Cryptocurrency: Debt, People Buying Hard Assets with Cheapening Fiat

grarpamp grarpamp at gmail.com
Tue May 16 14:15:10 PDT 2023


US Now Spends More Servicing Its Debt Than On National Defense

By Mark Cudmore, Bloomberg Markets reporter and strategist

Thanks to rising yields, the US government now has to spend more each
year on servicing its immense debt burden than it spent on national
defense in 2022.

The calculation is based on estimated annualized debt payments as of
end of April versus the Treasury’s release of last year’s budget
expenditures.

If you want one stat to sum up why debt-ceiling negotiations are so
fraught this time around, making them both harder to conclude and yet
more important for markets, this is probably it. Estimated annualized
debt-servicing costs are about 90% higher than they were back in 2011.
This is partially due to an exploding debt pile, but also due to a
significant shift higher in US yields.

In 2022, based on how the Treasury breaks down line items, the US
government only spent more on social security ($1,244b) and health
($909b), with income security in line with today’s debt-servicing
costs at $813b.





A Disorderly Reset With Gold Revalued By Multiples

Authored by Egon von Greyerz via GoldSwitzerland.com,

Tectonic shifts lie ahead. These will involve a US and European debt
crisis ending in a debt collapse, a precipitous fall of the dollar and
the Euro with Gold emerging as a reserve asset but at multiples of the
current price.

The next phase of the fall of the West is here and will soon
accelerate. It has been both precipitated and aggravated by the absurd
sanctions of Russia. These sanctions are hurting Europe badly and
affecting the US in a way that they didn’t expect, but was obvious to
some of us. The Romans understood that free trade was essential
between all the countries that they conquered. But the US
administration blocks have both the money and the ability to trade of
the countries they don’t like.

But shooting yourself in the foot really hurts and the consequences
are in front of our eyes. No foreign country will want to hold US debt
or dollars. That is a catastrophic problem for the US as their
deficits will grow exponentially in coming years.

So a debt collapse is not just a looming disaster but a bomb hurling
towards the US economy at supersonic speed.

With the imminent death of the petrodollar and explosion of US debt,
there is only one solution for the funding requirements of the US
Government – the FED which will stand as the sole buyer of US
Treasuries.
A CATASTROPHIC DEATH SPIRAL

So the DEBT spiral of higher debt, higher deficits, more Treasuries,
higher rates and falling bond prices will soon turn into a DEATH
spiral with a collapsing dollar, high inflation and most probably
hyperinflation. Sounds like default to me but that word will probably
never be used officially. It is hard to admit defeat even when it
stares you in the face!

Yes, the US will probably obfuscate the situation with CBDCs (Central
Bank Digital Currencies) but since that is just another form of Fiat
money, it will at best buy a little time but the end result will be
the same.
 US Debt Ceiling Farce belongs to Broadway rather than Wall Street

The debt ceiling was created in 1917 as a means of restricting
reckless spending by the US government. But this travesty has gone on
for over 106 years. During that time there has been a total disdain
for budget discipline by the ruling Administration and congress.

The problem is not just the debt but the cost of financing it.

The annualised cost of financing the Federal debt is currently $1.1
trillion. If we assume conservatively that the debt grows to $40
trillion within 2 years, the interest cost at 5% would be $2 trillion.
That would be 43% of current tax revenue. But as the economy
deteriorates, interest will easily exceed 50% of tax revenue. And that
is at 5% which will probably be much too low as inflation rises and
The Fed loses control of rates.

Thus a very dire scenario lies ahead and that is certainly not a worst
case scenario.

THE FED IS BETWEEN A ROCK AND A HARD PLACE

The Fed and the thus US government are now between Scylla and
Charybdis (Rock and a Hard Place).

As it looks today, the US will bounce between Scylla and Charybdis in
coming years until the US financial system and also the economy takes
ever harder knocks and goes under just as every monetary system has in
history.

Obviously the rest of the West including an extremely weak Europe will
follow the US down.
BRICS AND SCO – RISING POWERS

The whole world will suffer but the commodity rich nations as well as
the less indebted ones will ride the coming storm far better.

This includes much of South America, Middle East, Russia and Asia. The
expanding power blocks of BRICS and SCO (Shanghai Cooperation
Organisation) will be the strong powers where a much increasing part
of global trade will take place.

Barring major political and geopolitical upheavals, China will be the
dominant nation and the main factory of the world. Russia is also
likely to be a major economic power. With $85 trillion of natural
resource reserves, the potential is clearly there for this to happen.
But first the political system of Russia needs to be “modernised” or
restructured.

