American Sanctions | Economic Reality of Gold vs Paper Currency
By now, we may have thought that life would have become unbearable for those who lived in the former Soviet Union or Russia. It is, after all, a couple of years since they became the most sanctioned nation on the planet. In 2022, they moved to the lead in terms of how many sanctions one nation could endure from the United States (see graph below). We even warned before then that perhaps sanctions could end up harming us (the US) more than the intended target of the sanctions and of the international move towards gold at the expense of those of us who transact in dollars. Today, we will take a look at how life has fared for the average Russian living under a strict American sanctioning policy, compared to the experience of the average American living on the side of the ones doing the sanctioning. It is a classic tale of gold vs paper currency and/or debt.
Tucker Carlson - Sanctioned Groceries
Whether we like him or not, American journalist Tucker Carlson has become one of the most influential journalists in our nation today. He has frequently done the hard work of investigative reporting while delving into topics and issues often considered off-limits to most mainstream news outlets. Tucker recently went behind the scenes in Russia to provide an inside look at the living conditions inside the "most sanctioned nation on the planet." What he found was shocking to many, including himself, but it seemed to reinforce the notion that tangible assets like metals are important holdings to own and produce when faced with such a conflict. As a reader of this blog, you were perhaps not as shocked as many as we wrote about this when the conflict and increased sanctions began.
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A quick Google search for the "Tucker Carlson Grocery Store Trip" clip referenced above is more likely to pull up a multitude of clips created by his detractors. While detractors have pointed out their grievances with Carlson and his visit, no one has disputed that it costs $103.82 to fill the grocery cart with similar items that cost $400.00 here in the United States. This is not an argument in support of all things Russian at the expense of all things American - not by a long shot. However, it is something to consider in terms of an economic system based on tangible goods such as gold, oil, and wheat versus a system based on debt and paper currency.
Low Debt vs. High Debt
Russia holds lots of tangible goods with low debt levels (18% of GDP), while the US carries high and unsustainable debt levels (130% of GDP) and imports many goods, including food items. While it is true that the average Russian earns only a fraction of what the average American earns, they also need only a fraction (1/4) to purchase the same amount of groceries each week. What can we do as Americans to help make ourselves as impervious to American sanctions as it is to the average Russian shopper? We have advocated the same things for years - decreasing personal debts and creating or increasing an allocation to precious metals. Let's now take a look at how gold vs. the dollar has fared over the last few years and how owning precious metals can help the average American.
We've all seen the charts showing the reduction in the purchasing power of the dollar over the last hundred years compared to the value of gold. But what about the last three years? We have seen official inflation readings of 5.9% (2021), 8.7% (2022), and 3.2% (2023). The simple addition of these readings gets us to 17.8%, but compounding them (more realistic) gets us to a 3-year increase of 18.8%. When we consider that the effects of actual inflation are often double what the official inflation rate suggests (see chart above), our potential loss of purchasing power for the last three years could exceed 30%. But for the sake of argument, let's assume the official loss of purchasing power for the dollar is correct, at -18.8% for the last three years.
That would mean we would need 18.8% more dollars to purchase the same items or enjoy the same lifestyle as three years ago. Good luck if the bulk of our savings was stored in the typical bank account. According to Bankrate, the average CD rates topped out at 2% at the end of the period. Using the highest average rates would give us 3.88% more dollars after three years, but our purchasing power would be 3.88% minus (-) 18.8% inflation = (-) 14.92% loss of purchasing power. If investing in the stock market, the DOW index went from 31500 to 38500, for a gain of 22%. But the value of the dollar dropped by 18.8%, meaning our purchasing power gained only 3.2% - but at least it was a gain unless we pay some taxes on the inflation disguised as stock market gains.
American Impacts of Owning Gold
The price of gold three years ago (3/8/21) was $1,683, vs $2,143 at the time of this writing. This is a 27% increase when priced in dollars, worth 18.8% less. For those holding gold in physical form throughout this period, there were no taxes due or tax reporting required. This equates to a real gain in purchasing power of 8.2% over the three-year period in dollar terms. While at first glance, 8.2% may not sound like a great return for three years, it shines pretty brightly when compared against the alternatives from the bank (minus (-) 14.92%) or the stock market (3.2% before taxes). This also helps explain why a national economy based on gold, tangible commodities, and low debt levels is able to endure a paper-financial assault from those with a debt-and-paper-dollar-based economy.
There was a day here in the United States when $103.82 would buy a week's worth of groceries for a family of four (as in Russia) instead of the $400.00 it takes in the US today. By storing a portion of our savings in gold instead of in a savings account, we can help ensure our future ability to enjoy the same lifestyles in spite of the effects of rising prices. The same policies that brought record amounts of sanctions to Russia have also created 80-year record inflation rates for the households of average Americans not owning gold. Thankfully, we can all do something about that.
