Winning the Wealth Transfer

The Wealth Transfer is Here

In the past, I’ve warned about the coming Great Wealth Transfer.  But now we need to talk about it in the present tense, because it’s here.

And it will only accelerate from here on out. The Rich will get richer at the expense of everybody else.

This isn’t personal. It’s simply a feature of what happens near the end of a debt-based monetary system run by corruptible humans.

Of course, those in charge don’t think of themselves as corrupted or villainous. I’m sure that Federal Reserve Chairs Greenspan, Bernanke and Yellen all think of themselves as good and decent people doing “God’s work”. But the truth is they’ve irrevocably harmed millions — if not billions — of innocent people.

They and other central bankers have become the standard bearers of a system that can best be described as a reverse Robin Hood scheme, one that takes from the poor and gives to the rich. It’s just that in this tale, the ‘poor’ means everybody not in the top 1%.

So you need to understand this wealth transfer process — how it works, who’s perpetrating it, and what dangers to watch for. If not, you’ll be a victim of it. And you’ll probably live in confusion and shock by how hard just ‘getting by’ becomes going forward.

Realizing that you’re being specifically targeted by a system determined to separate you from your wealth is the essential first step towards figuring out how to evade the predators and protect yourself.

The Great Wealth Transfer, Act 1: Financial Repression

What do we mean by a Wealth Transfer?

It isn’t just some academic concept. It’s a playbook that’s been used many times in the past by governments to forcibly extract wealth from the public and use it for the benefit of those in power.

The first part of this Wealth Transfer process is called Financial Repression. It’s an extremely effective — and nefarious — financial engineering scheme, which we’ve discussed here at PeakProsperity.com many times over the years — notably here, here, here and here.

Financial Repression is enacted when governments take on too much debt (which they often do!) and find themselves with few politically acceptable ways of escaping that situation. So, in ways both overt and covert, they conspire to use the public’s savings to dig the government out of its debt hole.

The formula for Financial Repression

• Step 1: A government (or an entire nation) gets into trouble by borrowing too much.
• Step 2: Rather than pay this debt down honestly via cutting spending (unpopular) or by defaulting (even more unpopular), the government conspires with the central bank to slowly liquidate its stack of obligations by forcing negative real interest rates on everyone — that’s when you get paid less in interest than the current rate of inflation. So if you’re getting 0% on your savings, but annual price inflation for the things you need to live is more like 5% (sound familiar?), you lose.
• Step 3: But there’s a problem. Negative interest rates don’t work if people can dodge the Financial Repression by parking their money safely elsewhere. So a ring fence has to be built — using capital controls and explicit interest rate caps on and across the whole spectrum of interest-bearing securities. Nobody can be allowed access to investments offering positive interest rates. And to prevent people from simply hiding their wealth under their mattresses, cash can be outlawed. (This is what the “war on cash” and the talk of moving to a “cashless society” is really about)
• Step 4: Sit back and watch with glee as everyone with savings silently and steadily has their purchasing power transferred to the debtors, be those public or private entities. You see, lower real interest rates not only reduce the government’s costs of servicing its debts, but they erode the real value the debts themselves. The government is deliberately killing the value of the money we’ve worked hard to earn and save, for the sole purpose of avoiding the consequences of its reckless borrowing. They get a hall pass; we get screwed.

This is theft, plain and simple — engineered theft of the highest order. It takes from the many, without their consent. It’s not openly debated, put up to a vote, or even openly admitted to. It’s deliberately done behind the public’s back.

This is what Janet Yellen and her merry band of thieves at the FOMC are carefully administering. Seniors who can’t afford to live on their savings? Young adults who can’t afford to buy a home? The central bankers ignore them, as well as the social pain and economic misery their policies are inflicting on hundreds of millions of people.

But make no mistake, the loss of income that the Financial Repression inflicted by these sociopaths has harmed the elderly, pensioners, savers, and the young. Plus inflated the biggest asset bubble in history, which will make 2008 look like a picnic when it bursts. All to prolong the government’s out-of-control spending addiction a little bit longer, and to put even dollars into the pockets of the banks and the wealthy Elite.

