) led to energy shortages and rising fuel prices.

Civil unrest and ‘mostly peaceful’ protests were a constant problem in the 70s and 80s. Meanwhile, criminals rampaged across American cities, and the murder rate soared. Major cities like New York, LA, and Chicago became synonymous with violent crime.

The world stopped making sense. And gold became a safe haven from that chaos.

There’s an old saying (originally a Danish proverb) suggesting that if history doesn’t repeat, it certainly rhymes. And I think it’s obvious that we’re facing many of the same challenges today.

There are major problems in the Middle East. Energy is becoming scarce (especially in Europe). The US military suffered a humiliating withdrawal from Afghanistan. Civil unrest and crime rates are totally unacceptable. Inflation continues to rage. And the President, a.k.a. “the Big Guy” appears suspicious A.F.

Just like in the 1970s, gold represents a safe haven from this chaos. And even though it’s hovering at a near-record around $2,000, I think that there is still a long way for gold to rise.

The US national debt is now $33.7 trillion; that’s up more than HALF A TRILLION just in the month of October.

The people in charge have absolutely zero fiscal restraint. Zero responsibility. Zero sense of how destructive their actions are. They spend money and go deeper into debt as if there will never be any consequences, ever, until the end of time. They’re disgustingly ignorant, and dangerous.

The truth is that there are serious consequences to all of this debt. And we don’t have to guess what they are.

The Congressional Budget Office is already projecting that, by 2031, the US government will spend 100% of its tax revenue just on mandatory entitlements (like Social Security) and interest on the debt.

This means that, after 2031, the funding for literally everything else in government-- from the US military to the light bill at the White House-- will have to be funded by more debt.

That’s only 7 years away.

Then, two years later in 2033, Social Security’s primary trust fund will run out of money; this will cost the government an additional $1 trillion in additional spending each year to keep the program running. Naturally they’ll have to borrow that money too.

Eventually the national debt will become so large that simply paying interest each year will consume more than 100% of tax revenue.

The Federal Reserve will most likely attempt to bail out government by creating trillions upon trillions of dollars. But just as we saw over the past few years, such actions will most likely result in much higher inflation.

Disgusted with their financial circumstance, voters across America will likely turn to Socialist politicians who blame all the problems on the evils of capitalism, rather than their own incompetence. And with a majority of leftists running the country, they’ll only make things worse.

I also anticipate more conflict in the world, thanks in large part to the continued decline of America’s stature and reputation for strength.

It’s also quite likely that the US dollar could lose its royal status as the world’s dominant reserve currency by the end of the decade.

I don’t necessarily believe that the dollar will simply vanish from global trade. But it won’t be “King” dollar anymore. Perhaps more like “Earl” or “Viscount” dollar, alongside other currencies and exchange mechanisms-- including gold.

In fact we could easily see central banks around the world ditching their US dollars and loading up on gold as part of a new, de-dollarized global financial system.

This could potentially trigger trillions of dollars worth of capital inflows into the gold market, causing a surge in gold prices.

And these are just some of the reasons why gold could still have a long, long way to rise from here.

Bear in mind that I’m not thinking about the gold price next month, or even next year. I think long-term, and my views on gold are based on trends that will likely continue to unfold over the next decade.

I’m not a ‘gold bug’. I don’t have a fanatical view about anything other than my own children. I’m not a gold speculator either.

But it’s obvious to me that in an upside down world where there are such obvious long-term threats to the US dollar, it makes sense to look for real stores of value.

And that’s why $2,000 gold could just be the beginning of a much bigger story.

To your freedom,   Simon Black, Founder  Sovereign Man

 https://www.sovereignman.com/international-diversification-strategies/2000-gold-is-just-the-beginning-heres-what-might-happen-next-148409/

This Region Has The Highest Concentration Of Plan B Options On The Planet

This Region Has The Highest Concentration Of Plan B Options On The Planet

Notes From the Field By Simon Black  November 2, 2023

Imagine that a couple weeks ago, on a cool October day, you were suddenly transported to a small mountain town celebrating Oktoberfest.  You see red-roofed, wood-frame homes plastered against the nearby mountains, and the quaint downtown is filled with microbreweries and pastry shops offering apple strudel.

You distinctly hear a group of blond-haired blue-eyed locals speaking German, and you confidently conclude you have found yourself in a small village in the Bavarian Alps.

But that instinct would have been wrong. In actuality you would have been smack-dab in the center of Argentina, in a town called Villa General Belgrano.

The town was founded by two Germans in 1932 who loved the region’s similarity to their homeland.

We don’t know precisely why those two gentlemen decided to leave Germany in 1932. But there were obviously plenty of good reasons. Germany had recently lost World War I and been saddled with reparations debt that destroyed the economy.

Hyperinflation was rampant. And a sinister new political party called the National Socialist German Workers Party was quickly gaining power under its leader, Adolf Hitler.

With so much unrest at home, both before and after World War II, Villa General Belgrano became a haven for German expatriates.

And it was these Germans who were lucky to find refuge, not just in an accommodating country like Argentina, but in a tailor-built German enclave like Villa General Belgrano.

Their children and grandchildren were given German names, and they grew up speaking native German in the home. It became a mini-Germany in the middle of South America.

