Blaise Pascal and Albert Eienstein fortell our future

The “man who invented Monte Carlo” — Blaise Pascal — well understood psychology as well as being a genius in Mathematics. At the time, gambling houses were full of crooked games; they had to be because few understood how odds worked and it was as likely as not the House proprietor didn’t have any better idea of what odds the House faced than the player did. Pascal brilliantly understood two things–that the human mind could errantly perceive patterns (where none existed–this isn’t unique to humans by the way), and that most people didn’t like to take the time to contemplate mathematics. From this, Roulette was born. A (then) fast moving game of chance in which it would be impossible for a person to consistently win over the house (even if you bet either straight red or black or odd or even you will still lose at a rate of at least 2/38 over time although the early roulette wheels only had one green 0 space; newer ones have improved house odds by placing an additional 00 space in the mix). The house didn’t HAVE to cheat; the profit was built into the wheel. Additionally, people (errantly) believed (as they still do) that winning and losing came in streaks when the marginal probability is unchanged with each throw of the ball (or flip of the card or roll of the dice). While the odds of flipping ten ‘heads’ in a row with a coin is 1/1024, IF someone DOES flip ten ‘heads’ in a row, he’s not due for a ‘tails’; the chance of heads on the 11th flip remains 50-50. This is a powerful psychological force. If one needs more proof of concept, the Biden regime might seem due for a ‘win’ of some kind but its losing track record persists–crapping out with every roll. Pascal also understood that interest–or in the more basic concept OF interest and value–was exponential in nature (just like many other natural things; hence we have a natural logarithm and its partner exponential E to the X and ten to the X because this often models natural events like atomic fission quite well). Chernobyl blew up largely due to operator buffoonery but the core physical principle is that reactor power CAN double every tenth of a second left unchecked–and a similar principle can and has imploded many an economy.

When asked one of mankind’s most ingenious inventions, Einstein remarked “compounding interest” (although he might have stolen this from old Ben Franklin). Meaning that interest–or its inverse–inflation–was exponential in nature (Al, Blaise, and old Ben understood this quite well). You can run the numbers yourself–and when doing so find out that if one considers paying back a 30-year loan vice a 15 year loan one pays wayyyyyyyy more interest—like way way more–than simply double. Now, in finance there is sometimes a good reason to stretch out a loan and suck up the interest; namely if the value of the bought asset is outrunning the exponential interest–OR–conversely–if the money spent is devaluing at a greater rate than the interest paid on the loan. In the latter case, one kind of HAS to spend the money in that it’s rapidly losing value and putting it in something that doesn’t DO this becomes critical (although finding that right something is often very hard to do and everyone has a scheme that won’t work). Of course, the RIGHT answer is that money holds its value; historically with fiat currencies this never happens. Strangely enough, with recent events, it seems the general public is taking on more debt–even at the incredible credit card rates up to 20%. In a way we think they ‘get it’ — when real inflation runs at 20% it suddenly makes sense to avail oneself of credit and live the high life, making the plan to later default and leave someone ELSE holding the bag. Which, although seemingly fiscally irresponsible, is a VERY rational thing to do. We don’t advocate such an approach, but it does make sense given that their very own government is doing far worse fiscal misdeeds.

In that interest rates are exponential, so are those of inflation. In ANY economy, there is a point by which there is so much inflation momentum that it becomes impossible to put on the brakes (think of a big loaded SUV with tiny brakes going down a continuous 8% grade with the gearshift stuck in neutral. If caught early enough, before too much speed is gained, the SUV can easily be stopped. Or perhaps stopped, the brakes are allowed to cool, and then small segments of driving and stopping are made to negotiate the hill. But in that energy varies as the square of the velocity, there comes a point going down the hill if speed is left unchecked where the brakes can only partially slow the SUV and eventually burn out leaving the car to careen down the hill wiping out the occupants and the vehicle).

We’ve had an extremely busy summer here at D-J with clients attempting to develop a strategy to deal with energy prices and inflation. As we’ve noted before, ONLY a governmental entity CAN cause inflation (Milton Friedman has a good treatise on this). We at D-J believe this is completely intentional at this stage, and is a deliberate attempt to garner power by destroying a market economy. Those so doing apparently haven’t done much study of history in that it’s usually those at the reigns who face the angry mobs with pitchforks and torches when they can’t eat or heat their homes. One would do well to remember the French Revolution, the Russian conflagration in the early 20th century, as well as what happened to WWII despots when the people realized they’d been sold out by their ‘leaders.’ It doesn’t turn out well for anyone, particularly those holding the bag.

So–what’s happening ? It’s not Russia, it’s not China, it’s not bitcoin, it’s not the ‘supply chain’ (whatever that nefarious media propaganda buzzword is). It’s twofold:

Our inflation problem is driven by EXACTLY two things at this point. The first–and most salient is years of deficit spending and monitizing debt is finally catching up with us. For years, the Federal Government has been running massive debt; it’s relatively recently that it’s engaged in a shell game with the Fed to buy this debt and then turn around and print money. This is effectively a tax–a particularly evil one in that it destroys value of all things as well as money held in reserve by individuals’ savings. Not only has the Federal Government spent so deep into a hole it can barely service the debt (taking whatever we send it such that one dollar of tax revenue leverages five others of borrowing) but also it now raids our piggy banks. Destroying its buying power. Think of it and all the taxes you pay–not only has this NOT been enough to satiate a bunch of miscreant robber barons armed with pens and ties, but also now it goes after your savings and retirement. This pit is bottomless. Janet Yellen had the audacity to lie about the severity of the problem (treating us like idiots saying the inflation was ‘temporary’) and then compound her lie by saying “well, it was a little worse than we thought.” All of US saw it coming; the ONLY rational explanation is she’s a dishonest miscreant (NO ONE who’s spent a life in finance could expect any different a result of the massive debt the Feds have accumulated–at best it would be gross negligence but no-one is that stupid).

