US BANKRUPTCY AND ECONOMIC DECLINE

[Kushinator]

We’re so deep in debt that minor tax hikes will do nothing to decrease our debt.

The debt never decreases. We are still servicing interest on WWI and WWII debt to this day.

All that matters is if GDP grows faster than deficits and debt in the medium to long term.

 

[Kushinator]

Today? Not so much, the 'risk free rate of return' is currently a 'guaranteed loss' and no, we're not going to get away with that forever.

Real returns on sovereign debt in the developed world are all negative, and have been so for quite some time. Nevertheless, the dollar's status as the world reserve currency is here to stay, until China opens up their economy. I doubt ill see it in my millennial lifetime.



Source

 

[newpublius]

Nevertheless, the dollars status as the world reserve currency is here to stay, until China opens up their economy.

Source

This is binary thinking, ie it is either THE reserve currency or it is no longer a reserve currency. That is the wrong way to look at it. As of TODAY, the dollar is losing its relative importance as a reserve currency. It is simply wrong to say that the dollar is THE reserve currency even today. The pound, the euro, the yen, the Swiss Franc and there are others are all important 'reserves'

The US dollar has lost significant relative importance in this respect.



And that trend continues thru today:

Central Banks Retreat From U.S. Dollar

The dollar’s share of global reserves has decreased to its lowest level since 1995, according to International Monetary Fund figures.

www.wsj.com

Central Banks Retreat From U.S. Dollar
Dollar’s share of global reserves has decreased to lowest level since 1995

"The dollar’s share of global reserves has decreased to its lowest level since 1995, according to International Monetary Fund figures on central banks’ foreign-exchange holdings released last week. The currency now stands at 59% of global reserves as of December 2020—a 1.5 percentage point decline over the quarter."



And before this the same situation prevailed. When the US had a weak dollar, its share of reserve currencies fell and when the US had a strong dollar, it rose again.

But if the US continues to do what it is doing, titanic budget deficits, titanic trade deficits, massive quantitative easing and low interest rates, trust me, people will find it increasingly unattractive to hold dollars and they will hold relatively less of them.

 

[Helix]

If you're so smart why didn't you hoard lumber? Or rental cars?

Aren't you the guy who tried to corner the 1645 tulip bulb market?

Nah, that wasn't me. I was traveling and getting into mountain climbing at the time, so i didn't learn about it until i got back to London in 1639.

 

[Kushinator]

This is binary thinking, ie it is either THE reserve currency or it is no longer a reserve currency. That is the wrong way to look at it. As of TODAY, the dollar is losing its relative importance as a reserve currency. It is simply wrong to say that the dollar is THE reserve currency even today. The pound, the euro, the yen, the Swiss Franc and there are others are all important 'reserves'

The U.S. dollar represents 59% of all global foreign currency reserves. The closest alternative is the EURO, but again much of their import trade is within their trading block, and so it's unlikely they'll move the needle much in the distant future.

The US dollar has lost significant relative importance in this respect.

Of course! Economic convergence dictates foreign currencies will continue to play a larger role on a global scale. Eventually, the dollar will fade as it's representation in global trade and asset markets abates.

And before this the same situation prevailed. When the US had a weak dollar, its share of reserve currencies fell and when the US had a strong dollar, it rose again.

But if the US continues to do what it is doing, titanic budget deficits, titanic trade deficits, massive quantitative easing and low interest rates, trust me, people will find it increasingly unattractive to hold dollars and they will hold relatively less of them.

First and foremost, budget deficits have more to do with liquidity being trapped in asset markets than anything else. Lower deficits at this stage of our economic trajectory equate to higher unemployment.

Secondly, trade deficits are a sign of savings imbalances which ensure trading partners buy up dollar denominated assets. Given that treasuries are no longer the biggest game in town, foreign capital from trade gains had been overflowing into real estate, equities, and corporate fixed income classes... which brings me to credit easing.

Central banks around the world are building their balance sheets well in excess of levels necessary to drive interest rates to zero (or negative). Japan, Germany, France, etc... have been negative on a nominal basis for quite some time. Reason being, the demand for high quality sovereigns has been insatiable for more than a decade. The absence of credit easing would ensure liquidity is trapped in sovereign fixed income markets instead of equity and corporate fixed income markets. At this point, it's circular....

The only way to alleviate a global liquidity trap is for developed economies to run massive deficits to make up for their domestic investment shortfalls. And here in the U.S., it is having immense success. Inflation has been rising, output is nearing it's strongest growth in nearly 40 years, and private domestic investment has rebounded considerably. However much more work needs to be done, and a major infrastructure stimulus is just what this country needs.

 

[highroller]

Historically the dollar gained reserve status because it was backed by gold.