South America still has many distinct advantages as a Plan B destination.

Many of the countries are relatively neutral, meaning they don’t jump at the chance to be involved in global conflicts like those in the Middle East.

And there has never been a major land war on the scale of the two World Wars. In fact, the region’s largest war was over 150 years ago.

And the immigration laws are generally extremely welcoming to foreigners.

Obviously these countries still have their problems; Argentina in particular has serious problems with inflation, corruption, and more (though with the popularity of libertarian Presidential candidate Javier Milei, the economy may end up resurrecting itself.)

Despite the problems in the region, however, Central and South America have arguably the largest concentration of Plan B residency options available in any region today. So most people can find someplace that suits them— or even an expat enclave that seems made for them.

We’ve talked a lot recently about the benefits of having a second residency which allows you— but doesn’t obligate you— to move to another country on a moment’s notice if you ever need to.

In a recent research report we sent to our premium Sovereign Confidential subscribers, we covered residency options in 17 Central and South American countries.

Each one usually offers three different ways to qualify.

Retirees can prove they have enough Social Security or pension income to sustain themselves.

Remote workers and those with passive income, often referred to as rentistas, can prove that their foreign-sourced income is enough to support their lifestyles.

And investors can put a certain amount of money into property or a business in the country to qualify for residency.

Each country has different financial requirements.

For example, Nicaragua only requires an investment of about $30,000 to qualify for its investment visa, while Chile requires half a million dollars.

The retirement visa and rentista visas also have varying requirements.

In Peru, each new resident only has to show they have $1,000 per month of income, plus $500 per dependent.

In Mexico, it has gone up to about $3,600 for temporary residency, or $6,000 per month for permanent residency (which is generally only available to retirees without first gaining temporary status).

Also keep in mind that countries have different requirements for the time residents must spend in the country in order to maintain or renew their residency.

The good news is that some Central and South American countries have no (or very low) physical presence requirement, meaning you don’t really need to spend any time there in order to maintain your legal residency.

This makes them ideal for “backup residencies” which you would only use in case of emergency.

Another huge perk of Latin America is that most countries make it fairly easy for residents to become citizens... meaning that eventually— assuming you meet the conditions— you could apply for a second passport.

Most will allow you to naturalize in the country and become a full citizen with a passport after living there with legal residency for five years. Some, such as Argentina and Peru, will naturalize you after just two years of residency— but you would need to spend at least 183 days on the ground each year before applying.

Second citizenship is even more powerful than foreign residency, because in addition to entitling you to live and work in another country, it also provides a travel document that can open up doors all around the world.

But naturalization isn’t the only way to qualify for a second passport in Central and South American countries.

Almost all are “jus soli” or “right of soil” countries, which automatically grant citizenship to anyone born in the country.

This is a way to give your child the gift of a second citizenship by having a baby abroad. Plus it can fast track the parents’ timeline for naturalization.

For example, foreign parents of babies born in Mexico are eligible for immediate permanent residency, and their naturalization timeline shrinks to just two years.

Brazil is another good option. Having a baby in Brazil grants the child citizenship, and the parents permanent residency. Plus the parents can apply for citizenship in just one year, instead of the usual four years. (You’ll have to spend at least six months— and ideally more— physically present in Brazil in order to qualify to apply for naturalization.)

If you include Caribbean nations, then this region of the world offers yet another pathway to a second passport— citizenship by investment, for which several Caribbean nations are famous.

Unfortunately gaining citizenship through ancestry, which is a common option for those with European descent, is not available in any South or Central American countries.

But especially for US residents, who may be located closer, or at least in the same time zone to many of these Central and South American countries, it is worth understanding what they have to offer.

Because a good Plan B is one you can execute on a moment’s notice. You don’t want to start thinking about your options while packing your suitcase.

To your freedom,  Simon Black, Founder  Sovereign Man

https://www.sovereignman.com/international-diversification-strategies/this-region-has-the-highest-concentration-of-plan-b-options-on-the-planet-148414/

This Easy Step Is An Essential Part Of Any Plan B

This Easy Step Is An Essential Part Of Any Plan B

Notes From The Field By Simon Black  October 26, 2023

Sigrid Paul was living in East Berlin in 1961 when she gave birth to a beautiful baby boy.  Unfortunately, though, her son was born with major health problems... and Sigrid had to seek out the best possible medical care to treat him.  This was more than fifteen years after World War II, and Germany had already been split between East and West for more than a decade.

Unsurprisingly, the capitalist West had substantially higher quality healthcare than the socialist East (which was really just a Soviet puppet state). In fact, the West had higher quality everything... and that’s why over three million East Germans defected to the West between 1945 and 1961.

By the early 1960s, the Soviet Union was desperate to stop the drain of talent and workers from East Germany. It was an embarrassment for them. So they slowly ramped up ‘people controls’ to keep the population of East Germany within its socialist utopia.

They started with more vigorous border check points, exit visas, “papers, please”, etc.

Many East Germans started to become anxious about what might come next, and whether they would continue to be able to travel to the West... including Sigrid Paul. She had been traveling to West Berlin regularly for her son’s medical care, and she was worried about being trapped.