Delaying The Inevitable (A Slow But Steady Decline)

So Financial Repression is Act I of the Great Wealth Transfer. It’s happening now, and it will likely persist for a lot longer. Sadly, it will continue for as long as the banks, the Fed, and the politicians can get away with it — until the economy collapses under all the debt and/or the impoverished public breaks out the torches and pitchforks.

The middle class will experience this as a steady erosion of their financially security. It’s a drip, drip, drip style of torture. Every year, your income and savings will buy less. The value of your money will be in terminal decline.

Those who don’t understand Financial Repression are probably still confused by Trump’s victory.  But if you realize that the vast majority of the people of the United States (and Europe and Japan) have been tossed under an economic bus to help serve the narrow interests of a tiny financial elite, and are barely hanging on to a middle class lifestyle as a result, electing an anti-establishment firebrand candidate suddenly makes a lot more sense. It explains the similar rejection of incumbents we’re now seeing across Europe.

Virtually everybody in the bottom 95% is being economically and financially sacrificed to bail out the prior bad decision of the central banks and their associated governments. And as that’s deeply unfair, it breeds resentment. Psychology tells us that resentment breeds contempt. And once there, relationships are doomed to fail. Our leaders have broken their covenant with the governed, and the governed are increasingly pissed. Expect that simmering anger to boil over at some point.

But, as mentioned, Financial Repression is just Act I. Act II is a lot more ugly.

Financial Repression is a way to delay the day of reckoning. That day will still arrive, and be all the more destructive for the pent-up forces that have built up during the delay.

How The Death of Paper Currency Will Redefine Wealth

At the heart of the matter here is that too many debts, too many claims, have been created. There’s a finite amount of “real stuff” in the world (productive companies, farmland, mineral ores, timberland, buildings, railways, waterways, etc). But with each new issue of debt, the claims on that real stuff multiply.

So what’s at risk here is an inflection point where the world realizes it’s holding a lot of paper, but little of substance. At that moment, the value of nearly every financial asset — stocks, bonds, mortgages, derivatives — even and especially our own currency — will be sharply, painfully reduced.

In Part 2: Winning The Great Wealth Transfer, we detail what that re-adjustment process will look like and where the carnage will be most extreme. More importantly, we explain that even though the paper losses will be staggering, the number of “real things” — those factories, acres and commodities — won’t have changed at all. Merely their ownership will have changed. And that will make all the difference in determining winners and losers.

Click here to read the report (free executive summary, enrollment required for full access)

Winning the Wealth Transfer

The main driver of the Wealth Transfer is rooted in the concept of too much money. And debt. They’re the same thing, as we have a debt-based money system. That is, our money is created through the issuance of debt.  One begets the other.  So we can track either (preferably both) to understand what’s really happening.

We do this here at Peak Prosperity because we very much want you to be on the right side of the Wealth Transfer.  Our goal is to educate, so that you can make informed decisions about how to best position yourself.  [Fun Fact: the root of ‘educate’ is the word ‘educe’ which means ‘to bring out.’  So for us, ‘educate’ does not mean to hand facts over for later recall, but rather it is a two-way process by which we can together bring out something that was hidden before and share that in common].

So, as we being to dig into the details here, take a moment to revisit our short Crash Course video chapters on money and money creation (at banks and The Fed). With that grounding, we can dive right into the role of money in an economy.

Remember, money and debt have no intrinsic value.  They only have value because we all agree that they do.  Money (and debt) has no intrinsic value beyond what we humans agree it has.  Money is a social agreement.

A $20 bill has value because you and I agree that it does. Why we agree is because a $20 bill can do something for us. We can walk into a store and buy real things we need with it, therefore it has utility. If we couldn’t walk into a store and do anything with the money, then it would have no value at all.

For example, what do you think would happen if I walked into a store with a $100 trillion dollars?  Well, nothing at all if it was this piece of paper:

The social agreement over that particular paper note has long since been broken by the hyperinflation that ravaged Zimbabwe over the past decade. The spell is gone. It’s now only just a piece of paper, albeit an interesting one.