No, it gained reserve status because the United States won WW II and Europe was destroyed. Also, A LOT of debt is backed in it.

When there is an economic panic, NO ONE wants gold. They want DOLLARS because all their DEBT is in DOLLARS.


It may not last forever, but what has. Acting morally superior isn't going to help save the dollar. Raising taxes might though.

 

[newpublius]

Of course! Economic convergence dictates foreign currencies will continue to play a larger role on a global scale. Eventually, the dollar will fade as it's representation in global trade and asset markets abates.

But that's not what you said, you said THIS:

"Nevertheless, the dollars status as the world reserve currency is here to stay"

And its not 'here to stay' -- its status is completely dependent on how we treat the dollar and right now we're treating it in a way where people won't want to hold it in reserve.

But if we keep doing what we're doing it will NOT be THE reserve currency much longer, it will become A reserve currency very soon.

 

[newpublius]

No, it gained reserve status because the United States won WW II and Europe was destroyed.

Bretton Woods sees the US dollar as the spoke because it was backed by the world's largest reserves of gold. Other countries still very well could have opted for gold itself, nothing prevented that and they lived in an era where there was a strong predisposition to do just that. They opted for dollars because they were convertible for gold and they could take the dollars and buy treasuries and earn interest. They went for dollars because it was 'gold that earned interest' --- 1960s sees Vietnam, the Moon Shot, Great Society and seeing the increase in the number of dollars foreigners began changing them in for gold. Of course Nixon then had to abandon the gold standard.

And yes, until Volcker choked off inflation, the US dollar slowly lost its importance as a reserve currency. When Volcker increased interest rates in the 80s to choke off inflation, he instantly created real yield between the treasuries and the inflation rate and as a result the dollar got much stronger in the 1980s, generally, and the US dollar was more frequently used as a reserve currency. And now we're doing the exact opposite. Alot of things are happening right now that are very, very bearish for the dollar.

"When there is an economic panic, NO ONE wants gold. They want DOLLARS because all their DEBT is in DOLLARS."

You're wrong. On Feb 1, 2020, the USDX stood at 97.39 ; it then went to 102.82 which was indeed the historic 'flight to safety' to US dollars. Since that time, since that time the US has engaged in massive fiscal spending and monetary expansion and the USDX has dropped to 92.91 today.

Gold actually shot up as the pandemic hit. Since then it has gone sideways



Gold is a YIELDLESS asset so if somebody holds gold they pay with the opportunity cost of holding something else.

Nevertheless, this is 2021, the historical basis for gold as a central bank reserve was more self-evident 60+ years ago, gold's reputation is simply different today than it was then.

 

[highroller]

Bretton Woods sees the US dollar as the spoke because it was backed by the world's largest reserves of gold.

I am well aware of monetary history.

 

[highroller]

You're wrong. On Feb 1, 2020, the USDX stood at 97.39 ; it then went to 102.82 which was indeed the historic 'flight to safety' to US dollars. Since that time, since that time the US has engaged in massive fiscal spending and monetary expansion and the USDX has dropped to 92.91 today.

Anything in the 90s is fine. Also if everybody wants your dollars why would you not spend/print them?

 

[SMTA]

The U.S. dollar represents 59% of all global foreign currency reserves. The closest alternative is the EURO, but again much of their import trade is within their trading block, and so it's unlikely they'll move the needle much in the distant future.

Of course! Economic convergence dictates foreign currencies will continue to play a larger role on a global scale. Eventually, the dollar will fade as it's representation in global trade and asset markets abates.

First and foremost, budget deficits have more to do with liquidity being trapped in asset markets than anything else. Lower deficits at this stage of our economic trajectory equate to higher unemployment.

Secondly, trade deficits are a sign of savings imbalances which ensure trading partners buy up dollar denominated assets. Given that treasuries are no longer the biggest game in town, foreign capital from trade gains had been overflowing into real estate, equities, and corporate fixed income classes... which brings me to credit easing.

Central banks around the world are building their balance sheets well in excess of levels necessary to drive interest rates to zero (or negative). Japan, Germany, France, etc... have been negative on a nominal basis for quite some time. Reason being, the demand for high quality sovereigns has been insatiable for more than a decade. The absence of credit easing would ensure liquidity is trapped in sovereign fixed income markets instead of equity and corporate fixed income markets. At this point, it's circular....

The only way to alleviate a global liquidity trap is for developed economies to run massive deficits to make up for their domestic investment shortfalls. And here in the U.S., it is having immense success. Inflation has been rising, output is nearing it's strongest growth in nearly 40 years, and private domestic investment has rebounded considerably. However much more work needs to be done, and a major infrastructure stimulus is just what this country needs.