What I outline above is of course structural shifts that will take
time, probably decades. But whether we like it or not, the first
phase, which is the fall of the West, could happen faster than we
like.
A MONETARY SYSTEM ALWAYS ENDS IN A DEBT EXPLOSION

In 1913, total US debt was negligible, and in 1950, it had grown to
$406 billion. By the time Nixon closed the gold window in 1971, debt
was $1.7 trillion. Thereafter the curve has become ever steeper as the
graph below shows. From September 2019 when the US banking system
started to crack, the Repo crisis told us that there were real
problems although no one wanted to admit it. Conveniently for the US
government, the Repo crisis became the Covid crisis which was a much
better excuse for the Government to print unlimited amounts of money
together with the banks.

Thus, just in this century, total US debt has grown from $27 trillion
to $94 trillion!

But that was history and we know we can’t do anything about the past.
But now comes the fun.

I have been warning about a coming debt explosion for some time. Well,
I believe this is it.

In a recent article about the price of gold I explained that the final
stages of hyperinflation are exponential.

We will see a very similar exponential pattern with the coming debt
explosion. If we assume that the final 5 minutes of the exponential
phase started in September 2019, the stadium was then only 7% full and
will in the next few years grow from 7% to 100% full or 14X from here.

This is obviously just a demonstration and no exact science, but it
shows that theoretically US debt could now explode.

So let’s take a quick look at a few factors that will cause the debt explosion.
BANK FAILURES

A Hoover Institute report calculates that more than 2,315 US banks
currently have assets worth less than their liabilities. The market
value of their loan portfolios are $2 trillion lower than the book
value. And remember this is before the REAL fall of the asset values
which is still to come.

Just take US property values which are greatly overvalued by the lenders:

So the four US banks that have gone under recently are clearly just
the beginning. And no one must believe that it is just small banks.
Bigger banks will follow the same route.

During the 2006-9 subprime crisis, bailouts were the norm. But at the
time, it was said that the next crisis would involve bail-ins.

But as we have seen so far in the US, there were no bail-ins. Clearly
the government and the Fed were concerned about a systemic crisis and
did not have the guts to bail in the bank customers, not even above
the FDIC limit.

As the crisis spreads, I doubt that bank depositors will be treated so
leniently. Neither the FDIC, nor the government can afford to rescue
everyone. Instead depositors will be given an offer they can’t refuse
which is compulsory purchase of US treasuries equal to their credit
balance.

The European banking sector is in an even worse state than the US one.
European banks are sitting on large losses from bond portfolios
acquired when interest rates were negative. No one knows at this stage
the magnitude of the losses which are likely to be substantial.

Both in commercial property and housing, the situation is worse in
Europe than in the US since the European banks are funding most of
these loans directly themselves, including € 4 trillion of home
mortgages.

The banks also have a mismatch between low rates received on mortgages
against high rates paid to finance them.

The ex-governor of the Bank of France and ex-head of the IMF, Jacques
de Larosière accuses the authorities of subverting the private banking
system with deranged volumes of QE after it had become toxic:

“Central banks, far from promoting stability, have delivered a
Masterclass in how to organise financial crisis”
$3 QUADRILLION OF GLOBAL DEBT & LIABILITIES

If we add the unfunded liabilities and the total outstanding
derivatives to the global debt, we arrive at around $3 quadrillion as
I discussed in this article:

“This is it! The financial system is terminally broken”

Sadly, the Western financial system is now both too big to save and
too big to fail.

Still all the king’s horses and all the king’s men cannot save it. So
even if the system is too big to fail, it will with very dire
consequences.
GOLD TO BE SUBSTANTIALLY REVALUED IN THE DISORDERLY RESET

Just over a century after the creation of the Fed and the beginning of
the debt ceiling, the mighty dollar has lost 99% of its value in
purchasing power terms.

And measured against the only money which has survived in history –
Gold – the dollar has also lost 99%.

This is obviously not an accident. Not only is gold the only money
which has survived but also the only money which has kept its
purchasing power throughout the millennia.

For example, a Roman Toga cost 1 ounce of gold 2000 years ago, which
today is also the price for a high quality man’s suit.

You would have thought that losing 99% of its value for the reserve
currency of the world would be a disaster. Well it is of course, but
the US, as well as most of the Western world, has adjusted by
increasing debt exponentially to make up for the disastrous debasement
of the currencies.

What is even more interesting, gold is up 8-10X this century against
most currencies.

That is a superior performance to virtually all major asset classes.

And still nobody owns gold which is only 0.5% of global financial assets.

More recently gold is at all-time-highs in all currencies including the dollar.

But in spite of the extremely strong performance of gold or more
correctly put, the continued debasement of all currencies, no one
talks about gold.

Just looking at the number of articles covering gold in the press in
the graph below (white bars), it confirms that the most recent price
increase of gold (blue line) is met by a yawn.

This is obviously very bullish. Imagine if all stock markets made new
highs. It would be all over the media.

