Reality Bites

There is a joke that goes something like…” when a Millennial and a Boomer complain about each other, they need to remember that there is a whole generation between them that hates them both.” Among many of my Gen X brethren, there is a sense that somehow we got screwed; in fact, we are sure of it, but many are not clear how that happened. I know. Let me explain, my slacker friends.
After World War II, a pack of rich white guys met at a hotel in Bretton Woods, New Hampshire, and decided how to split up the world while sipping on Canadian Club and water, no doubt.
The US agreed to be the world’s policeman; in exchange, the US dollar would be pegged to the price of gold, and every currency in the world would be pegged to the US dollar.
The system worked great through the ’50s and ’60s until the US started running significant deficits to fund the Vietnam War and the ever-growing need of the locust herd know as the Baby Boomers. So, right around my birth, in the early ’70s, “we” decided that this whole gold reserve business was too much trouble. Conveniently, Saudi Arabia was willing to tell the world it would only price oil in US dollars in exchange for us agreeing to kill all their Shiite enemies at any time with a phone call.
The world runs on oil, and if countries can only buy oil in dollars, it inevitably created a massive demand for dollars. To keep the Saudis happy and make Soviet (Russian) oil uncompetitive, a “strong dollar” became a bedrock policy. A strong dollar sounds good, but it also made US exports uncompetitive and turned towns like Detroit and Cleveland into bombed-out hell-holes. By the time my Gen X hit the labor market, banking, computers, or Applebee’s were the only choices. Making widgets or building a business other than in tech was a fantasy.
Of course, the US could have taken another path. We could have exercised some fiscal discipline around entitlements, trade or avoided Quixotic wars in the Middle East, but where is the fun in that?
Fast forward to today and advanced economy sovereign debt levels are the highest in 120 years. Historically, when debt gets crazy like it is now, there are only three ways out: default, which is never going to happen, financial repression or inflation, or a series of hyperinflations.
I am betting on the inflation scenario. We have already seen the money supply grow at 25%+ since COVID-19 hit, and my guess is we will see plenty more over the coming months and years.
Some investors seem to think that -1.1% real rates are the bottom. Luke Gromen has pointed out that real rates bottomed at -14% after WWII. So, buckle up, my Gen X friends. That cash you have set aside for college or perish the thought retirement! You are going to need a hell of a lot more of it. Is there a way out? Perhaps. I will give you a hint. Twenty-one million.

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