The main point here is that the amount of money (or debt) in circulation has to remain in balance with the real things it is a claim upon:

If money (or debt) stays in balance, then everything is fine. But if there’s too much money, you get inflation. Too little and you get deflation.

Which brings us to the next part of the story.  What exactly do we mean by ‘real wealth?’  Simply put, real wealth is represented by real, tangible things.

We look at wealth as  having three possible forms. We can structure them as a pyramid, with primary wealth on the bottom, secondary wealth in the middle and tertiary wealth at the top:

Primary wealth is rooted in the abundance of the land. It consists of the rich fishing grounds, deep and fertile soils, thick coal seams, and concentrated ore bodies found in the natural world:

Once upon a time, nobody was confused when answering the question ‘Who’s the wealthiest person in your area?”  The answer was “the family that owns the most land”.  Land was wealth and everybody accepted that. The land was the headwaters from which all the wealth flowed.

The next layer, secondary wealth, represents the output when primary wealth is converted into finished goods or means of production:

So examples of secondary wealth might be cut lumber, fresh vegetables in the grocery store, or a coal-powered electrical power plant.  But let’s be very clear here; without primary wealth, secondary wealth isn’t possible. It can’t exist. Without a forest you cannot have lumber.  Without coal you cannot have a coal burning plant.  Without fertile soils you cannot bring vegetables to market.

I bet you know where I’m going with this…

Tertiary wealth is comprised of all the claims we make and layer upon the “real” wealth (aka primary and secondary wealth):

Tertiary wealth contains all the currency units in circulation, the bonds of a nation (which are a claim on future money), derivatives and the like.  Stocks are in the middle, as they can be a direct claim on secondary wealth (like stock in an oil-producing company), and sometimes not (such as stock in a purely financial institution which only trades in other forms of tertiary wealth).

But no form of tertiary wealth has any value at all if there’s no primary or secondary wealth for it to lay claim to.  A quick example might be a mortgage on a property has suddenly and completely been claimed by the sea. What’s that mortgage worth now? Nothing at all.

Tertiary wealth has value only because it lays claim to real wealth.  So the obvious question here is: What happens when the claims begin to increase faster that the underlying real wealth does?

This is a very important — and timely — question. The reason it all matters is because these tertiary claims have been skyrocketing, courtesy of the central banks, who have been flooding the world with new money:

(Source)

And all of that central bank money printing – the most in recorded history by an order of magnitude – has enabled the most explosive accumulation of debt ever seen as well:

(Source)

From 200% of GDP to 300% since 2000. That is truly staggering.

GDP in this story represents real wealth (though not completely, as a good deal of what is counted as GDP is really just financial trading, speculation and banking paper games, none of which actually generate or constitute real wealth generation), while the debt and central bank money creation are merely claims on that wealth.

What happens when you create too many tertiary claims?  History is clear on the matter.

Weimar Germany

History is full of periods when self-interested leadership has tried to cover up its past mistakes with money printing.  We have loads of examples to study on the matter and the only thing lacking here is general awareness of, and interest in, those lessons.

Consider Weimar Germany.  A set of bad decisions, a lost war, and a punitive reparations treaty all combined to create a period when printing more and more money made sense to those in power.  And so they did — intitially to much applause from seated politicians and much of the populace too, it should be noted.

At least for a while.

But we know how all that money printing turned out. Vast fortunes were lost and the savings of a nation were entirely wiped out. That period is still referred to by many as a time of great wealth destruction. And, indeed, many experienced it that way.

But the truth is that wealth was not destroyed, it was transferred. It passed from the unwary to the alert. And it did so in enormous and magnificent amounts.

It’s true that the German money’s claims against true wealth were destroyed during that time. But money and debt are not wealth.  As we’ve now learned to understand, they are only claims on wealth.

Real wealth, of course, is factories and farms, buildings and houses, raw land and minerals and water and farms. There were just as many of these things before the Weimar hyperinflation as there were afterwards.  That is, the amount of real wealth did not change as a consequence of all that money printing and subsequent money destruction.

But who owned it changed a lot.  The wealth was not destroyed (even though the money was); instead, it was transferred.

