"The US features a large Capital Accounts deficit [We borrow too much], driven by a structural trade deficit [We spend too much] and despite a positive income balance. In other words, the US is structurally living beyond its means.- Valentin Giust Global Macro Strategist, Credit Agricole
Why Gold Will Continue to Rise, And Your Standard of Living Will Drop
Authored by GoldFix ZH Edit
Given the global trend towards dedollarization accompanied by many nations offloading UST as a trusted store of value it merited looking at the world from a Current Accounts perspective. The conclusion is given global changes and the US’s slow pace adjusting to those changes, these will happen:
- Gold will continue to rise,
- Treasuries will continue to weaken,
- and the US standard of living will continue to deteriorate
Left Chart represents our negative trade balance, or stuff we import. The right chart represents the amount of foreign capital (mostly in bond purchases) that flows into the US which finances our spending...
What follows is how these conclusions were made.
Questions Asked and Answered
Credit Agricole released a very nice piece (at bottom) dissecting who owns what globally. Given mercantile trends and revamping of both supply chains, the report was helpful answering questions regarding Gold and its price path from here. These are the questions asked and answered.
What needs to change if the US is to continue to enjoy its current standard of living relative to the world?
What about UST makes them so desirable for foreign investors?
Who will buy our debt going forward if Foreigners are not?
What can we do to stop foreigners from selling, or make them consider buying more?
What other assets can approach UST qualities or be used to do this?
Can’t we just buy our own debt? ( nationalize the debt?)
Why isn’t simply buying our own debt enough to keep our current standard of living?
Who lends the US the most money...
Following along with this is suggested
The US is living beyond its means
It can do this because of external financing
Most of its external financing is in the form of UST Taken together, to keep its current standard of living purely using financial means, the US needs to nationalize its foreign held debt. It concurrently needs to entice foreign investment to remain invested in the US with a suitable alternative at a proper price. If the US does not do this (and does not resort to military action, or fails to increase economic productivity exponentially) , the US standard of living will continue to drop accelerating over time.
The reasons for UST preference are/were
- Minimal counterparty risk
- Reasonable fiat debasement risk hedged
- Extreme continuous exit liquidity for necessary trade
The world’s appetite for UST is shrinking for multiple, reasons
- Russian confiscation and trust broken
- Need to grow/revitalize their own economies
- Concern the US will not be able to honor its obligations in the very long term
Assuming the US wishes to keep its standard of living the same, it needs to do one or more of the following:
- regain the trust- (ball of yarn analogy)
- entice holdings by these nations to stay the same or increase by offering higher UST yields to compensate for the reasons/risks for disinvestment in #4 above
- The US must entice foreign investment by offering a substitute to pure UST in what is effectively a swap of debt for equity. The qualities of such an alternative to UST would entail:
- Has to be something they want
- Has to be something we have
- Has to satisfy sovereignty issues of both sides
- And must also satisfy those things that made UST acceptable to begin with ( above in #4) - i.e. Minimal counterparty risk, Reasonable fiat debasement risk hedged, Extreme continuous exit liquidity for necessary trade
To the extent the criteria in C are not satisfied approaching UST, the price must get cheaper to compensate for those shortcomings
Breakdown of what foreign nations have spent spent their money on in financing our own spending ...
The asset types that fit the criteria for foreign substitution of investment into UST are currently limited. Those that are potentially suitable do not satisfy all the criteria of the UST. They are according to class
- Foreign Direct investment (FDI)
- Gold and Silver
Credit Agricole estimates that the US would have to double the foreign holdings of FDIs and equities if it wanted to nationalize its public debt. That is, with these assets at current prices.. what will the prices be for our equities as our bonds continue to debase is another issue altogether
Equities and FDI have benefits and risks: chief among the benefits are upside potential, and chief among the risks make them not a store of value or liquid enough
Bullion also has benefits and risks. The risks are currently liquidity and confiscation risk. The benefits are that they actually are better in every way in satisfying what countries are currently concerned with in UST. That is counterparty, and debasement risk.
That is why. The US government, short of war, or inventing free energy will encourage the ROW to swap its debt for some hybrid combination of UST, Gold Bullion, and US Equity exposure. The alternative is: the standard of living for the US will continue to drop. This will be borne by the middle and working class population first.
Which nations stock do we own? Which nations own our stocks...
Several preliminary conclusions can be made from this analysis:
- Bullion will continue to rise in line with the current repricing
- UST will continue to be sold
- The Fed will continue to run a very tight monetary policy to help defray the UST offload
- The DOT and Fed will encourage domestic investment in UST by changing reserve requirement rules and via other methods imposed on banks who will pass them through to investors.
- Western nations with little to no collateral or supply chain replacements will suffer most from UST offload and repatriation of USD by Fed
- The US will cut deals with “anchor tenant” investor nations involving Bullion, Equities, favored status and treasuries to minimize the drop in Standard of living
“We don’t have to get the prices down”— VBL’s Ghost (@Sorenthek) February 11, 2024
- Janet Yellen: Secretary of the Treasury pic.twitter.com/3P6EJgqd7D
The whole sad process is not unlike a company that needs to refinance its debt with equity. When those go bad, they end with what is called Death Spiral convertible issuance.