Throughout history, whenever one nation saw its borders being approached or defended with rows of horses, cannons, troops and tents of a neighbouring army, such movement clearly suggested a major “uh-oh event” was in motion.
In short, nations were preparing for imminent change. Moving from military metaphor to current financial reality, the very same pattern of nations, bond markets and central banks prepping for “uh-oh” is undeniably in play.
Ever since the myopic weaponisation of the USD in the wake of backfiring sanctions against Russia in early 2022, the de-dollarisation process, combined with the now obvious and steady rise of the BRICS+ alliances, is a clear sign of financial “troop movements” at the border as the USD approaches its “uh-oh” moment. The world is gradually shifting form a USD and UST-driven mono-polar system toward a multi-polar and multi-currency new normal, all driven by increasing distrust for a weaponised USD and an overly indebted Uncle Sam.
The following chart explains the record-breaking tactical moves (2022-2023) by global central banks (especially in the East) to dump USTs while simultaneously stacking physical gold. Simply stated: The financial troops are in motion across our borders. It’s plain to see, and it’s plain to see why.
THE WORLD IS CATCHING ON: AMERICA IS BROKE
With global debt well past $320T, and with combined US public, corporate and household debt moving at warp speed toward $100T, most of our financial and global “generals”—from South America to Asia—are seeing what many pundits refuse to see, namely: The world is broke and the US is even more so.
Of course, those who are broke tend to have bad credit and little credibility. Uncle Sam is no exception, and his IOU, the once globally-revered UST, is nothing more than a declining asset from a junk credit. This explains the steady dumping of USTs around the globe in favour of that barbarous relic, physical gold.
But as “junky” as the recently Fitch-downgraded UST may be, it is still measured by the world reserve currency, which means despite having the balance sheet of any typical and debt-soaked banana republic, America is not just any banana republic. Stated more simply, the USD and the US IOU (i.e., sovereign bond market) won’t be going down easily nor overnight. But down it is going, right before our watering eyes.
THE US TREASURY BOND: UNLOVED, UNWANTED AND IN NEED OF A BAILOUT
In addition to being weaponised and hence distrusted, the UST is suffering from a public and embarrassing mis-match of supply and demand. Since 2014, foreigners have been net sellers of American IOUs. This, of course, means demand for the UST is sinking, which places mathematically downward pressure on its pricing and hence upward pressure on its yields.
Adding insult to injury, at the very same time that demand for US Treasuries is tanking, the supply of Uncle Sam’s desperate IOUs (to pay for staggering entitlement, military and other deficit spending) is rising.
This supply force, places even further downward pressure on US sovereign bonds and hence further upward pressure on yields. But rising yields in a debt-bubble is like a match in a gas station. Things start to blow to pieces, from UK Gilts and US banks to Main Street businesses and Wall Street bond desks.
FROM ‘‘HIGHER FOR LONGER’’ TO ‘‘PAUSING FOR LONGER’’
When you then add Powell’s recent “higher for longer” policy on top of this open supply and demand disaster, it’s so easy to see why US Treasuries are tanking and yields on the US 10Y have recently gone above the 5% marker. Of course, rising bond yields, which the Fed realises it can’t really control, means rising interest rates and hence rising interest expense—not just for the hundreds of small businesses filing for bankruptcy at double last year’s rates, but also for Uncle Sam.
Interest expenses on US public debt is now hitting the $1T mark, which Uncle Sam can’t afford. This likely explains why Powell’s higher-for-longer rhetoric is slowly morphing toward “pausing for longer” as the Fed begins to see what we’ve been warning for months: It’s stuck with no good options left.
TRAPPED BETWEEN BAD SCENARIOS
America, having lived for decades beyond its means in twin deficits, unprecedented debt levels, and a -65% Net Foreign Investment Position, is broke. Furthermore, there’s simply not enough GDP or tax receipts to cover a debt to GDP ratio of 120% and 6% deficit to GDP bar tab.
As shown in the charts, there is not enough natural demand for America’s increasingly desperate IOUs. But given that debt (and trillions and trillions of IOUs per year) is the rotten wind beneath the so-called wings of American exceptionalism, Powell, like all economics-challenged politicos (left and right in DC), recognises that this debt party cannot be allowed to come to end. There’s simply too much at stake.
SAVING THE UNWORTHY
In other words, there needs to be some buyer(s) of these increasingly expensive USTs (which Powell’s “war against inflation” made even more expensive), because debt –and hence US sovereign bonds—are the very bedrock of the US financial model—from risk asset markets and government spending to pension funds and annual tax (capital gain) receipts. Or stated even more simply: The bond market is too big to fail. It can’t fail. Which means the policy makers will need to save it.
Which means, as warned for years leading up to this seminal moment, the FOMC will have to create more synthetic money out of thin air to support this otherwise zombie-fied bond market.
Which means that money, previously back-doored in the form of BTFP and TGA-account liquidity, will require another Fed-pivot to more dovish and inherently inflationary QE after months of hawkish, and market destroying, QT.
Which means Powell’s war on inflation will end, as equally warned, in more, not less inflation, in order for Uncle Sam to inflate away his otherwise unsustainable debt problem/bubble. This, sadly, is nothing new under the sun. Ultimately, every debt-strapped empire, nation or regime is forced to make a choice between saving its debt-market or sacrificing its currency.
THE LESSER OF TWO EVILS FOR DEBT TRAPPED SOVEREIGNS
In the end, it is always the currency that is sacrificed, and hence it always the currency bubble which is the last to pop. Thus, and despite being the best horse in the global glue factory, and despite being the world reserve currency, and despite being the key currency in Euro Dollar and derivative markets (the “milkshake theory of perpetual USD demand), even the USD will get debased, inflated and hence weaker in the face of a debt reality that is even stronger than the once “immortal” greenback. Again, we are not the only ones who see this.
SO EASY TO SEE
The BRICS+ nations see it; the global bond markets see it; a rising list of UST-dumping and gold-stacking central banks see it. Even Jamie Dimon at JP Morgan sees it: America, along with its bond and currency markets, is heading downwards not upwards. Of course, informed, far-sighted and wealth-preservation-focused investors also see this. They have always seen it. They’ve known for years that fiat money always reverts to its zero-mean.
SMARTER THAN THE FED
They’ve known that the currency-debasement process is slow, yet steady, and they know that central banks like the Fed have been committing crimes against real money ever since 1971 saw the death of a gold chaperone on the now over-created USD. That is why individual and sophisticated investors, regardless of where or how their paper wealth was made, have always become their own “central banks” by insuring that same paper wealth with their own “gold-backed” reserves—i.e., their own physical gold.
In short, rather than “fight the Fed,” a smart minority of investors just had to be “smarter than the Fed.” This explains why gold is rising despite headline claims of victory over inflation, positive real rates or even a relatively strong (yet waning) DXY. Sophisticated gold investors have seen this currency end-game long before the policy-makers will confess it.
All we can do now is watch this sad yet oh-so-predictable game play itself out among a litany of excuses, scape-goats and platitudes. The math, however, is simple. Too much debt and too little growth means more debt paid for with increasingly debased currencies, a pattern for which physical gold always gets the last, dark laugh. EG