What’s Going on with Money Printing?
At the time of writing this article, newly minted president Joe Biden has announced another stimulus package in the amount of $1.9 Trillion dollars. Trillion with a Capital T! A Trillion dollars (let alone almost 2) is a freaking lot of money. A Trillion dollars is ONE THOUSAND ‘Billion Dollars! In 2020, the United States alone spent Trillions (>$4Trillion) in Covid-19 Spending & Tax Relief. The Spending is getting out of control.
Maybe you don’t live in the US and this won’t affect you? Unfortunately, this is a global phenomenon. Canada is actually worse, as they have spent a higher % of their GDP on stimulus. Now, to clarify, this article isn’t here to debate the merits of stimulus. We are living in strange times, and arguably the stimulus is needed to help people in need. Frankly there isn’t any alternative to stimulus. The fact is its happening and will continue to happen for the foreseeable future. In the US alone, President Biden could stimulate possibly up to $8-9 Trillion in 2021.
Where the heck are these governments getting all of this money from? Great question! The answer is they are printing it…out of thin air. They don’t even use physical printers to print the money anymore, they print it digitally. As an example, in 2020 (fiscal year 2020 that ended on September 30, 2020) the US spent around $6.5 Trillion in total government spending. However, the revenue the United States made was way $3.4 Trillion, and thus, resulted in $3.1 trillion added to their national debt. Take a look at this chart as the US Federal Deficit as a % of GDP.
It’s falling off a cliff. They are spending money (that they don’t really have) like there is no tomorrow! As a refresher the US and Canada have already dropped interest rates to zero in 2020. You can’t have high interest rates when you are borrowing record levels of debt after all.
So what does all of this money printing and stimulus mean and how does it affect me? Great question Mr/Mrs reader. It usually means that inflation is right around the corner. Inflation is the decline of purchasing power of a given currency over time. Another way to look at it, it takes more money to buy things today than it did the year before. The more money that is out there, the less value that the existing stock (supply) of money has. When you have a big debt pile (see charts above), inflation is good for governments, because as the value of the dollar decreases, so too does the value of the massive debt pile they have accumulated. The other thing, printing new money/ stimulus is far easier than the alternative, which is a full-blown deflation, crashing markets and a subsequent depression. In a depression, prices of everything falls and the purchasing power of the dollar/ currency actually goes up, which encourages savings and having cash. Why buy a car today (if you had the money), when I can buy a car next year for less money. Governments don’t like this (see GDP deficit picture above again!). They prefer inflation and for you to spend your savings.
If I was running a government and these were my two options (inflation vs depression), I’d probably also take the lesser of two evils, which is the money printing. The point is, the governments don’t really have a choice! THERE IS NO ALTERNATIVE TO MONEY PRINTING. I’ll say that again, there is no alternative. In 2008 the US stimulated over the great recession to the tune of $787 Billion dollars. Since the COVID crash, the number (if you count Biden’s new $2.1T) announcement is over $6T, probably closer to $8-9T. Close to 10 times the stimulus needed in 2008. The point I’m trying to make is this funny money isn’t solving the problem. Every decade they have to step in with more and more stimulus, with diminishing efficacy of said stimulus. It’s like a drug addict who has development an immunity to the drug. The Solution! Give the addict MORE DRUGs! And like an addict they CAN’T STOP (printing money that is).
Hugo Stinnes
This brings us to Hugo Stinnes. You see, history doesn’t repeat itself, but it often rhymes. Runaway inflation has happened before. Sometimes printing and spending money like there is no tomorrow has consequences. It happened in Weimar Germany (in the 1920s), it happened in Venezuela and in Zimbabwe. There are cautionary tales throughout history which illustrate the consequences when too much money gets printed.
Enter Hugo Stinnes. Hugo Stinnes, born in Germany in 1870, was a German industrialist who emerged after World War 1 to become the richest man in Germany in the early 1920’s. Hugo Stinnes was known as the ‘Inflation King’ of Germany.
For reference, whenever I say ‘Inflation King’, I am saying the words with a ‘Sausage King of Chicago’ accent from Ferris Buellers day off. In the early 1920’s Hugo Stinnes was the wealthiest man in Germany. As a quick history refresher, Weimar Germany suffered terrible hyperinflation in the 1920’s. It was really bad in 1922 and 1923. See the value of one gold mark in paper marks.
