Today’s guest is Lyn Alden, who’s background includes Electrical Engineering, and a current associate and partner of George Gammon. She is well-versed in macroeconomics, using a sort of Quantum Physics approach to breaking down this larger scale, moving economics. For Lyn, her passion and interest in finance is her drive.

“When it comes to how the world of finance works, that just clicks with me.”-Lyn

With an engineering background, as opposed to an economics background, Lyn rather dives into the principles, then the numbers themselves, and tries to reconstruct what she sees rather than take existing models in account. The world of macroeconomics looks more like a large network.

“I focus a lot on control systems.” She says to think of it like a household thermostat. Every time the temperature goes up, the sensors in the thermostat recognize this and kick in a reactionary response-cooling the air down. When the thermostat senses the room becoming too cool, the response is to turn the heat on and bring the room up to a warmer temperature.

For Lyn, that’s how a lot of macroeconomic systems work. The sensors (in the metaphoric thermostat) are typically policymakers. If deflation is occurring, the sensors (policymakers) come in with an “inflationary response” and different feedback loops.

Quantum Physics Vs Newtonian…in Economics?

Newtonian views, Robert points out, are mostly action and reaction. Ups, downs, straight lines. In a more Quantum Physics approach, one might see the network of macroeconomics and see the variables, the tiny changes, what happens not only IN the situation, but around it, the larger picture, the “roller coaster” trajectory. Robert likens Lyn’s approach as a Quantum Physics one, and because of this, wonders if Lyn has an opinion on what’s coming, what is the long-term outlook.

Lyn says eventually, we are likely to see a higher rate of inflation with a degree of currency devaluation. The money supply will grow substantially, and the individual buying power of those currency units will go down “pretty significantly” compared to hard assets.

Robert reminds us of a quote from Vladimir Lenin: “The best way to kill capitalism is to debauch the currency. [sic]”

The Weimar Republic, Robert says, which brought Hitler to power, also had those two tell-tale signs; “currency was gone, inflation went up.”

Lyn explains that after WWI, Germany’s production base was destroyed. Because of this, and in addition to war reparations from other countries, debts printed on the value of another country’s currency, not their own, this led to, and can lead to, hyperinflation.

“…they printed their own money to finance deficits.” The combination of the destroyed production ability in Germany, and outside war debts, and the printing of more and more currency led to the hyperinflation.

“So, the Weimar Republic printed as much money as possible…what’s going to happen here?”—Robert

According to Lyn Alden, her long-term forecast for the United States is one of higher inflation, not necessarily hyperinflation. Generally, she says, in cases like Weimar and some other emerging markets, you need a combination of a couple things to create hyperinflation. You need destruction of your own production base. (This occurred in both the Weimar Republic and in Zimbabwe, and is currently happening in Venezuela).

The second ingredient that contributes to hyperinflation is when a country owes a debt in a currency they cannot print, or a currency not their own. Some emerging markets right now, such as Argentina, owe a debt that is denominated in US dollars, but countries like Japan and the U.S. have debts mostly denominated in their own currencies.

Hyper-inflationary events, she says, “tend to have those couple recipes.”

Her take is that higher inflation is coming, but not necessarily hyperinflation.

Nixon took the dollar off the Gold Standard in 1971…

In 1971, the U.S. experienced rapid inflation, according to Lyn, after Nixon removed the dollar from the Gold Standard, but it didn’t reach the levels of hyperinflation, because we still had our production base. We didn’t experience a collapse in the economy, just a “really sharp devaluation of currency.” Severely damaged, but not obliterated currency, she says.

“I think going forward over the next decade…you could see in developed countries pretty significant currency devaluation.”-Lyn alden

What happens when Biden’s Administration takes control?

In Lyn’s view, the process (leading to a higher inflation and devaluation of currency) is going to take several years to play out. In the next few years, she says we’ll see what’s called reflation.

“You start from a low period of inflation…get to that higher kind of inflation. At first it can feel good to a lot of people.”

Like this year, when stimulus checks go out, and you have a rebound. The initial period when the printing of money (leading to devaluation of currency) is circulation and the high inflation of goods is occurring, slowly, that period can seem good initially.

What the problem will be, says Lyn, is that they’re very likely to overshoot, because their deficits are structural. Entitlements, military spending and interest on debts is very near all incoming tax receipts.

What does Lyn’s Crystal Ball say?

Lyn says we need to watch for the destruction in production of commodities. This is what would or could, combined with all the other factors we are experiencing, lead to a hyperinflation event.

Commodity prices, with the exception of gold and silver, are roughly the same price they were ten or fifteen years ago. We had a period of “commodity oversupply.” For example, a lot of cheap money allowed us to apply new technologies, Lyn says, to get more oil and gas out of the ground. We had an oversupply of copper. It feels abundant, but because the prices for these commodities haven’t been rising in many years, the incentive to get new production has diminished.

This year, we saw a very large reduction in capital expenditures for new oil and gas fields, she says. We’ve been seeing really weak copper development, and copper is an important element for the new economy for electrical grids, infrastructure, etc. Not just in the U.S., but in the world.

The places in “everyday life” that show more evidence of inflationary policy are things like tuition, childcare services, healthcare expenditures, but because we had an oversupply of commodities for a long period, and they’ve been relatively cheap, we haven’t seen inflation on the biggest scale yet.

What to watch going forward

Some of the supply for these commodities is getting pretty tight, Lyn tells us. When that happens, against large deficits that are in large part being monetized, you can start to see a general rise in commodity prices. It’s hard to say if it’s going to be next year or in three years, but as we get further into the 2020’s, Lyn thinks it’s something to consider. It can promote a much more inflationary trend and problems getting the commodities we need.