But in June of 1961, the leader of East Germany set everyone’s mind at ease when he publicly proclaimed, "No one has the intention of erecting a wall."

East Germans were comforted. Their government made them a promise that everything would be OK, so they stopped worrying. And Sigrid took comfort that she would continue to be able to access West German medical care.

But that all changed when residents of East Berlin awoke on the morning of August 13, 1961 to find a barbed-wire fence and concrete barrier erected between East and West Berlin... not to mention armed soldiers backed by the Soviet Union.

Sigrid panicked. She and her son were instantly cut off from medical care.

Fortunately, a group of East German doctors were able to falsify certain medical records and transport the boy to the West, saving his life.

But Sigrid was not permitted to go with him. Soviet bureaucrats forced her to remain. And when she was caught planning an escape to be with her son, she was arrested and served four years in prison.

If Sigrid had taken the risk seriously, she could have simply walked across the border to the West and started a new life there... when the option was still available. But like so many others, she ignored the obvious warning signs and believed the experts who told her that everything would be OK.

As a result, she was separated from her son and lived under a totalitarian regime until it finally collapsed in 1989.

Sigrid’s story is obviously an extreme case. But at its fundamental core it is a theme that is very common among human beings.

Most people are optimists who suffer from a bad case of normalcy bias. We really want to believe that tomorrow will look very much like today. And even when there are really bad warning signs flashing, our optimism and normalcy bias cause us to ignore the risks.

That’s especially true when our leaders make expert proclamations. And we’ve certainly seen our share of those:

Ten days to stop the spread. Silicon Valley Bank is safe. The Taliban won’t retake Afghanistan. No one will touch your Social Security. The debt doesn’t matter. Deficits don’t matter. America can afford two wars.

The list goes on and on.

For example, as I mentioned earlier this week, by 2031, US tax revenue will not even cover mandatory entitlement spending (like Social Security) and annual interest payments on the national debt.

This is according to the Congressional Budget Office, i.e. a US government agency.

You can practically circle a date on your calendar for a major financial crisis: 6 years, 11 months, 26 days from now.

To think that this doesn’t pose a huge risk to prosperity and stability within the United States is beyond delusional.

Meanwhile, civil unrest already seems to ignite on the streets across the US at the slightest provocation. Crime is at ridiculous levels. Imagine what this will look like when real economic pain hits.

In the face of such obvious risks, it makes a lot of sense to have a backup plan.

And one crucial aspect of a Plan B is having another place to go, where you are entitled to live, work, and raise a family.

That’s what gaining a second residency can do for you.

Obviously no place is perfect. But having a second residency abroad means that you’ll always have another place to go... another option. And more options means more freedom, more safety, more diversification, less risk.

Generally there’s zero downside in having this benefit. And there are plenty of different ways to do it:

For example, Golden Visas are popular residency programs in European countries such as Portugal and Greece. In exchange for an investment, you get an easy residency without burdensome requirements to spend a large amount of time on the ground in the country.

In Greece, the option to invest in real estate worth at least €250,000 (which you could use personally or rent out) is still available. Portugal recently scrapped its property investment option, but you could still get its Golden Visa for as little as a €200,000 investment in a cultural heritage project.

That’s actually another reminder to act while the offer is good— the best options don’t last forever.

But if you don’t want to spend that kind of money, there are plenty of residencies available to those who can simply prove they receive a certain amount of retirement, investment, or employment income.

Mexico and Costa Rica are examples of popular options for Americans, because of their proximity to the US and relatively low criteria to qualify.

In Mexico, retirees can gain permanent residency with an income of about $6,000 per month, or by showing about $240,000 worth of investments and bank balances. Qualifying for temporary residency is easier, and only requires an income of about $3,600 per month or balances of $60,000. (That’s about double the price from a couple years ago due to the strengthening of the peso— yet another reminder to act sooner rather than later.)

Costa Rica only requires a monthly income of $1,000 for retirees and $2,500 for remote workers, or an investment totaling $150,000 in various categories including real estate, business, or even vehicles.

Then there is Panama, which offers paths to residency for retirees and through a Golden Visa.

Retirees only need an income of $1,000 a month, through a pension or Social Security, to qualify for Panama’s pensionado visa.

Or a $200,000 investment in real estate could allow nationals of “Friendly Nations Treaty” countries, including the US, Canada, and many European countries, to gain residency in Panama. (For others, the Golden Visa requires a $300,000 investment).

I had the opportunity to look at some real estate in Panama when I was there a few months ago, and let me tell you, $200,000 goes a lot further there than in the US.

Of course these are far from your only options. The point is that there are plenty of accessible ways to gain a second residency in a country of your choosing.

And that is a pretty sensible thing to do given all the risks on the horizon.

To your freedom,  Simon Black, Founder  Sovereign Man

https://www.sovereignman.com/international-diversification-strategies/this-easy-step-is-an-essential-part-of-any-plan-b-148395/

Congress Forecasts America’s Fiscal Train Wreck For 2031. Here’s How A Plan B Can Help

Congress Forecasts America’s Fiscal Train Wreck For 2031. Here’s How A Plan B Can Help

Notes From the Field By Simon Black  October 24, 2023

Yesterday I wrote a comprehensive explanation of the extreme fiscal catastrophe that the US faces thanks to the federal government’s relentless spending addiction.

