Take President Trump… Fed chief Jerome Powell… and Treasury Secretary Steve Mnuchin. They’re the three most influential policymakers in the world.
Over the past few days, they’ve been slugging away at bitcoin and other cryptocurrencies.
And it’s not an isolated incident. It’s part of the big-picture story we’ve been tracking for you – the return to honest money… and the feds’ attempts to stop it.
Let me explain…
In other words, its monopoly status as currency issuer.
And with good reason. With cryptocurrencies like bitcoin, you – not a bank – are the custodian of your savings. Cryptocurrencies are also outside the control of central banks.
And bitcoin, as we showed you on Monday, is superior to the U.S. dollar as a long-term store of value.
In today’s dispatch, we’ll show you why finding a store of value outside of the dollar is now more urgent than ever.
It’s something central bankers call “NIRP.” It stands for negative interest rate policy.
But it’s nothing more than a central bank tax on wealth.
In theory, you should earn interest income on your savings. That’s how your bank typically incentivizes you to deposit your hard-earned dollars with it.
But with NIRP, it’s backwards. Instead of being paid to save, you pay to save.
Say you have $100,000 in your savings account. With a negative rate of 1%, you’re forking over $1,000 to the feds every year. At a negative rate of 3%, you’re $3,000 poorer at the end of the year.
As Legacy Research cofounder Bill Bonner explains it…
The idea is that savers will throw up their hands… open up their wallets… and spend, spend, spend to avoid paying that tax on their savings.
It’s in the Constitution: Only Congress should have the power to tax.
Congress answers directly to voters… in theory at least.
Nobody voted for Alan Greenspan, Ben Bernanke, Janet Yellen, or Jerome Powell. These central bankers are government appointees. But thanks to the NIRP loophole… they now also have the power to tax you.
This isn’t limited to America. NIRP has been racking our brains here at Legacy Research ever since the European Central Bank (ECB) tried it out in 2014.
Back then, Bill called this new world of negative interest rates “Neverland”… after Michael Jackson’s ranch in California. Both, he said, were places “where anything can happen… and something bad always does.”
But since Bill sounded the warning, this central bank wealth tax has spread across some of the world’s most advanced economies.
ECB is the most influential. It sets rates across the 19 countries in the European Union that use the euro.
And central bankers in Switzerland, Sweden, Denmark, and Japan have also hit savers with a NIRP tax.
The Fed hasn’t tried to tax U.S. dollar accounts this way – yet. But simple math says it’s not far off.
You only have to look at how much the Fed cut its target rate during the last bear market on Wall Street – the 2007-09 bear market.
The S&P 500 peaked on October 9, 2007. It plunged 57% from there.
It took a Fed rate cut of 5 percentage points to stem the bleeding (from about 5% all the way down to 0%).
Today, the Fed’s target rate is 2.5%. So it only has 2.5 percentage points to play with before it takes rates into negative territory.
Make no mistake: In the next downturn, the Fed will have no choice but to take rates into negative territory.
Taking rates down to zero, as it did during the 2007-09 bear market, sounds extreme. But according to the San Francisco Fed, it wasn’t low enough.
As it put it in a report on NIRP in the U.S. it published in February…
Allowing the federal funds rate [the Fed’s target interest rate] to drop below zero may have reduced the depth of the recession and enabled the economy to return more quickly to its full potential.
It’s an “escape hatch” from having your savings taxed this way.
If central bankers believe taxing U.S. dollar savings is what’s going to keep the boom going… they won’t think twice.
It’s no wonder folks are seeking out alternative currencies. Bill again…
Money is not a result of government diktat. It’s what happens naturally when people find a medium of exchange for goods and services that’s also a store of value. They go with whatever works best. And for money to work best, it has to be honest.
But today, central banks are intentionally making their currencies dishonest. They’re lowering interest rates to a point where they couldn’t exist in nature.
I expect that’s part of what makes bitcoin so popular. It’s a response to a lot of bad money. It’s an obvious thing to say, but people are flocking to new currencies because the existing ones aren’t very reliable.
Remember, the whole point of bitcoin is that it’s not governed by a central bank. Its money supply is governed by an algorithm. So unlike your dollars in the bank, it shields you from central banks’ wacky ideas.
But today, bitcoin may be even more attractive than gold as a way to escape the feds’ funny money.
You don’t have to put bitcoin in a vault and hire an armed guard to watch it. It’s secured cryptographically on a blockchain – the tamperproof public digital ledger that uses a network of computers to store records.
In the end, it comes down to a matter of taste.
Some folks are more comfortable with a digital store of wealth such as bitcoin. Others are more comfortable with the kind you can “stub a toe on” such as gold.
We’ll leave the final word on that with colleague Teeka Tiwari – editor of Palm Beach Confidential and world-renowned crypto expert…
Some investors may opt to buy gold to shelter their wealth from negative rates. And I do recommend owning some gold. It’s the safest and most secure way to protect the value of your money.
But it’s not very convenient. You can’t just break off a piece of gold and anonymously go buy something with it. When you’re ready to buy something, you’ll need to convert your gold into some other form of currency.
But like cash, bitcoin and other cryptocurrencies are liquid. You can easily send them anywhere in the world from an app on your phone for very low fees. Best yet, when you use digital currencies, you enjoy a high degree of anonymity. So your financial privacy is secure.
One of your fellow readers has a different take on the value of bitcoin and other cryptos…
The purpose of bitcoin, along with all the other thousand or so cryptocurrencies, was to be an alt-currency. But from what I have read, less than 1% of transactions are for purchasing items.
There is no value in any of the cryptos. They are not backed by anything of value such as gold. Only speculation keeps the prices going up. I have read articles of bitcoin fanatics calling for $100k per bitcoin and others were calling for $1 million. This is pure fantasy and fanaticism.
– Marc D.
Meantime, on July 4, Legacy cofounder Bill Bonner said the Lincoln administration “annihilated the principle of self-government.” (See why here.)
And it prompted this question from one of your fellow readers…
What exactly did Lincoln do to dismantle self-government?
Dan Denning, Bill’s coauthor on The Bonner-Denning Letter, was on hand with an answer in last Friday’s mailbag edition. And it’s ruffling some feathers today (we warned you to proceed at your own risk)…
Dan makes overmuch about Lincoln refusing to recognize as legitimate the withdraw of slave-holding states from the Union. The rebellious states entered the Union voluntarily but by refusing to treat all men equally, they failed to adhere to its Constitution.
Moreover, Lincoln justifiably recognized the states’ withdrawal as an action done so without the approval of those it disenfranchised. American citizens in these states, the majority of whom had no right to vote (i.e., women, free blacks, and slaves), were capriciously made no longer Americans without their express approval.
The hypocrisy the rebellion leaders practiced while they sat in pews listening to sermons about goodwill toward men must have been exquisite to watch. Lincoln shaped history for the better and was murdered for doing so.
– Jim R.
Are central banks doomed to “inflate or die” ad infinitum, as Bill said yesterday? Did Marc D. miss the mark about the value of cryptos (or lack thereof)? And did President Lincoln act like a tyrant, as Dan wrote last Friday?
Write us at [email protected].
Regards,
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Chris Lowe
July 17, 2019
Lisbon, Portugal