And this is the hidden part of money printing. Its inevitable destructive events are always presented to us as if they were some form of unforseeable natural disaster, just an accident that happened. “Oh no!” the newspapers will cry out, “No one could have seen this coming. So much wealth has been lost!”

But now you will know that nothing of the sort will have happened at all.  Just as much land and productive resources will be there before a great market crash (or hyperinflation, which is just destruction from another direction) as after.

Protecting Yourself

The trick to protecting yourself is to be holding as few of the paper claims as possible when the claim-destroying episode begins. I don’t mean to imply that this is an easy task – it’s not. It’s quite challenging to keep your wealth through any period of destruction/transfer, and that’s the reason why I decry the actions of the Fed and other central banks.

Shame on them for making our lives that much more difficult simply so they can avoid openly confronting the repercussions of their bad decisions. The future losses many will experience are going to be tragic. My only hope there is that real consequences are visited upon the architects of the coming disaster so they can be held to account, and perhaps future leaders will think twice before repeating their mistakes.

At a high level, our advice is simple enough; just hold as much primary and secondary wealth as you can when the wealth destruction begins in earnest.  This is the lesson from Venezuela, where people with garden space that they can protect are in far better shape than those without.

The money in Venezuela is dying. But real wealth has persisting value. It’s really that simple.

In our book Prosper! we detail how you can begin to transfer your financial wealth (mainly tertiary in nature) into other forms of wealth.  For example, Financial Capital can be readily converted into Living, Material, or Knowledge capital.

Each of these is either real primary or secondary wealth. And Knowledge Capital, uniquely, cannot be taken away from you — it will travel wherever you go.

It’s our position, unshaken over the years, that you want to be holding real, tangible wealth. Gold is one of the very best and easiest forms for doing so because it is valued in every country on the planet, and it has been valued all throughout history.  It’s the only form of money of which we are aware that is not simultaneously someone else’s liability.

Let that sink in for a moment.

In a world of too much debt, which means too many liabilities, where we cannot know who is holding which risks, money without counterparty risk is a rare and wonderful thing indeed.

Conclusion

The summary here is this: We are still printing and borrowing enormous amounts of money and credit, but the world is not growing any larger in response.  The pressure is building.  Nobody knows when all of that money and credit will have to be ‘trued up’ against the amount of real stuff out there. But it will. History shows us that it always does.

And that moment will be referred to by most as a period of wealth destruction. 401ks will be shredded, bonds will become worthless, defaults will spike, institutions and entire countries will fail – but the truth is that all of that paper ‘wealth’ was an illusion. People’s faith in it had been betrayed long before, when those in power started abusing the system by creating too many tertiary claims.

After the dust settles, there will be winners and losers, and those with the proper framework will understand that what actually happened was that all of the wealth was transferred from those who thought they owned it, to those who actually did.

The biggest remaining question is whether the wealth transfer comes about in the form of an inflationary destruction, like in Venezuela today, or as a deflationary bust more in the fashion of Greece.

Because we cannot yet pick which way the tower will fall – into deflation or inflation – it is best to be poised ready for either.  Luckily we have a strong financial team we can recommend that can help navigate these incredibly uncertain times.

Again, we cannot possibly predict exactlly when this mother of all bubbles will finally end, but we’re seeing the signs that the endgame is uncomfortably near. Now that you’ve read this, when it does occur, you at least will not be fooled by all the attempts the pundits will use to explain to you how unfortunate it was for everyone caught up in all the wealth destruction.  You will be among the educated and alert who will know that the real wealth is merely being transferred — hopefully in part, into your hands.

But don’t be surprised when many of the recipients of that wealth transfer turn out to be  – surprise! – the banks and other financial elites that the Fed has so carefully enabled and protected. While they’ve abused the system badly, they also know how to game it.

The danger in that, of course, is that we humans hate injustice. Like the monkeys in this experiment, we’re wired to lash out against it:

I rather doubt that the financial elites have thought things all the way through.  They may not like what follows next, as an enraged populace finally wakes up to the enormous fraud that has been perpetrated upon them.

We shall see.