Tag Archives: Federal Reserve

The Federal Reserve Is A Barbarous Relic

The Sky is Falling

“We believe monetary policy is in a good place.”

– Federal Reserve Chairman Jerome Powell, October 30, 2019.

The man from good place. “As I was going up the stair, I met a man who wasn’t there. He wasn’t there again today, Oh how I wish he’d go away!” [PT]

Ptolemy I Soter, in his history of the wars of Alexander the Great, related an episode from Alexander’s 334 BC compact with the Celts ‘who dwelt by the Ionian Gulf.’  According to Ptolemy’s account, which survives via quote by Arrian of Nicomedia some 450 years later, when Alexander asked the Celtic envoys what they feared most, they answered:

“We fear no man: there is but one thing that we fear, namely, that the sky should fall on us.”

 Today, at the risk of being called Chicken Little, we tug on a thread that weaves back to the ancient Celts.  Our message is grave: The sky is falling.  Though the implications are still unclear.

Various Celts – left: fearsome warriors; middle: fearsome warriors afraid of the sky falling on their heads; right: Cernunnos, fearsome Celtic horned god amid his collection of skulls. [PT]

The sky, for our purposes, is the debt based dollar reserve standard that has been in place for the past 48 years. If you recall, on August 15, 1971, President Nixon “temporarily” suspended convertibility of the dollar into gold.  The dollar  became wholly the fiat money of the Treasury.

At the G-10 Rome meeting held in late-1971, Treasury Secretary John Connally reduced the new dollar reserve standard to a bite-sized nugget for his European finance minister counterparts, stating:

“The dollar is our currency, but it’s your problem.”

The Nixon-Connally tag team in the White House. [PT]

Predictably, without the restraint of gold, the quantity of debt based money has increased seemingly without limits – and it is everyone’s massive problem.  What’s more, over the past 30 years the Federal Reserve has obliged Washington with cheaper and cheaper credit.

Hence, public, private, and corporate debt levels in the U.S. have multiplied beyond comprehension.  Total US debt is now on the order of $74 trillion.  \The consequences, no doubt, are an economy that is equally distorted and disfigured beyond comprehension.

Behold the debt-berg in all its terrible glory. [PT]

Selective Blind Spots

America is no longer a dynamic, free-market economy.  Rather, the economy is stagnant and operates under the central planning authority of Washington and the Fed. The illusion of prosperity is simulated by spending trillions of dollars funded by history’s greatest debt bubble.

Simple arithmetic shows the country is headed for economic catastrophe. Clearly, Social Security and Medicare face long-term financial challenges. Current workers must shoulder a greater and greater burden to pay for the benefits of retired workers.

At the same time, the world that brought the debt based dollar reserve standard into being no longer exists. Yet the dollar reserve standard and the Federal Reserve still remain as legacy institutions.

The divergence between the world as it exists – with its massive trade imbalances, massive debt loads, wealth inequality, and inflated asset prices – and the legacy dollar reserve standard is irreversible. Unless the unstable condition that has developed is allowed to transform naturally, there will be outright collapse.

Rather than adopting policies that allow for economic transformation and minimizing the ultimate disruption of a collapse, today’s planners and policy makers are doing everything they can to hold the failing financial order together.  They are deeply invested academically and professionally; their livelihoods depend on it.

You see, selective blind spots of the best and brightest are normal when the sky is falling.  For example, in 1989, just two years before the Soviet Union collapsed, Paul Samuelson – the “Father of Modern Day Economics” –  and co-author William Nordhaus, wrote:

“The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.” – Paul Samuelson and William Nordhaus, Economics, 13th ed. [New York: McGraw Hill, 1989], p. 837.

Could Samuelson and Nordhaus possibly have been more clueless?

The bizarre chart illustrating the alleged “growth miracle” of the “superior” Soviet command economy, as seen by Samuelson – published about one and a half years before the Soviet Bloc imploded in what was undoubtedly the biggest bankruptcy in history. [PT]

The Federal Reserve is a Barbarous Relic

On Wednesday, following the October federal open market committee (FOMC) meeting, the Federal Reserve stated that it will cut the federal funds rate 25 basis points to a range of 1.5 to 1.75. No surprise there.

