“Protecting Capital in a Codependent Relationship”

“Protecting Capital in a Codependent Relationship”

By Julien B. Booth

January 26, 2022

The Federal Reserve became increasingly active after the dot.com crisis of 2000. Today they have pure celebrity status, speaking tours, and lucrative post-retirement jobs.  The widening inequality gap, recent departures of three Federal Reserve Governors for insider trading, and unnecessary market volatility have cemented the Federal Reserve as an institution that no longer truly serves the interest of the American people.

The Federal Reserve is recognizing that the inflation of the monetary base (printing money) has created problems for those people that need housing, food, and energy.  Federal Reserve dependency has consequences.

The Fed has yet to act, but the mere discussion of reducing Quantitative Easing (QE), 0% interest rates, and the waning of Government stimulus is creating the next “catastrophe”.  The most worthless assets are falling through the floor at speed (crypto, junk SPAC, non-revenue, non-earning companies etc).  Bitcoin et al. losses exceeded 30% in a three-week timeframe.  Ultimately, higher-quality stocks are affected (primarily tech-related) as the leverage must be unwound.  Crashes happen intraday now (see NFLX on 1.21.2022 earnings miss).  Unfortunately, the amount of damage to individuals is profound as Robin Hood et al. and free checks from Uncle Sam broadly raised participation in the riskiest assets.

0% interest rates and massive money creation is NOT sustainable.  The balance sheet is now approaching $9 Trillion of “QE Money”, our government debt is $30 TRILLION (usdebtclock.com), and the long-term liabilities for Social Security and Medicare are almost incalculably large.  Crypto and fiat (paper) currency are not proving stores of value.

The more modern monetary policy has proven that bending gravity is quite hard. The Federal Reserve and fiscal stimulus measures will become increasingly exotic (digital dollars, UBI) as deflation is an enemy we quite literally cannot afford.  While raising interest rates is the talk du jour, the markets are clearly signaling that this outcome is unwelcome.  Politicians do not like unwelcome outcomes.  Ultimately, real money must have several attributes (source: St. Louis Fed):   There have been many forms of money in history, but some forms have worked better than others because they have characteristics that make them more useful. The characteristics of money are durability, portability, divisibility, uniformity, limited supply, and acceptability.

I believe we are in the latter stages of U.S. dollar hegemony.

Definition: The term hegemony describes a geopolitical phenomenon of the 1990s in which the U.S. dollar, a fiat currency, became the primary reserve currency internationally.  

During the past two years, the quantity of the U.S. dollar base money has increased by approximately 40%.  Cryptocurrency was supposed to be a solution for fiat currency debasement.  While I recognize its utility and respect the intent, there remain impediments to its widespread adoption.

No one knows what lies ahead for fiat/paper money. However, the current situation is untenable, and alternatives backed by precious metal assets, real assets, and other finite resources provide a potential solution.  I believe real assets, including Gold, are imperative for protecting capital.  We will keep you apprised as the world changes . . . quite literally, hour by hour.


Julien B. Booth

Chief Investment Officer – Fixed Income & Real Assets

BRC Wealth Management