I wrote, for example, that the US national debt is now $33.6 trillion… and it has increased more than HALF A TRILLION DOLLARS just so far this MONTH. Astonishing.

And it’s a pretty safe bet that the US government will continue its wild spending spree.

I’m not being pessimistic when I say that. In the last fiscal year which just ended a few weeks ago, a whopping 83% of US tax revenue was spent JUST on Social Security/Medicare, the military, and interest on the national debt.

And spending on those three programs is probably not going down.

Does anyone honestly think that a majority of politicians in Congress will slash defense spending at a time like this? Or eliminate Social Security? Or default on the national debt?

Those three spending items can’t really be cut. In all likelihood they will INCREASE.

Given all the conflict in the world, US defense spending will probably grow. Social Security spending is already scheduled to increase according to the program’s own published forecasts.

And, considering how quickly the national debt is rising-- coupled with higher interest rates-- annual interest payments will skyrocket.

This means that spending on Social Security, military, and interest, will likely increase from 83% of tax revenue, to ONE HUNDRED PERCENT of tax revenue, over the next several years.

America will have to go into debt to fund everything else in the federal government, from Veteran’s Benefits to Homeland Security.

But don’t take my word for it. Even the Congressional Budget Office (CBO), which is a government agency of the United States Congress, agrees.

The CBO’s most recent 10-year forecast shows that mandatory entitlement spending (like Social Security) plus annual interest payments on the national debt, will EXCEED all US federal tax revenue by 2031. And that doesn’t even include defense spending!

This reality is only SEVEN YEARS AWAY.

Yet if that train wreck weren’t enough, remember that Social Security’s key trust fund will also run out of money two years later in 2033, according to the program’s most recent annual report. And bailing out Social Security will cost trillions of dollars just to get started.

So, just to be clear, the government’s own projections show that they will reach the fiscal point of no return in just seven years… and then require a multi-trillion dollar bailout of Social Security two years later.

Yet as grim as that timeline may be, these government forecasts also naively assume that there will be no major war, pandemic, or national emergency in the meantime. So in reality the doomsday may be much closer.

I’m not being dramatic or sensational. Again, I’m literally citing US government forecasts.

But is this cause for panic? Absolutely not.

Now, of course there will be major consequences.

For example, a lot of politicians will tragically find themselves out of work… but there won’t be any money available to pay them unemployment benefits. The government will shrink considerably, and legions of bureaucrats will have to find productive jobs in the private sector.

People who depend on government handouts will no longer have a generous sugar daddy to take care of them. Bankrupt state governments won’t be able to rely on federal bailouts anymore and will have to start acting responsibly.

Clearly a lot of these consequences will be good.

But at the same time, it’s important to acknowledge that millions of unsuspecting people will have their lives turned upside down from the negative consequences.

Social Security is in serious trouble; 50+ million people are at risk of having their benefits slashed by 2033.

There’s also a very high likelihood that the Federal Reserve will start cutting interest rates and printing money again in order to bail out the federal government… thus creating a LOT more inflation.

Taxes will almost certainly rise. Crime could definitely increase, especially petty theft and robbery. And business conditions could be a lot more difficult; it will be harder to raise capital, harder to borrow, and harder to sell, causing a number of companies to either fail, or to never be started in the first place.

There are definitely serious, serious consequences ahead. But it’s important to keep a level head: the United States is not going to fall into the ocean and cease to exist.

Even under much more difficult conditions, the United States will still have a massive, diversified economy and extraordinary talent pool. The brilliant entrepreneurs, engineers, and professionals across America won’t suddenly become dumber just because the currency loses value, or because the Department of Commerce is eliminated.

There will always be substantial opportunity for talented, independent-minded people to become successful. And this has been the case for virtually all of human history.

Nations and empires have been going broke for thousands of years. Currencies have been debauched for just as long.

But people who understood these risks have typically been able to position themselves for success… and to mitigate the risks in their own lives.

Today this is even easier to do. And that’s really what’s at the core of having a Plan B.

The idea of a Plan B is to form a rational view of obvious risks, and then take sensible steps to reduce their impact… or even benefit from them.

For example, if Social Security forecasts running out of money by 2033, it makes sense to spend the next several years setting aside more money for retirement in the most flexible and robust structure you can establish.

Fortunately, such structures exist-- like a solo 401(k).

If it’s a near certainty that taxes will rise, there are plenty of legal ways to reduce what you owe. And you can use the tax savings to set aside more money for your retirement, which feeds back into the suggestion above.

If crime rates spike and civil disturbances become more frequent, it makes sense to consider having another place to go for you and your family to be safe. That might be somewhere overseas in a country where you enjoy visiting and your kids could pick up foreign language proficiency.

It might even be a place where you could one day become eligible to apply for a second passport, creating a lifetime of benefit and flexibility for your entire family.

If the value of the US dollar is going to decline… and the rest of the world seems likely to find a replacement as the dominant reserve currency… it makes sense to find alternative assets that can hold their value over time.