But the real insights were garnered several days earlier.  Leading up to the FOMC meeting Fed Chair Jerome Powell received some public encouragement from one of his former cohorts –  former President of the Federal Reserve Bank of New York, Bill Dudley.  What follows is an excerpt of Dudley’s mental diarrhea, which he released in a Bloomberg Opinion article on Monday:

“People shouldn’t be as worried as they are about the risk of a U.S. recession. That said, it wouldn’t take much to trigger one, which is why the Federal Reserve should take out some insurance by providing added stimulus this week.

“Sometimes, an adverse event and human psychology can reinforce each other in such a way that they bring about a recession. Given how slowly the economy is growing, even a modest shock could do the trick.

“This danger bolsters the argument for the Fed to ease monetary policy at this week’s meeting of the Federal Open Market Committee. Such a preemptive move will reduce the chances that the economy will slow sufficiently to hit stall speed. Even if the insurance turns out to be unnecessary, the potential consequences aren’t bad. It just means that the economy will be stronger and the inflation rate will likely move more quickly back toward the Fed’s 2 percent target.”

Retired former central planner Bill Dudley. These days an armchair planner, and as deluded as ever. [PT]

Dudley, like Samuelson, believes he can aggregate economic data and plot it on a graph; and, then, by fixing the price of credit, he can make the graphs appear more to his liking. He also believes he can preempt a recession by making ‘insurance’ rate cuts to stimulate the economy.

Like Samuelson, Dudley doesn’t have a clue. The Fed cannot preemptively stop a recession.  And after the dot com bubble and bust, the housing bubble and bust, the great financial crisis, zero interest rate policy, negative interest rate policy, quantitative easing, operation twist, quantitative tightening, reserve management, and many other failures, the Fed’s standing is clear to everyone but Dudley…

The Federal Reserve is a barbarous relic. The next downturn will be its death knell.  Alas, what comes after the Fed will probably be even worse. Populism demands it.

Source: by NM Gordon | ZeroHedge

 

For The First Time In 6 Years, No Central Bank Is Hiking

The global central bank experiment with re-normalization is officially over.

After roughly half the world’s central banks hiked rates at least once in 2018, the major central banks have returned to easing mode, and as the chart below shows, for the first time since 2013, not a single central bank is hiking rates.

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How The Fed Wrecks The Economy Over And Over Again

When people talk about the economy, they generally focus on government policies such as taxation and regulation. For instance, Republicans credit President Trump’s tax cuts for the seemingly booming economy and surging stock markets. Meanwhile, Democrats blame “deregulation” for the 2008 financial crisis. While government policies do have an impact on the direction of the economy, this analysis completely ignores the biggest player on the stage – the Federal Reserve.

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Lower Income Americans Are Begging The Fed For Less Inflation

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While the Fed may be surprised that low income workers aren’t as enthused about inflation as they are, we are not. A recent Bloomberg report looked at the stark disconnect between Fed policy and well, everybody else but banks and the 1%.

While the Fed sees low inflation as “one of the major challenges of our time,” Shawn Smith, who trains some of the nation’s most vulnerable, low-income workers stated the obvious: people don’t want higher prices.  Smith is the director of workforce development at Goodwill of Central and Coastal Virginia.

In fact, he said that “even slight increases make a huge difference to someone who is living on a limited income. Whether it is a 50 cents here or 10 cents there, they are managing their dollars day to day and trying to figure out how to make it all work.’’ Indeed, as we discussed yesterday, it is the low-income workers – not the “1%”ers, who are most impacted by rising prices, as such all attempts by the Fed to “help” just make life even more unaffordable for millions of Americans.

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Fears, and risks, associated higher prices comprise much of the feedback that the Fed has getting as part of its “Fed Listens” 2019 strategy tour, labeled as a multi-city “outreach tour”. So much for objectivity. Fed Governor Lael Brainard faced additional feedback from community leaders earlier this week in Chicago when she chaired a panel on full employment. 

