by Gary Alexander

June 22, 2021

The inflation of monetary dreams grows and grows. Last week, Senate Budget Committee Chairman Bernie Sanders and Majority Leader Chuck Schumer brought forth a $6 trillion “reconciliation package” that would combine key elements of President Biden’s infrastructure plan along with climate change reform and health care spending, requiring not a single Republican vote. (That’s why they’re smiling.)

Sanders and Schumer Scheming Image

This isn’t the first time Grand Illusions were financed with massive amounts of unbacked paper money.

The Grand Experiment began on July 22, 1776, when the Continental Congress issued $2 million in new bills, known as Continentals, which bore the inscription, “The United Colonies.” Unbacked by gold or any other hard asset, the bills led to almost immediate inflation. By 1778, it took $6 in paper to buy what $1 bought in 1776. By November 1779, it took $40 to buy what $1 bought in 1776. As General George Washington said at the time, “A wagonload of currency will hardly purchase a wagonload of provisions.”

The Continental failed and left the young nation with a hefty war debt. Chastened by the experience of that Continental currency, the U.S. Constitution prescribed: “No State shall…make any Thing but gold and silver Coin a Tender in Payment of Debts,” and America drafted a series of gold and silver coins in the 1790s, resisting the urge to issue new paper notes until the Civil War, with Lincoln’s “Greenbacks.”

Continental Currency and Greenbacks

The U.S. didn’t abandon gold in one step. In June 1933, America officially went off the gold standard for domestic convertibility, but nations still traded in gold. The newly minted 1933 $20 gold Double Eagles were almost all confiscated, melted, and destroyed but one remains. On June 7, it sold for a record $18.9 million. Once owned by Egypt’s King Farouk, it was later seized in a Secret Service sting. With a face value of $20, this one-of-a-kind collectible drew nearly $19 million at auction. Beat that price, Bitcoin!

1933 Double Eagle Gold Coins

The most important monetary memory of our lifetime comes later this summer – the 50th anniversary of President Nixon “closing the gold window” on August 15, 1971 – a Sunday night. At the time, gold’s price was fixed at $35 per ounce. It’s now about $1,765 – or more than 50 times higher in 50 years.

Not bad. In the same 50 years, the Dow is up about 36-fold and the S&P 500 is up 43-fold. That’s not entirely fair, since stocks pay dividends, and gold is not designed to compete with stocks. However, gold is designed to compete with paper money or bonds, and it is doing an excellent job in that regard.

SP500 vs DOW Jones vs Gold vs Silver Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

We’re Still Hoarding Massive Amounts of the Treasury’s New, Freshly-Printed Cash

Despite rising inflation, Americans are still careful shoppers and wary consumers, with a decent respect for the possibility of a return of COVID or a similar disaster. We’re still preparing for that “rainy day.”

America’s personal savings rate reached 14.9% in April, about double what it was before the pandemic. Businesses are also holding on to billions of dollars in cash – so much so that banks are asking corporate clients to start spending the cash on their businesses, or something, since cash in the bank is a drain on bank profits. Between the end of March and the end of May 2021, bank deposits rose by $411 billion to $17.1 trillion. The rate of increase is slowing, but $17 trillion is nearly four times the 20-year average.

The money-printing marathon began in March 2020 with the Fed’s “QE-Forever” plan. Since the fateful week of March 23, 2020, the Fed has purchased $3.4 trillion in securities. Three rounds of pandemic relief checks – plus massive aid to the airlines and troubled cities—caused commercial bank deposits to increase $3.3 trillion. This caused the holdings of Treasuries and agency debt by banks to almost double.

US Treasuries & Agencies Held by Fed & Banks

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Previous monetary expansions were during the Revolutionary War or Civil War. What’s our excuse now?

This is part of the Grand Experiment that goes under the name “Modern Monetary Theory” (MMT). Can we create all this liquidity without inflation or a debt hangover? Some theorists say it is possible, but they can’t point to an historical example of a nation that pulled off this trick, including our own long history.

Corporations may be facing worker shortages and component shortages, but there is no shortage of cash. Corporations raised lots of money over the past year in the bond market at record-low interest rates in order to refinance outstanding bonds or pay off lines of credit at the bank, or buy back their own shares.

M2 vs Personal Saving Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I’ve shown these charts and rehearsed these trends before, but you can see by the steep vertical lines that these trends are unprecedented. We’re flush with cash, yet our government keeps spending trillions of fiat dollars on stimulus programs for people who refuse to work or to businesses and workers who don’t need help, in what seems like an effort to buy votes by handing out sugar-coated treats to just about everyone.

It’s a Grand Experiment. It might work miracles, but I wouldn’t bet on money printing as a road to riches.

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
Commodity Inflation is Coming Under Control

Income Mail by Bryan Perry
Confusion is a Major Market Nemesis

Growth Mail by Gary Alexander
The Grand Experiment in “Funny Money” Continues

Global Mail by Ivan Martchev
The Fed’s “Untaper Tantrum”

Sector Spotlight by Jason Bodner
Why I Am Ignoring Last Friday’s Market Mess

View Full Archive
Read Past Issues Here

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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