Having a Plan B isn’t about doom and gloom pessimism. It’s a completely rational way to approach the obvious problems in the world… while acknowledging that there’s still tremendous opportunity ahead.

Simon Black, Founder  Sovereign Man

https://www.sovereignman.com/international-diversification-strategies/congress-forecasts-americas-fiscal-train-wreck-for-2031-heres-how-a-plan-b-can-help-148390/     

Six Predictions From The Last Week’s Horrific Treasury Report

Six Predictions From The Last Week’s Horrific Treasury Report

Notes From the Field By Simon Black   October 23, 2023

By the time Philip II ascended to the throne of Spain in the year 1556, the empire he inherited from his father was already the most dominant superpower in the world.

Spain had a formidable military, and its famous naval armada struck fear in the hearts of its adversaries.

Spain also held vast colonies across the Americas, Africa, and Asia that produced unimaginable wealth; just one single mine in Bolivia-- Cerro Rico-- was so abundant that it has produced more silver than any other mine in history. And it still operates to this day.

Spain must have seemed invincible back then. And Philip II probably thought his Empire’s dominance would last forever.

And yet less than 100 years later, Spain had succumbed to the same historical fates that have caused ALL empires to decline.

Decades of bad decision making. Corruption. Bureaucracy. Inflation. Endless and costly warfare. Idiotic decrees that restrain economic growth. Chasing away productive citizens and businesses.

Excessive spending. Excessive debt.

Debt, in fact, was such an enormous problem for Spain that its kings had to default on their debts multiple times.

Empires are extremely expensive to maintain. Governments have to become bloated and costly. Administering colonies requires a lot of money. Military expenditures skyrocket.

And Spanish kings didn’t exactly hold back when it came to spending on lavish courts and luxuries.

So even though Spain should have been immensely wealthy, it was actually taking on a mountain of debt.

It’s almost incomprehensible how a nation with so much income and so many resources could have squandered its wealth.

Yet we’re seeing the same phenomenon play out in real time in the United States, for many of the same reasons as the Spanish Empire’s decline. And it’s even more incomprehensible.

Like Spain, the US was once the clear, dominant leader in the world, synonymous with wealth and power. But decades of war, excessive spending, debt, etc. have taken a toll.

A few days ago the final numbers for the US government’s Fiscal Year 2023 were published. (Remember that the Fiscal Year runs from October 1 through September 30, so FY23 ended a few weeks ago.)

The numbers are absolutely atrocious… and an obvious sign of America’s fiscal decline.

I’m not saying this to be sensational. I’m saying this because it’s a cold, hard fact. You cannot sugarcoat a $2 trillion annual increase in the national debt-- which is what the numbers show.

What’s really concerning about this, however, is how little the people in charge seem to care.

The President of the United States is so clueless that he doesn’t even understand the difference between the national debt, versus the annual budget deficit.

He’s also so clueless that he even claimed as recently as two weeks ago that the government is running a budget surplus. It’s obviously not.

(Notably, the Big Guy also claimed that “Americans know they are better off financially than they were before. It’s a fact.”)

He’s totally wrong, of course… as evidenced by the national debt having increased $2 TRILLION for Fiscal Year 2023.

It’s worth noting that the national debt has already increased more than $500 BILLION just so far this MONTH. So this addiction to debt and spending does not seem to be abating anytime soon.

Treasury Secretary Janet Yellen-- who was formerly the head of the Federal Reserve-- went so far as to say that America “can certainly” afford to fund two wars at the same time, i.e. both Ukraine and Israel. There’s simply no instinct for restraint.

Then there are lawmakers like AOC who believe that deficits don’t matter, and that “we should eliminate the debt ceiling in the United States because of the Constitutional reasons…”

Yet despite sounding like an inarticulate buffoon every time she opens her mouth, AOC is representative of an entire movement of prominent economists and PhD ‘experts’ who similarly believe that deficits and debts are irrelevant.

Nobel Prize winner Paul Krugman has said in the past that the US national debt is simply “money we owe to ourselves” therefore no one should really worry too much about it.

(Coincidentally, Krugman wrote those words in February 2015 when the national debt was ‘only’ $18 trillion. Today it’s almost twice that level.)

Well, Krugman is completely wrong, and the facts are clear.

Out of the $33.6 trillion national debt, it’s true that roughly $7.1 trillion of that is owned by different agencies and departments within the federal government. I suppose that’s the “we” that people always refer to when they say “we” owe the debt to “ourselves”.

But nearly ALL of that $7.1 trillion is owned by Social Security and government retirement programs for its civilian and military personnel. Other programs like the FDIC, US Post Office, and the federal unemployment office also own a lot of US government bonds.

So the argument that ‘we owe the debt to ourselves’ absurdly presumes that it’s OK to default on Social Security… or military retirement obligations… or the FDIC.

Well, such a default would trigger a massive financial and social crisis in the Land of the Free, and few politicians are willing to go down that road.

$7.7 trillion of the national debt is owed to foreign nations. And nearly all of those bonds are owned by countries who are flat broke (like Japan) or who are major adversaries of the United States (China).

This is pretty important, because it means that those countries will be less and less likely to buy and own US government debt in the future. More on that below.