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Patrick Dujakovich, president of the Greater Kansas City AFL-CIO, told the audience in Chicago: “I have heard a lot about price stability and fiscal sustainability from the Fed for a very, very long time. Maybe I wasn’t listening, but today is the first time I’ve heard about employment sustainability and employment security.”

The problem that the Fed continues to face is that it has backed itself into a corner. With the economy supposedly “booming” and the stock market at all time highs, rates remain low and any tick higher would likely begin to cause massive shocks to a debt-laden and spending-addicted economy that has been swelling into dangerously uncharted waters over the last 10 years.

As one potential answer, the Fed is now looking at “inflation targeting” (whose disastrous policies we discussed here yesterday), which amounts to simply pursuing higher inflation for a while to “make up” for “undershoots” of the Fed’s 2% target since 2009. But the reality is that this idea cripples consumers, especially those at the lower end of the income spectrum.

Stuart Comstock-Gay, president of Delaware Community Foundation, told an audience at the Philadelphia Fed: “The sometimes positive impacts of inflation for certain of us have no good benefits for people at the lower end of the spectrum.”

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And even former Fed economists agree. Andrew Levin, who’s now a Dartmouth College professor said: The Fed and other central banks need to make sure they can foster the recovery from a severe adverse shock. But the answer is not to push inflation higher. Elevated inflation would be particularly burdensome for lower-income families.’

Other economists have similar takes:

University of Chicago economist Greg Kaplan found that the cumulative inflation rate was 8-to-9 percentage points lower for households with incomes above $100,000 versus those with incomes below $20,000 over the 2004-2012 period. During that time, inflation averaged 2.2% which would be in the range of what Fed officials are now discussing as a possible strategy.

US Federal Reserve Bank’s Net Worth Turns Negative, They’re Insolvent, A Zombie Bank, That’s All Folks

While the Fed has been engaging in quantitative tightening for over a year now in an attempt to shrink its asset holdings, it still has over $4.1 trillion in bonds on its balance sheet, and as a result of the spike in yields since last summer, their massive portfolio has suffered substantial paper losses which according to the Fed’s latest quarterly financial report, hit a record $66.453 billion in the third quarter, raising questions about their strategy at a politically charged moment for the central bank, whose “independence” has been put increasingly into question as a result of relentless badgering by Donald Trump.

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What immediately caught the attention of financial analysts is that the gaping Q3 loss of over $66 billion, dwarfed the Fed’s $39.1 billion in capital, leaving the US central bank with a negative net worth…

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… which would suggest insolvency for any ordinary company, but since the Fed gets to print its own money, it is of course anything but an ordinary company as Bloomberg quips.

It’s not just the fact that the US central bank prints the world’s reserve currency, but that it also does not mark its holdings to market. As a result, Fed officials usually play down the significance of the theoretical losses and say they won’t affect the ability of what they call “a unique non-profit entity’’ to carry out monetary policy or remit profits to the Treasury Department. Indeed, confirming this the Fed handed over $51.6 billion to the Treasury in the first nine months of the year.

The risk, however, is that should the Fed’s finances continue to deteriorate if only on paper, it could impair its standing with Congress and the public when it is already under attack from President Donald Trump as being a bigger problem than trade foe China.

Commenting on the Fed’s paper losses, former Fed Governor Kevin Warsh told Bloomberg that “a central bank with a negative net worth matters not in theory. But in practice, it runs the risk of chipping away at Fed credibility, its most powerful asset.’’

Additionally, the growing unrealized losses provide fuel to critics of the Fed’s QE and the monetary operating framework underpinning them, just as central bankers begin discussing the future of its balance sheet. And, as Bloomberg cautions, the metaphoric red ink also could make it politically more difficult for the Fed to resume QE if the economy turns down.

“We’re seeing the downside risk of unconventional monetary policy,’’ said Andy Barr, the outgoing chairman of the monetary policy and trade subcommittee of the House Financial Services panel. “The burden should be on them to tell us why this does not compromise their credibility and why the public and Congress should not be concerned about their solvency.’’