The SECOND reason is the attempted deliberate destruction of the diatomaceous (sorry for the pun) fuel industry. In an attempt to control everything (it’s all about energy), the current regime has waged a war on fossil fuels. With absolutely NOTHING to replace them. While we at D-J are advocates of all forms of energy commensurate with the specific application (including Nuclear which has great promise), we do realize that while the supply of fossil fuels might be finite you NEVER attempt to intervene and bridle their use by law until you have a suitable, economically feasible replacement. Which we don’t at this point; ALL forms of energy have externalities and ALL are renewable (and not). Solar is great for limited off the grid applications in sunny places; it doesn’t do much to augment a grid. Same as for wind which has been a bust in terms of reliable grid power. We’ve debunked the Carbon scam on many occasions here (the trivial emission levels of CO2 by mankind has nothing to do with earths’ temperature–and is far overshadowed by other natural forces including varying solar output) but it’s been used as an excuse by miscreants and dupes to attempt to make fossil fuels more expensive such that so called ‘renewables’ become more financially attractive. This never works and explains what’s happening now. The Biden regime has deliberately used a war as an excuse to attempt to kill the fossil fuel industry–along with the ‘green’ scam–by deliberately destroying supply to drive the price of fuel up. Massive amounts of land have been locked up and exploration to obtain oil on these lands has been prohibited. The US went from a net energy exporter to being exceedingly dependent on foreign oil. While at the same time the MEANS to efficiently deliver this oil via pipeline from friendly nations have been deliberately destroyed by the cancellation of major pipelines. To exacerbate this, draconian EPA regulations have been imposed on industry to prevent REAL new energy that works from being exploited. Of course, we’ve all seen the media propaganda surrounding all of this; our advice to clients along these lines is not believe them–to the extent of doubting the media even if it said water is wet.

Most of this is well-known to our clients. They are wondering what to do and what happens next.

For the what to do unfortunately there isn’t a rosy picture; the key is not to panic and live a good life. Capitalize in durables when one can, leave decent stock market assets alone, have SOME liquid reserves of cash (but not too much), and it might be prudent to have some gold and silver (although these are more of a comfort material; perhaps having enough to buy food and energy over the span of one year which isn’t all that much in reality–precious metals have very limited utility in that one can’t eat ones’ gold). Obviously one needs be armed and have plenty of ammo; but most of our clients are in this position from the LAST time there was a run on ammo so really don’t need to stockpile any more inventory. Have enough tools to live life, and spend some time educating yourself in how to find a lasting food source (hint: food doesn’t come from the grocery store). Hold prudent inventory of basic need stuff and leave it at that. Since most of our clients ‘go long’ on everything in life most at this point are personally well stocked for any form of man-made or natural disaster anyway. The key here we believe is not to panic and to leave investments alone. If our client doesn’t have a Valhalla of sorts, we advise to construct one; at the very least it will provide enjoyment of life in a beautiful place. And invest in oneself–skills, experiences, enjoyment, living life, pets (if desired), etc.

For what happens next we’re into the unknown. While it’s POSSIBLE there could be a Paul Volcker clamp on the money supply (and a Reagan boom following it), this seems VERY unlikely with the attitude of the present regime. They seem quite content in strangling energy and promoting inflation. So–to us–it’s unlikely things will abate anytime soon. Whether it’s gross negligence, general incompetence, or deliberate malice it really doesn’t matter; the net result is the same. Thanks to our buddies Al, Blaise, and Ben, we know how this turns out. At SOME juncture the Fed reaches a point of no return–where the service on the monetized debt exceeds its ability to print money that still has some value (most government pensions–including social security– are CPI-U indexed or indexed in SOME way to inflation which even if the books are cooked takes over due to exponential interest. AND those individuals with these pensions will raise holy hell if they don’t at least try to keep up). It’s a very rapid and tightening exponential spiral — similar to the flight path of the infamous tiki bird (which flies in ever tightening circles until its head flies up its own a**). If we’re not there yet we’re pretty darn close.

At D-J, we’re not afraid to make bold predictions. OUR prediction from our mathematical models at this juncture is if we see fuel prices within the next year in the ‘free’ states (those not having boutique gas or taxing the hell out of it) at or above $9.00/gallon for a month (gasoline) ($10.00 a gallon for Diesel) with no sign of abatement, the US economy will literally collapse within one year due to runaway inflation. Like the Titanic and the iceberg cuts in its hull, we believe it a mathematical certainty. This is the point by which it will have entered the ‘turning point’ of the exponential curve beyond what GDP gains and production can counter within the time available. One would hope that sane individuals intervene before this point, but we don’t seem to be seeing much of that these days. Energy prices hit everything; there IS hope for America to ‘Power Out’ of this by massive fossil-fuel energy production (as well as an ambitious program of building nuclear reactors)–but it’s gotta happen soon. As does taking real steps to tighten the money supply (fulfilling the Fed’s primary mission of keeping a dollar a dollar) and cutting government spending (we’re at the end of our credit card limit). The ‘green’ environwackos use the “save the planet” scam but this esoteric drivel pales into insignificance when a family can’t eat.