Damn fine analysis.

 

[Kushinator]

But that's not what you said, you said THIS:

"Nevertheless, the dollars status as the world reserve currency is here to stay"

And its not 'here to stay' -- its status is completely dependent on how we treat the dollar and right now we're treating it in a way where people won't want to hold it in reserve.

Incorrect. Other economies are emerging and converging which is creating and environment with more aggregate currency reserves. Of course the dollar's representation of total currency reserves will continue to decline. However, i don't believe I'll see the dollar fall from top reserve status on my millennial lifetime.

But if we keep doing what we're doing it will NOT be THE reserve currency much longer, it will become A reserve currency very soon.

Your point is loaded with partisanship. Until the rest of the global economy reaches a saturation point where U.S. markets are not the envy of the world, the USD reserve status is here to stay.

England's pound sterling didn't lose reserve status because the rest of the world abandoned it for dollars. Instead, the rest of the world (and the U.S. global hegemon) outgrew them. The same logic will repeat in the future.

 

[newpublius]

Your point is loaded with partisanship. Until the rest of the global economy reaches a saturation point where U.S. markets are not the envy of the world, the USD reserve status is here to stay.

But its not 'here to stay' -- the dollar itself needs to remain attractive enough to actually hold as a reserve currency and that is simply not a given.

The USD is currently in the process of losing reserve status. The reason is that its become increasingly less attractive to hold dollars. If we continue to follow the current dollar policy (yes, this is an affirmative choice), people WILL use the dollar as a reserve LESS OFTEN.

The reserve status is entirely dependent on the dollar's attractiveness.

England's pound sterling didn't lose reserve status because the rest of the world abandoned it for dollars. Instead, the rest of the world (and the U.S. global hegemon) outgrew them. The same logic will repeat in the future.

England basically bankrupted itself in WW1 and the Great Depression didn't help (and WW2 wouldn't help later either). England went off the gold standard in 1931, the US went off of it during the Depression but went back onto the standard after WW2. The dollar became the reserve currency because it was 'gold that paid interest' so it was actually BETTER than gold.

The British devalued.....

The 1931 Devaluation of Sterling

The 1931 devaluation of sterling ended a decade of financial struggle. It marked the collapse of an international financial order that had served the world for generations and had been reconstructed at considerable expense following the First World War. The gold...

link.springer.com

.....and then they didn't go back on.

The US devalued and then went back onto the standard at $35 an ounce.

Yes, the world abandoned a currency that was no longer backed by gold for a currency that was. That was a time when that was a much bigger deal.

Happened to the US when Nixon went off the gold standard in 1973 which coupled with the inflation of the 1970s, the dollar's use as a reserve currency declined streadily. What restored it? Volcker. Volcker made the dollar attractive again and the dollar gained increasing status as a reserve currency.

Right now, TODAY, if the attractiveness of the dollar does not increase it WILL continue its decline as a reserve currency.

 

[newpublius]

You know, I’ve been here in my entire adult life at the debt is unsustainable and we are on the brink of hyper-inflation and the only way to protect yourself is to buy gold.

How strange is it that the same people telling you this are the ones selling gold?

To get to hyperinflation the US would have to actually increase the money supply at a much, much greater pace. Right now since the pandemic the growth in the broad money supply, not just the simple sum aggregates, the Divisia M3/M4 money supply growth is about 2-3 times above what would be necessary to achieve the 'golden' growth rate of 2% (the 2% inflation target is vestigial and comes from the growth in the supply of gold itself).

We will experience consistent 5-10% inflation if the current policy continues.

They set a cheap money policy and now there will be cheap money consequences.

And if those consequences aren't palatable then that can be stopped by going Volcker and stopping it. It can be stopped, essentially at will.

Then the fiscal reckoning will come because the government will begin to have difficulty financing the deficit, the interest payments will increase as a % of the budget.

 

[Kushinator]

Right now, TODAY, if the attractiveness of the dollar does not increase it WILL continue its decline as a reserve currency.

The dollar will continue to represent less and less of allocated foreign currency reserves as the economy that produces dollar denominated assets, goods, and services continues to be less representative of the overall global economy.

Your subjective notion of attractiveness is hollow, and only serves to push a partisan agenda.

 

[newpublius]

Your subjective notion of attractiveness is hollow, and only serves to push a partisan agenda.

But its not subjective, holding dollars in reserve has become increasingly LESS profitable and today its even a downright LOSING proposition.

The result is predictable, the world is shifting away from the dollar as a reserve.

 

[Kushinator]

We will experience consistent 5-10% inflation if the current policy continues.

Just like Japan... oh wait!

They set a cheap money policy and now there will be cheap money consequences.