Of course, the culprit for the record loss is not so much the holdings, as the impact on bond prices as a result of rising rates which spiked in the summer as a result of the Fed’s own overoptimism on the economy, and which closed the third quarter at 3.10% on the 10Y Treasury. Indeed, with rates rising slower in the second quarter, the loss for Q3 was a more modest $19.6 billion.

And with yields tumbling in the fourth quarter as a result of the current growth and markets scare, it is likely that the Fed could book a major “profit” for the fourth quarter as the 10Y yield is now trading just barely above the 2.86% where it was on June 30.

Meanwhile, the Fed continues to shrink its bond holdings by a maximum of $50 billion per month, an amount that was hit on October 1, not by selling them, which could force it to recognize but by opting not to reinvest some of the proceeds of securities as they mature.

The Fed is expected to continue shrinking its balance sheet at rate of $50BN / month until the end of 2020 (as shown below) unless of course market stress forces the Fed to halt QT well in advance of its tentative conclusion.

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In any case, the Fed will certainly never return to its far leaner balance sheet from before the crisis, which means that it will continue to indefinitely pay banks interest on the excess reserves they park at the Fed, with many of the recipient banks being foreign entities.

Barr, a Kentucky Republican, has accurately criticized that as a subsidy for the banks, one which will amount to tens of billions in annual “earnings” from the Fed, the higher the IOER rate goes up. He is not alone: so too has California Democrat Maxine Waters, who will take over as chair of the House Financial Services Committee in January following her party’s victory in the November congressional elections.

* * *

Going back to the Fed’s unique treatment of losses on its income statement and its under capitalization, in an Aug. 13 note, Fed officials Brian Bonis, Lauren Fiesthumel and Jamie Noonan defended the central bank’s decision not to follow GAAP in valuing its portfolio. Not only is the central bank a unique creation of Congress, it intends to hold its bonds to maturity, they wrote.

Under GAAP, an institution is required to report trading securities and those available for sale at fair or market value, rather than at face value. The Fed reports its balance-sheet holdings at face value.

The Fed is far less cautious with the treatment of its “profits”, which it regularly hands over to the Treasury: the interest income on its bonds was $80.2 billion in 2017. The central bank turns a profit on its portfolio because it doesn’t pay interest on one of its biggest liabilities – $1.7 trillion in currency outstanding.

The Fed’s unique financial treatments also extends to Congress, which while limiting to $6.8 billion the amount of profits that the Fed can retain to boost its capital has also repeatedly “raided” the Fed’s capital to pay for various government programs, including $19 billion in 2015 for spending on highways.

Still, a negative net worth is sure to raise eyebrows especially after Janet Yellen said in December 2015 that “capital is something that I believe enhances the credibility and confidence in the central bank.”

* * *

Furthermore, as Bloomberg adds, if it had to the Fed could easily operate with negative net worth – as it is doing now – like other central banks in Chile, the Czech Republic and elsewhere have done, according to Nathan Sheets, chief economist at PGIM Fixed Income. That said, questionable Fed finances pose communications and mostly political problems for Fed policymakers.

As for long-time Fed critic and former Fed governor, Kevin Warsh, he zeroed in on the potential impact on quantitative easing.

“QE works predominantly through its signaling to financial markets,’’ he said. “If Fed credibility is diminished for any reason — by misunderstanding the state of the economy, under-estimating the power of QE’s unwind or carrying a persistent negative net worth — QE efficacy is diminished.’’

The biggest irony, of course, is that the more “successful” the Fed is in raising rates – and pushing bond prices lower – the greater the un-booked losses on its bond holdings will become; should they become great enough to invite constant Congressional oversight, the casualty may be none other than the equity market, which owes all of its gains since 2009 to the Federal Reserve.

While a central bank can operate with negative net worth, such a condition could have political consequences, Tobias Adrian, financial markets chief at the IMF said. “An institution with negative equity is not confidence-instilling,’’ he told a Washington conference on Nov. 15. “The perception might be quite destabilizing at some point.”