So what this is telling us is that this gold bull market, or currency
bear market, has a very long way to go.

As I often point out, no fiat money but only gold has survived
throughout history.

Gold’s rise over time is always guaranteed as governments and central
banks will without fail destroy their currency by creating virtually
unlimited fake money.

Since this has been going on for 1000s of years, history tells us that
this trend of constantly debasing fiat money is unbreakable due to the
greed and mismanagement of governments.

And now with the debt crisis accelerating, so will the gold price.

Luke Groman makes a very interesting point in his discussion with
Grant Williams (grant-williams.com by subscription).  Luke suggests
that although the dollar will not yet die as a transactional currency,
that it is likely to be replaced by gold as the reserve asset
currency.

The combination of dedollarisation and liquidation of US treasuries by
foreign holders will lead to this development.

Commodity countries will sell for example oil to China, receive yuan
and change the yuan to gold on the Shanghai gold Exchange. They will
then hold gold instead of dollars. This will avoid the dollar as a
trading currency when it comes to commodities.

In order for gold to function as a reserve asset, it will need to be
revalued with a zero at the end and a bigger figure at the beginning
as Luke says. The whole idea would be that gold will become a neutral
reserve asset which floats in all currencies.

The inverse triangle of Global debt resting on only $2 trillion of
Central Bank gold shown above makes the revaluation of gold obvious.

A floating gold price as a reserve asset is of course much more
sensible than a fixed gold price backing the currencies and would be
the nearest to Free Gold.

See my 2018 article, “Free Gold will kill the Paper Gold Casino”.

So the consequence of gold becoming a reserve asset could involve a
rise of say 25X or 50X the current level.  Certainly not an improbable
outcome in today’s money. The debasement of the dollar and other
Western currencies is likely to have a similar effect but then we are
not talking in today’s money. Time will tell.

As gold is now in an acceleration phase, we are likely to see much
higher levels however long it takes and whatever the reason is for the
rise.

The 1980 gold price of $850, adjusted for real inflation would today be $28,300

As gold is now in an acceleration phase, we are likely to see much
higher levels however long it takes.

What is clear is that fiat money, bonds, property and stocks will all
decline precipitously against gold.

What is important for investors is to take protection now against the
most significant RESET in history which is a disorderly reset.

So if you don’t hold gold yet, please, please protect your family, and
your wealth by acquiring physical gold.

Gold repositioning as a Global Reserve Asset could happen gradually or
it could happen suddenly. But please be prepared because when it
happens you don’t want to hold worthless paper money or assets.




Much Of The Markets Still Don't Believe The US Can Default

By Ven Ram, Bloomberg markets live reporter and strategist

    "if political [debt ceiling] kabuki ends in risk-off drama then
Fed does QE (like BoE last Oct)…this is why other assets classes not
worried." - BofA's Michael Hartnett

Except in some specific corners, most of the markets don’t quite buy
the story that the US Treasury could, after all, default on its
obligations.

T-bills due around the estimated time of the X-date have shown some
angst, with yields on one-month instruments up some 200 basis points
in less than a month. Meanwhile, credit-default swaps are pricing in a
3% chance of a default. While that may not seem alarming, that default
pricing is way higher than in 2011 and 2013, when we were last witness
to such stress.

Yet, the rest of the markets are still pretty sanguine about the
eventual outcome. The S&P 500 is still holding onto to its 7+% rally
for the year, while the Nasdaq 100 is up a gravity-defying 22%.
Front-end Treasury yields have come off more than 100 basis points
from their peak for the cycle, but that is more a reflection of the
markets positioning — rightly or wrongly — for a putative Fed pivot
rather than anything to do with the debt-ceiling impasse. Gold, which
BBG readers reckon will be a haven should the US indeed default,
hasn’t done much so far this month.

While the supposed X-date — when the Treasury will have run through
its gamut of emergency maneuvers — is supposedly June 1, in reality it
may turn out to be different because it’s impossible to look through
the crystal ball and know precisely when, say, tax receipts may flow
in. That is perhaps one reason the markets reckon that lawmakers will
do what common sense dictates by the time the D-Day rolls in.

    X-date outlook is worsening as FDIC withdrew $12bn on May 4-5 from
TGA & Treasury released new estimates of extraordinary measures
remaining. Looking like $20bn cash on hand at end of day on June 1
(old expectation was $38bn) https://t.co/Zf6dIaBIkQ
pic.twitter.com/cbF3LVdiwW
    — Donald Schneider (@DonFSchneider) May 15, 2023

The point, though, is the the US economy, already facing considerable
headwinds from the turmoil in the banking industry, isn’t quite so
well-placed to flirt with another Wile E. Coyote moment. And that is
the part the stock markets haven’t quite priced in — yet


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