Nonsense. The alternative is liquidity trapped in the U.S. Treasury market and slower overall economic growth. There isn't an alternative at this stage.

And if those consequences aren't palatable then that can be stopped by going Volcker and stopping it. It can be stopped, essentially at will.

The Fed isn't going to jack up interest rates because the price of used autos was surging, nor are we going to experience 5% to 10% inflation in the coming years because deficits ballooned in response to the greatest global shock since WWII. Get real.

Then the fiscal reckoning will come because the government will begin to have difficulty financing the deficit, the interest payments will increase as a % of the budget.

Hey, you can dream amirite?

But its not subjective, holding dollars in reserve has become increasingly LESS profitable and today its even a downright LOSING proposition.

Holding basically every currency outside of CAD and CHF is a losing proposition. And yet, allocated U.S. dollar reserves continue to increase just as total allocated reserves have been.

When the inevitable transition occurs, it won't be because of ditching dollars, but because the global economy will need more than the U.S. is capable of providing. But again... if it happens in my millenial lifetime....

The result is predictable, the world is shifting away from the dollar as a reserve.

The world is growing faster than the U.S..

 

[Colin Norris]

A balanced and sensible update , imho , from Yaron Brook . BHZ Capital .​

I am perhaps biased because I am involved in Commodities Trading and see a fantastic prices spurt before the year end . From his stated reasons I have been inclined to see hyper inflation in the ghastly short term move to a possible full scale depression
YB is not as negative . Perhaps I am too pessimistic . Huge correction but just painful inflation but not the hyper type !
I am even playing with coffee presently because of the wicked frosts in Brazil earlier in the week but that is more short term speculation than trading .


Kitco News


The U.S. is headed for bankruptcy and economic decline, and the best way to protect your wealth is with gold, said Yaron Brook, managing partner of BHZ Capital.
Brook is the best-selling author of several books, including “Free Market Revolution: How Ayn Rand's Ideas Can End Big Government”. He is the chairman of the board at the Ayn Rand Institute and is host of the Yaron Brook Show.
Speaking with Michelle Makori, editor-in-chief of Kitco News, on the sidelines of the Freedom Fest 2021 conference, Brook said the government is “destructive” and is responsible for the economic troubles the U.S. finds itself in.
“COVID has shown us that the American people are willing to behave like sheep when the government dictates what they should and shouldn’t do. Also, the government is willing to take on massive powers,” he said. “We’re seeing the government move systematically towards bankruptcy. Who’s going to pay this debt?”
This high level of debt is almost impossible to be paid off now, Brook added.
“We are approaching levels of debt we saw in World War Two, but in World War Two, right after the war, we ran surpluses, so we paid it all back. Nobody’s going to run a surplus today. Politically, it’s impossible,” he said.
The more immediate consequence of high debt and government policies, including fiscal and monetary policies, is high inflation with no growth, or stagflation. However, the economy won’t reach hyperinflation territory, Brook said.
“[Hyperinflation] is quite unlikely because we know how to deal with inflation, we know how to stop it, it’s just very, very painful. I think what we’re really in for is a very long period of stagnation, maybe combined with inflation, maybe now. One thing we’re not going to see is significant economic growth,” he said.
Brook added, “I just don’t see good things happening in the U.S. economy. You’ve got massive malinvestment, you’ve got money flowing to the wrong things.”
The solution, according to Brook, is to reduce government intervention and abolish the Federal Reserve.
For the investor, assets to avoid in a stagflation scenario are risk assets like equities and long-term bonds. In fact, bonds will “get crushed”, he said.
“You want to be in something like gold, because gold actually maintains its value. It's on an investment as much as it is a store of value,” he said.

It always makes me chuckle when all th e doomsday predictions suddenly appear when Democrat governments get elected.
It doesn't matter who does the debt will continue to rise and will never be paid.
Every government will continue to point more.

 

[H0manAnthonyDominikPOTUS]

JUST ADMONISH ABOLISH ABSOLVE THE National debt and say we are no longer doomed. WITH AN EXECUTIVE ORDER BOOK. Biden can sign it with a marker or a pen.

 

[Cynical]

The debt never decreases. We are still servicing interest on WWI and WWII debt to this day.

All that matters is if GDP grows faster than deficits and debt in the medium to long term.

Is there any level that is unsustainable?

 

[Kushinator]

Is there any level that is unsustainable?

It's all relative. Level's have nothing to do with anything that matters... sure they carry weight with respect to shock value, but that's about it. Imagine going back to 1970 and thinking in 50 years, total U.S. public debt would surpass $20 trillion. Ideally, governments should borrow in these low (or even negative real) interest rate environments, and look to reduce deficits as interest rates increase.