The rest of the US national debt, roughly $18.8 trillion, is owned mostly by large businesses, financial institutions, money market funds… plus state and local governments.

Money market funds, pension funds, and retirement funds own trillions of dollars of government bonds. Apple owns about $25 billion of US government bonds. Bank of America owns $200 billion.

It’s not like the US can default on the city of Chicago or the State of California. Or pension funds that manage the retirement assets of millions of Americans. Or big banks.

As I wrote last week, Bank of America has already suffered more than $107 billion in losses from its ownership of US government bonds (and related securities). If the Treasury Department decides to not pay its debts-- because, you know, ‘we owe it to ourselves’-- then nearly every bank in the US would be wiped out.

Again, none of these is a crisis that any politician wants to trigger. So not only is ‘we owe it to ourselves’ completely incorrect, but it also doesn’t even matter. Failure to make payments on the national debt would be catastrophic.

Now, according to the most recent Treasury Report, the federal government spent a whopping $879 billion on interest payments in FY23. But that’s with an average interest rate below 3%.

Interest rates have now passed 5% and may be headed higher.

So, fast forward a few years when the national debt could exceed $40 trillion and average interest rates reach 5% or more. That would mean potentially $2 TRILLION per year, just to pay interest.

To say this is unaffordable would be an outrageous understatement.

Because on top of all this debt drama, the US government’s tax revenue is also sagging. Total FY23 tax revenue was $4.4 trillion. And that’s down from nearly $5 trillion the year before.

Just do the math: interest costs on the national debt are spiraling out of control at a time when tax revenue is falling. It’s not a pretty picture.

And based on this scenario, I’d humbly make a few predictions:

1) The Federal Reserve will reverse course and start cutting rates.

This might not happen right away; the Fed seems far more concerned right now with appearing like they’re in control and know what they’re doing. But no Fed Chairman wants to preside over the bankruptcy of the United States.

So the Fed will have to cut rates and start printing money again in order to save the federal government, as well as the banking system, Social Security, and more.

2) This will lead to more inflation.

With the Fed creating so much money-- trillions of dollars at once-- the US economy will suffer the same predictable consequences as it did in 2021 and 2022: inflation.

3) And a loss of confidence in the dollar

Higher inflation coupled with outright government dysfunction has already caused much of the world to seek alternatives to the dollar. Another bout of inflation, plus potentially several more years of incompetence will probably be enough to reset the dollar-centric Bretton Woods system once and for all.

4) Foreign nations will stop investing in US government bonds

With the dollar no longer at the center of global finance, foreigners (presently $7.7 trillion) will no longer have the same incentives to own US debt. This means that one of the US government’s major funding sources will dry up, leaving politicians scrambling to find money.

5) Politicians will demand new and higher taxes.

With foreigners no longer buying US government bonds at the same pace, politicians will try to raise tax revenue. Expect wealth taxes, higher income taxes, green taxes, and even windfall profits taxes on certain assets and income like crypto, gold, oil profits, etc.

6) Many Americans will move further left

Politicians and their media allies will insist that capitalism has failed… and rescuing the nation from this hardship will require bigger government and more intervention. Sadly, millions of people will believe them, and a new wave of socialism could rise.

I’m not suggesting that this outcome is imminent. Or even certain.

It could still take several years for these issues to unravel. And I’ve written before that America’s challenges are still fixable… however the window of opportunity is narrowing quickly.

It’s also true that other rival powers like China have their own critical challenges. But this is irrelevant; other nations’ challenges don’t eliminate the seriousness of America’s.

We can certainly hope that the West will put itself back on course. But as we used to say in the military, ‘hope is not a course of action’. And it’s for this reason that it makes so much sense to have a Plan B.

Simon Black, Founder  Sovereign Man

https://www.sovereignman.com/trends/six-predictions-from-the-last-weeks-horrific-treasury-report-148384/?inf_contact_key=5262c3fb464593684651872953dbb17cd18a532c4142cb79caf2b269de1401fa

This Strategy Cuts the Tax Bill of American Entrepreneurs in Half

This Strategy Cuts the Tax Bill of American Entrepreneurs in Half

October 18, 2023  Notes From The Field By Simon Black

 One of the many Orwellian habits of politicians is give cute acronyms to their idiotic legislation.

The CARES Act from 2020, for example, stood for “Coronavirus Aid, Relief, and Economic Security”.

The CARES Act was one of the most destructive pieces of legislation in US history; it paid people to stay home and NOT work, which decimated the US labor market. And it also cost tax payers hundreds of billions of dollars in fraud from the “Paycheck Protection Program”.

But, hey, at least the CARES act shows that they care.

Another ridiculous acronym is the GILTI tax, which stands for Global Intangible Low-Taxed Income. It’s supposed to be pronounced “GUILTY”, which is completely absurd.

First, let me give you some background.

Most countries around the world impose RESIDENCY-based taxation, i.e. you generally only pay taxes if you live in that country. If you move away, you don’t have to pay tax there anymore.

Even high-tax countries like France don’t tax their citizens who leave France. So if a French citizen moves to Singapore or Costa Rica, he/she no longer pays most French income taxes.