That point will likely come some time during the next two years as the acrimonious relationship between Trump and Fed Chair Jerome Powell devolves further, at which point the culprit by design, for what would be the biggest market crash in history will be not the Fed – which in the past decade blew the biggest asset bubble in history – but President Trump himself.

Source: ZeroHedge

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Diagnosing What Ails The Market

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The Central Bank Bubble’s Bursting: It Will Be Ugly

The global economy has been living through a period of central bank insanity, thanks to a little-understood expansion strategy known as quantitative easing, which has destroyed main-street and benefited wall street. 

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Central Banks over the last decade simply created credit out of thin air. Snap a finger, and credit magically appears. Only central banks can perform this type of credit magic. It’s called printing money and they have gone on the record saying they are magic people.

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Increasing the money supply lowers interest rates, which makes it easier for banks to offer loans. Easy loans allow businesses to expand and provides consumers with more credit to buy goods and increase their debt. As a country’s debt increases, its currency eventually debases, and the world is currently at historic global debt levels.

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Simply put, the world’s central banks are playing a game of monopoly.

With securities being bought by a currency that is backed by debt rather than actual value, we have recently seen $9.7 trillion in bonds with a negative yield. At maturity, the bond holders will actually lose money, thanks to the global central banks’ strategies. The Federal Reserve has already hinted that negative interest rates will be coming in the next recession. 

These massive bond purchases have kept volatility relatively stable, but that can change quickly. High inflation is becoming a real possibility. China, which is planning to dethrone the dollar by backing the Yuan with gold, may survive the coming central banking bubble. Many other countries will be left scrambling. Some central banks are attempting to turn the current expansion policies around. Both the Federal Reserve, the Bank of Canada, and the Bank of England have plans to hike interest rates. The European Central Bank is planning to reduce its purchases of bonds. Is this too little, too late?

The recent global populist movement is likely to fuel government spending and higher taxes as protectionist policies increase. The call to end wealth inequality may send the value of overvalued bonds crashing in value. The question is, how can an artificially stimulated economic boom last in a debtors’ economy?

Central bankers began to embrace their quantitative easing strategies as a remedy to the 2007 economic slump. Instead of focusing on regulatory policies, central bankers became the rescuers of last resort as they snapped up government bonds, mortgage securities, and corporate bonds. For the first time, regulatory agencies became the worlds’ largest investment group. The strategy served as a temporary band-aid as countries slowly recovered from the global recession. The actual result, however, has been a tremendous distortion of asset valuation as interest rates remain low, allowing banks to continue a debt-backed lending spree.

It’s a monopoly game on steroids.

The results of the central banks’ intervention were mixed. While a small, elite wealthy segment was purchasing assets, the rest of the population felt the widening income gap as wage increases failed to meet expectations and the cost of consumer goods kept rising. The policies of the Federal Reserve were not having the desired effect. While the Federal Reserve Bank began to reverse its quantitative easing policy, other central banks, such as the European Central Bank, the Swiss National Bank, and the European National Bank have become even more aggressive in the quantitative easing strategies by continuing to print money with abandon. By 2017, the Bank of Japan was the owner of three-quarters of Japan’s exchange-traded funds, becoming the major shareholder trading in the Nikkei 225 Index.

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The Swiss National Bank is expanding its quantitative easing policy by including international investments. It is now one of Apple’s major shareholders, with a $2.8 billion investment in the company.

Centrals banks have become the world’s largest investors, mostly with printed money. This is inflating global asset prices at an unprecedented rate. Negative bond yields are just one consequence of this financial distortion.

While the Federal Reserve is reducing its investment purchases, other global banks are keeping a watchful eye on the results. Distorted interest rates will hit investors hard, especially those who have sought out riskier and higher yields as a consequence of quantitative easing (malinvestment).

The policies of the central banks were unsustainable from the start. The stakes in their monopoly game are rising as they are attempting to rectify their negative-yield bond purchasing with purchases of stocks. This is keeping the game alive for the time being. However, these stocks cannot be sold without crashing the market. Who will end up losers and winners? Middle America certainly isn’t going to be happy when the game ends. If central banks continue in their role as stockholders funded by fiat currency, it will change the game completely.