Hyperinflation causes the currency to become essentially worthless. Most people lose a lot of money during hyperinflationary events (because your savings and your purchasing power become less and less). You are punished for saving money in your bank account like a responsible person. What’s interesting about Hugo Stinnes is during this hyperinflation his wealth grew and grew a lot. It grew so much that he became the Richest man in Germany.
Hugo Stinnes came from a Family that owned a coal mining plant, so his family had some funds as a starting point. But how Hugo became the wealthiest man in Germany came from his borrowing of money and allocation of said money to hard assets. Prior to the hyperinflation, Hugo Stinnes borrowed large amounts of money in Germany’s native currency (the German Papiermark ‘Paper Mark’).
As the chart illustrates the value of the Paper Mark started to really lose its value around 1921 and proceeded to get exponentially worse for several years. He used the borrowed money to expand his family’s business and diversifying into shipping and cargo lines (to transport his coal) as well as Steel and other hard assets. When the hyperinflation hit, the value of the Paper Mark money he borrowed was worth less and less (when it came time to pay back) and the hard assets he owned (precious metals, real estate, infrastructure vehicles) all increased in value, relative to the declining German Paper Mark. Hard assets don’t lose their value during hyperinflation the same way that the native currency does. On one hand Hugo Stinnes’s hard assets were increasing in value and producing income in hard currencies, simultaneously while the hyperinflation of the Paper Mark was decreasing the value of his Paper Mark debts. By 1924 when the value of the paper mark was relatively worthless (Stinnes debts) and his assets had ballooned in value (relative to the paper mark) Stinnes had become the richest man in Germany.
The moral of this story for today
It’s quite the story, and one which holds a lot of relevance as our Governments continue to print, and print, and print more and more money. The fact this event happened 100 years ago almost to the date is purely coincidental, but wealthy investors today are starting to change their portfolio allocations to own more hard assets. Bill Gates, the world 3rd richest man now owns an astonishing 242,000 acres of farmland across 18 states. Real Estate is a hard asset. Warren Buffet, the worlds 6th richest man invested $500 million in Barrick Gold in 2020 (he later sold a lot of his Gold position in 2020 as a disclaimer). Buffet has historically been against Gold, so the change in direction was curious. Buffet also owns a billion dollars in silver. Gold and Silver are previous metals, both of which are hard assets.
Michael Saylor the CEO of MicroStrategy has followed the Hugo Stinnes playbook to a tee only a few months ago, raising $650 Million Dollars at less than 1% interest. Michael Saylor then took all of that $650M and bought Bitcoin with it. Bitcoin, you guessed it, is a hard asset.
Other hard assets to go along with Bitcoin, real estate, silver and gold include copper, rhodium, platinum, and fine art. Anything that is difficult to reproduce is a hard asset essentially. If you don’t have any exposure to hard assets, it may be time to start allocating. I’m not saying that hyperinflation is coming, but the probability of it happening becomes higher and higher with every dollar printed. Biden alone has stated that $8-9 Trillion of stimulus may be coming this year and as I said earlier, I don’t think they can stop printing as the markets will crash.
The sad thing about this story is a lot of middle class and working-class people lost a lot of money in Weimar Germany in the 1920’s. This is the whole purpose of this article! Stinnes is a cautionary tale of how hyperinflation (although can benefit a small few if they are properly prepared, mostly leaves a lot of people with less wealth after the inflation than what they had before). If hyperinflation does hit, think of the inflation like a flood. Hard assets are the arc that will protect you (preserve your wealth) from the upcoming flood. I'm not sure what % of your assets are allocated to hard assets, but if hyperinflation does hit, the number most definitely should not be zero.
Think of hyperinflation like a flood, and hard assets (gold, silver, Bitcoin especially) are the arc that will protect you. Last time I checked, the hardest asset out there is Bitcoin. Any questions, just drop us a line and we will happily respond.
Disclaimer: This article should not be taken as legal investing advice, I am wrong 100% of the time. The choice is yours whether to invest in any asset or not.
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Bitcoin digital bits of code is not a hard asset! Try buying food from a farmer with Bitcoin during a currency collapse!