The United States is almost unique in the world in that it imposes citizenship-based taxation, requiring US citizens to file and pay federal taxes… even if they move overseas.

Until recently, however, this same rule did NOT apply to US companies; for decades, US companies could ‘move’ overseas, i.e. establish foreign entities in low-tax jurisdictions around the world. And those low- or no-tax foreign entities would not owe any tax in the US.

Enormous companies like Apple, Google, and Facebook famously all took advantage of this benefit by planting their tax flags in low-tax jurisdictions like Ireland or British Virgin Islands.

Doing so saved these companies tens of billions of dollars in taxes, much to the ire of politicians who think they know how to spend everyone’s money better than we do.

So, in 2017, politicians finally changed the law. And US companies who own foreign companies in low-tax jurisdictions became subject to this new GILTI tax… because that’s precisely how the government wants you to feel about reducing your tax bill: guilty.

Of course this is ludicrous. No one should feel guilty for following the government’s own rules to legally reduce their tax bills.

After all, politicians don’t exactly spend your money responsibly, wisely, or oftentimes even ethically.

We’re always told that we should voice our discontent with government in the voting booth. But if we’re being intellectually honest, elections have rarely made things better.

If you really have a problem with the way that incompetent politicians spend your money, then a far better approach is to use their own rules to minimize the amount of money you have to pay them. Simple.

And, ironically, the “GILTI” tax actually presents an interesting strategy to reduce taxes, especially for entrepreneurs and business owners in the Land of the Free.

That’s because, instead of actually punishing or forbidding the ownership of low-tax foreign companies, GILTI inadvertently ENCOURAGED it.

In the past, a US business could set up a new company, along with a tiny office, in a place like the British Virgin Islands where the tax rate is 0%.

All of the employees were still in the US and employed by the US company. All of the work was being done in the US. But all of the revenue, and all of the profit, was being booked by the British Virgin Islands company.

The net result was that the US business, through its BVI company, paid 0% tax.

The one catch was that all the money essentially had to stay in the BVI. If the BVI company paid any of its profits back to the US business, there would be substantial tax to pay.

GILTI changed all of that.

The new rules still allow US businesses to own foreign companies. But now, whenever the foreign companies generate a profit, those foreign profits are immediately taxable in the United States.

Bizarrely, though, the foreign companies’ profits are entitled to a 50% tax discount. Since the current corporate tax rate in the US is presently 21%, this means that foreign profits are taxed at 10.5%.

Now, 10.5% is obviously a lot more than 0%.

But the key benefit of the GILTI rules is that a US business can bring in ALL of its foreign profits, immediately, at the discounted tax rate.

Once that money is in the US, it can be plowed back into the business, or invested in a variety of other asset classes, including stocks, real estate, etc.

Clearly there are a multitude of additional rules and details to understand-- I’ve only provided a very high-level overview; and anyone considering this approach should seek professional tax advice.

For example, this structure is more difficult to implement for brick-and-mortar businesses… though it is especially compelling for online-based businesses, including drop-shippers.

The larger point is to show that there are so many completely legitimate ways to save a lot of money in your annual tax bill. And that’s nothing to feel gilti about.

Simon Black, Founder   Sovereign Man

https://www.sovereignman.com/international-diversification-strategies/this-strategy-cuts-the-tax-bill-of-american-entrepreneurs-in-half-148367/

Silicon Valley Bank Part II Starts Tomorrow At 6:45am

Silicon Valley Bank Part II Starts Tomorrow At 6:45am

Notes From the Field By Simon Black  October 16, 2023

It’s been seven months now since Silicon Valley Bank went bust. And so much has happened in the world since then that SVB’s collapse almost feels like ancient history.  But something is going to happen tomorrow-- at precisely 6:45am Eastern time-- that could rekindle anxiety in the banking system once again.

And it’s not hard to understand why; the problems in the banking system… the problems that brought down Silicon Valley Bank and others… didn’t go away. In fact they got worse. And now several other large US banks are getting dangerously close to the edge.

This is not hyperbole. I’ll explain:

Remember that Silicon Valley Bank failed because they suffered sudden, massive investment losses… losses that were so large that the bank’s entire capital was wiped out.

And yet Silicon Valley Bank’s hyper-destructive investment wasn’t toxic subprime loans, or some exotic derivative. SVB went bankrupt because they loaded up on US government bonds.

US government bonds are supposed to be THE safest asset class in the world. Yet even supposedly ‘safe’ assets can lose money. And government bonds have suffered enormous losses over the past two years.

The reason is pretty simple: interest rates. Back in the summer of 2020, interest rates were at historic lows. And if you don’t know anything else about bonds, just understand that whenever interest rates rise, bond prices fall.

Banks like SVB bought tons of US government bonds back in 2020 and 2021 when interest rates were at historic lows. So, put another way, banks paid record high prices to buy government bonds.

But starting in 2022, the Federal Reserve started to raise interest rates. And with each successive Fed interest rate hike, bonds became worth less and less.

Silicon Valley Bank’s bonds eventually lost so much money that the bank was wiped out.

The $500 billion dollar problem in the US banking system, of course, is that Silicon Valley Bank wasn’t alone. In fact MOST banks bought government bonds… which means that MOST banks have racked up enormous losses over the past few years.