The dollar index is going down, what does that mean?

The dollar is weakening versus “a basket of other major currencies, like the euro, and the yen.” For the last several years, the dollar has been relatively strong versus the other currencies. In the next several years, Lyn expects to see the dollar have another shift down, similar to the early 2000’s and late 1980’s.

“So, when it comes down from those strong peaks, that tends to be pretty bullish for commodities. And it also tends to be pretty good for some foreign equities as well. If you're a dollar-based investor, you can potentially counter that by having some foreign equity exposure, as well as commodity exposure.”—Lyn Alden

In the middle of the coming decade is where we are likely to see some of these key shortages in the abundant commodities, that Lyn talks of.

We had a large destruction of small business this year, due to COVID-19; something near 100,000 restaurants went out of business while larger corporations, stayed in business. That is largely in part to capital financing, bailouts, and the Feds buying their bonds.

“I think that a lot of these forces are going to kind of come to a head probably as we get roughly in the middle of this decade would be my best guess.”

China and the currency war

Robert mentions that we have a sort of currency war and trade war happening with China, mainly from losing our production and shipping overseas to them. China may be in a similar situation as America.

Lyn agrees, but says one of the things they’re focusing on is this potential commodity shortage. In the past several years, they’ve been investing in commodity projects around the world, instead of reinvesting their dollar surpluses and trade surpluses into buying US treasuries, like before.

They’re financing oil field development in Russia, Eastern Europe, Latin America and they’ve called this The Belt and Road Initiative (or One Belt One Road). They’ve built tons of infrastructure, and also commodity development. That is China’s attempt and answer to the macroeconomics they see happening world wide.

Lyn says they’re clearly trying to make sure they have access to commodities, and working on ways to buy those commodities outside the U.S. dollar-based system.

Buying Commodities in the Dollar-based System

Lyn explains that for several decades, only U.S. dollars could buy commodities around the world, for the most part. If France buys oil from Saudi Arabia, they pay for it in U.S. dollars, even though it’s neither parties currency.

China surpassed the United States in terms of becoming the world’s biggest commodity importer. But they still pay for them in U.S. dollars, for the majority. One project China has been working on was diversifying the types of currencies they can buy commodities with. Now, they can pay Russia in euros for some of their oil and gas.

In the long term, Lyn says, their currency is probably going to hold up relative to the U.S. dollar pretty well. They won’t want it to get too strong against the dollar, because they don’t want to lose export competitiveness.

Robert mentions the idea that there is a currency war, but one of “competitive devaluation”. The European Union also doesn’t want to get their currency too strong relative to the United States. To Robert’s point, the winner of this type of competition becomes hard assets, things inherently scarce and that cannot be debased; commodities, gold, silver, Bitcoin.

Where does the Euro stand?

Lyn says, from a three-year perspective, the the euro could strengthen relative to the dollar. The biggest problem long-term, for the European Union, is that they have basically a monetary union between the countries (the euro) but not a fiscal union.

The countries of the EU combined monetarily to the euro, however, none of those countries can print the euro. A lot of the southern countries have a significant amount of debt; obligations they can’t print. How does that fall out?

This is why, Lyn believes, Europes banks have been trading extremely low valuations. There’s a big, potential, fracture point in the EU currency system. People are afraid of the solvency risk that some of the banks can have if the euro encounters a major problem.

According to Lyn, there are decisions ahead for the EU. Either break apart the union, or take the opposite approach and unify their fiscal situation more and become more centralized.

England and Brexit

Lyn’s opinion on Brexit is that England is lucky and had good “foresight to not give up their own currency again.” They’re a part of the EU but not the monetary shared currency, the Euro.

The break up (Brexit) with the EU monetary system is difficult to unwind, she says, and England has shown that, but the difficulty would be much more significant for a country like Italy to remove themselves from the euro; their currency is full.

Brexit, she says, is a small taste of what some of these countries would face if they broke out.

What’s the forecast for Latin America, South America and Mexico?

Lyn says that if we get a weaker dollar, and a pretty strong commodity market, it could benefit Latin America pretty significantly. One of the problems Latin America faces, is that it is rich in commodities, but commodities have struggled in the past decade or more.

Many Latin American countries have high US dollar-denominated debts, as well; Brazil, Chile, and Mexico are a few. When the dollar strengthens, it puts pressure on their local economies; it’s like their debts are going up relative to their cash flows. Their cash flows are denominated by their local currencies.

If our dollar weakens, we can see emerging market growth periods, because it’s almost like their debt is getting devalued. It will come down to how well they govern, in specific countries.

Turkey and debt in their corporate sector

Asked about Turkey, and their currency problems, Lyn says that the main issue is that Turkey has a high US dollar-denominated debt in their corporate sector. Their government is not very leveraged.

They have some advantages, in this way. They’re very well positioned, but have outside issues. They haven’t built up high foreign exchange reserves, she reminds us, which means they don’t have a lot of US dollars stored away “like acorns for the winter”. During the strong dollar period, they face problems.

If the dollar weakens, Lyn believes it’s like taking “the foot off the throat of Turkey”. If they have good governance, they can come out pretty strong. They have good demographics, good geopolitical positioning, and a competitive manufacturing base. Their biggest issue is the corporate debt in US dollars, that they can’t print. “They are subject to the whims of how the dollar holds up relative to other things.”

To hear more from Lyn Alden, please visit her website at lynalden.com and you can see her contributions at georgegammon.com as well.