Middle America has cause to feel uneasy…

Source: ZeroHedge

The Fed’s “Magic Trick” Exposed

In 1791, the first Secretary of the Treasury of the US, Alexander Hamilton, convinced then-new president George Washington to create a central bank for the country.

Secretary of State Thomas Jefferson opposed the idea, as he felt that it would lead to speculation, financial manipulation, and corruption. He was correct, and in 1811, its charter was not renewed by Congress.

Then, the US got itself into economic trouble over the War of 1812 and needed money. In 1816, a Second Bank of the United States was created. Andrew Jackson took the same view as Mister Jefferson before him and, in 1836, succeeded in getting the bank dissolved.

Then, in 1913, the leading bankers of the US succeeded in pushing through a third central bank, the Federal Reserve. At that time, critics echoed the sentiments of Messrs. Jefferson and Jackson, but their warnings were not heeded. For over 100 years, the US has been saddled by a central bank, which has been manifestly guilty of speculation, financial manipulation, and corruption, just as predicted by Mister Jefferson.

From its inception, one of the goals of the bank was to create inflation. And, here, it’s important to emphasize the term “goals.” Inflation was not an accidental by-product of the Fed – it was a goal.

Over the last century, the Fed has often stated that inflation is both normal and necessary. And yet, historically, it has often been the case that an individual could go through his entire lifetime without inflation, without detriment to his economic life.

Yet, whenever the American people suffer as a result of inflation, the Fed is quick to advise them that, without it, the country could not function correctly.

In order to illustrate this, the Fed has even come up with its own illustration “explaining” inflation. Here it is, for your edification:

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If the reader is of an age that he can remember the inventions of Rube Goldberg, who designed absurdly complicated machinery that accomplished little or nothing, he might see the resemblance of a Rube Goldberg design in the above illustration.

And yet, the Fed’s illustration can be regarded as effective. After spending several minutes taking in the above complex relationships, an individual would be unlikely to ask, “What did they leave out of the illustration?”

Well, what’s missing is the Fed itself.

As stated above, back in 1913, one of the goals in the creation of the Fed was to have an entity that had the power to create currency, which would mean the power to create inflation.

It’s a given that all governments tax their people. Governments are, by their very nature, parasitical entities that produce nothing but live off the production of others. And, so, it can be expected that any government will increase taxes as much and as often as it can get away with it. The problem is that, at some point, those being taxed rebel, and the government is either overthrown or the tax must be diminished. This dynamic has existed for thousands of years.

However, inflation is a bit of a magic trick. Now, remember, a magician does no magic. What he does is create an illusion, often through the employment of a distraction, which fools the audience into failing to understand what he’s really doing.

And, for a central bank, inflation is the ideal magic trick. The public do not see inflation as a tax; the magician has presented it as a normal and even necessary condition of a healthy economy.

However, what inflation (which has traditionally been defined as the increase in the amount of currency in circulation) really accomplishes is to devalue the currency through oversupply. And, of course, anyone who keeps his wealth (however large or small) in currency units loses a portion of their wealth with each devaluation.

In the 100-plus years since the creation of the Federal Reserve, the Fed has steadily inflated the US dollar. Over time, this has resulted in the dollar being devalued by over 97%.

The dollar is now virtually played out in value and is due for disposal. In order to continue to “tax” the American people through inflation, a reset is needed, with a new currency, which can then also be steadily devalued through inflation.

Once the above process is understood, it’s understandable if the individual feels that his government, along with the Fed, has been robbing him all his life. He’s right—it has.

And it’s done so without ever needing to point a gun to his head.

The magic trick has been an eminently successful one, and there’s no reason to assume that the average person will ever unmask and denounce the magician. However, the individual who understands the trick can choose to mitigate his losses. He or she can take measures to remove their wealth from any state that steadily imposes inflation upon their subjects and store it in physically possessed gold, silver and private cryptocurrency keys.

Source: ZeroHedge