And the bank that has racked up the worst losses of all… is Bank of America, which reports its quarterly earnings tomorrow morning at 6:45am.

Now, Bank of America has done its best to hide its losses. And they use a completely legal accounting scam to do it.

In short, banks have a quirky option in the way that they classify their bonds; one way is to classify their bonds as what’s called “Available for Sale”, or AFS.

This classification means that if the bank ever needs to come up with some quick cash, they can sell AFS bonds at any time. AFS bonds are literally available for sale, as the name suggests.

The other classification is called “Hold to Maturity”, or HTM. Bonds designed as HTM cannot be sold. Instead, the bank must hold its HTM bonds for their full duration.

So if a bank buys, say, a 30-year Treasury bond and classifies it as HTM, the bank has to hold that bond for the full thirty years. They cannot sell it.

While such accounting vagaries might not be especially thrilling, I assure you that the distinction between HTM and AFS is critical in understanding the scam that’s taking place.

Banks traditionally used to classify the vast majority of their bonds as AFS. And this made sense; AFS is the most flexible classification. AFS gives banks the option to either sell the bonds, or hold them. HTM bonds, on the other hand, cannot be sold and MUST be held to maturity.

And that’s why, back in 2015 for example, Bank of America classified a whopping 83% of its bonds as AFS, and only 17% as HTM. And that ratio was pretty typical of most big banks.

But the nuance of AFS is that, if the bonds lose value, banks have to report those losses… and the bond losses negatively impact their earnings.

In the past, this never really happened. Bond prices were exceptionally stable. And aside from minor fluctuations, banks never really had to report big losses on their bond portfolios. Until now.

Government bonds have lost 23% of their value since 2020 due to the Fed’s interest rate hikes, creating hundreds of billions of dollars of losses for big banks.

A 23% loss for US government bonds is unprecedented, and it’s never happened in modern financial history.

If banks were holding most of their bonds as AFS, like they traditionally used to do, they would have to report these huge losses. And that would be devastating for their earnings, for their stock prices, and for their executive bonuses.

So instead of reporting those losses, the banks have magically reclassified their bonds from AFS to HTM.

Unlike the AFS classification, banks don’t have to record any losses on their HTM bonds. So reclassifying bonds from AFS to HTM is like pretending that hundreds of billions in losses don’t exist.

Bank of America, for example, has at least $100 billion in bond losses, potentially much more. But because they’ve reclassified most of their bonds as HTM, those losses haven’t adversely affected their capital, or their earnings.

Remember when I said that Bank of America used to classify a standard 17% of its bonds as HTM? Well, today, 83% of their bonds are now HTM. It’s a HUGE difference.

And the ONLY reason why they would do this is to avoid recording $100+ billion in losses.

Bear in mind that Bank of America only has around $200 billion in total capital. So if they were honest in their accounting, they’d have to write down roughly HALF of their capital. Maybe more.

This is becoming eerily close to another Silicon Valley Bank problem.

Granted, the market happily ignored Silicon Valley Bank’s financial woes until it was too late. And I’m guessing that, tomorrow morning, the market might also choose to ignore Bank of America’s growing bond losses. For now.

But this problem cannot be ignored forever. And it’s a pretty clear example of what’s known in finance as a “Gray Rhino”.

You’re probably familiar with the famous “Black Swan” metaphor, which refers to a highly improbable, difficult-to-predict event that has a major, negative impact.

The COVID-19 pandemic was an obvious Black Swan event.

The metaphorical opposite of a Black Swan is known as a Gray Rhino-- an event that is fairly likely and should be easy to predict.

Gray Rhinos don’t sneak up on you; visible evidence builds until the risk becomes completely obvious.

And yet, Gray Rhinos are almost always ignored… typically because people have confidence in flawed systems, illogical axioms, or historical legends.

The world is full of Gray Rhinos that very intelligent people choose to ignore. America’s national debt crisis is a Gray Rhino. Social Security’s looming insolvency is a Gray Rhino. The US dollar’s loss of reserve status is a Gray Rhino.

These are all obvious risks that hardly anyone acknowledges. Instead, people have rejected simple arithmetic and clung to an irrational belief system based on the historical legend of America.

Major banks in the US have suffered more than $500 billion in bond losses, wiping out a substantial portion of their capital. Despite some banks’ attempts to cleverly hide those losses with accounting tricks, the problem is obvious.

By the way, this same problem has affected the FDIC-- whose Deposit Insurance Fund is invested primarily in US government bonds… and has hence also suffered massive losses.

It’s also affected the Federal Reserve, which now has roughly $1 TRILLION in losses from its bond portfolio.

(Ironically, many smaller banks are now MUCH safer; smaller banks are typically much more responsible with their depositors’ savings, and so they haven’t suffered the same types of losses.)

This is a Gray Rhino. But unlike other Gray Rhinos like the national debt, the US dollar, and Social Security which may still be a few years from erupting, this banking Gray Rhino might rear its head much, much sooner.

To your freedom,  Simon Black, Founder  Sovereign Man

https://www.sovereignman.com/trends/silicon-valley-bank-part-ii-starts-tomorrow-at-645am-148358/