First of all, I hope that I am wrong about everything I am bringing up here. This said, I don’t think I am. I am convinced that we will see significant inflation, far worse than what we’ve seen the last two years, over the next 2-5 years.
National Debt
The US’s debt to GDP ratio (currently 118%) has reached a point where significant inflation is almost inevitable. This is because the US government is faced with two options when dealing with high levels of debt: either default on the debt or print more money to pay it off.
Defaulting on the debt is generally seen as an undesirable option, as it can lead to a loss of confidence in the government’s ability to manage its finances and can have severe economic consequences. Therefore, the more likely option is that the government will choose to print more money.
However, increasing the money supply in this way leads to inflation, as there are more dollars chasing the same amount of goods and services. This decreases the value of the dollar and increases the cost of goods and services, i.e. inflation.
Furthermore, the US is also dealing with a peak cheap energy dynamic, which adds an inflationary pressure to the economy. As the cost of energy increases, it drives up the cost of goods and services, contributing to inflation.
Luke Gromen, a highly respected macro analyst, predicts a compressed period of very high (100% to 300%) inflation for two to three years, rather than a longer period of moderate inflation. This kind of rapid inflation could drastically reduce the real value of debt, but it would also likely have significant impacts on the economy and people’s living standards. See podcast below for a more in-depth explanation.
Source:
https://www.whatbitcoindid.com/podcast/the-sovereign-debt-bubble
Energy
One way to think about the relationship between energy and money is to consider energy as a fundamental measure of value. Everything we produce, whether it’s a physical good or a service, requires energy in some form. In this sense, the money we pay for goods and services can be seen as a proxy for the energy used to produce them.
Money, in a sense, represents the ability to do work or create wealth, and energy is literally the capacity to do work (that’s the physics definition of energy). So, there’s a direct parallel between money and energy in terms of what they represent.
The cost of energy can directly impact the value of money. If energy costs rise, it generally costs more to produce goods and services, and those costs are often passed on to consumers in the form of higher prices (inflation). This reduces the purchasing power of money – each unit of currency buys less than it did before.
Energy resources like oil and gas are often traded globally in U.S. dollars. Changes in energy prices can therefore impact the value of the dollar. For example, if energy prices rise, it may increase demand for dollars (since more dollars are needed to buy the same amount of energy), which can increase the value of the dollar relative to other currencies. This dynamic is breaking down, as we’ll explore shortly.
In summary, energy and money are closely linked. Energy is a fundamental input to all economic activity and a key determinant of the cost of goods and services, which directly impacts the value of money. Changes in energy availability and cost can therefore have significant impacts on the value of money.
No one alive has ever seen what we’re going through, the combination of what we’re going through plus the scale of what we’re going through. Energy availability has historically, for the last 150 years, been a story of more at a cheaper price, and now we’re getting more at a more expensive price, and that changes everything.
Because everything in the economy requires energy, when the cost of energy goes up, the cost of everything goes up. Cost of everything going up = inflation.
Peak Cheap Energy – Luke Gromen
Banking Crisis
US banks bought a fuck-ton of US Treasuries in 2020 and 2021. This was great for the USG, which needed to fund those stimmy checks. This was not so great for the banks, as interest rates were at 5,000-year lows. Any small increase in the general level of interest rates would lead to massive mark-to-market losses on banks’ bond portfolios. The FDIC estimates that US commercial banks are carrying an unrealised $620 billion in total losses on their balance sheets due to their government bond portfolios losing value as interest rates rose. This is what caused the big bank failures earlier this year. There’s also a big commercial real estate crisis looming, which will hurt the regional banks even further.
The longer interest rates remain high, the more insolvent the banks will be. This will lead to bank failures, which will inevitably be bailed out by the Federal Reserve. Which means printing more money. Or they could lower interest rates, which also means printing more money. Either way, there’s going to be a lot of money printed.
Printing money = inflation.
Arthur Hayes Says, “Get your Bitcoin, and Get Out!”
De-dollarization
De-dollarization, the process of countries shifting away from the US dollar in international trade, could also contribute to a devaluation of the US dollar. Over the years, countries like China and Russia have been gradually reducing their dependence on the US dollar. This is done in part by transacting more in their own currencies or in other alternatives, such as the Euro or even digital currencies. As the demand for US dollar decreases on the global stage, the value of the US dollar can also decrease.
The American Empire, our empire, has used our financial system, and its currency – the US dollar – as the key weapon in maintaining our global hegemony. This is coming to an end.
Invesco just released its annual global survey of 85 sovereign wealth funds and 57 central banks, collectively managing $21T.
And what does it say?
1) Flight to gold. “Amid volatile [bond] yields, 2022 saw a flight to gold, questions around the US dollar’s future as the world’s reserve currency, and increased diversification of currency holdings.”
2) Gold hedges inflation. “Reserve portfolio managers identified inflation as a key risk…69% of central banks countering global inflation through gold allocations.”
3) Gold as a safe-haven. “96% of central banks increasing gold allocations cited its status as a ‘safe-haven’ asset”
4) Sanctions are a major factor. “A substantial percentage of central banks are concerned about the precedent set by the US freezing of Russian reserves, with the majority (58%) agreeing that the event has made gold more attractive.”
5) Physical gold in vaults only. “Consequently, central banks now prefer to hold physical gold rather than gold ETFs or derivatives…”
6) Not even London is trusted. “We…had it held in London…but we’ve now transferred our gold reserves back to our own country to keep it safe – its role now is to be a safe-haven asset” said one central bank based in the West.
7) Yuan rising as a trade currency, not a ‘reserve’ currency. “A considerable proportion do expect a shift towards renminbi (27% of central banks), but expectations differ based on the region.”
8) India now the #1 emerging market to invest in, over China. “India has now overtaken China as the most attractive Emerging Market for investing in Emerging Market debt.”
9) Dollar is being hedged with EM currencies (!). “While the US dollar is expected to retain its dominance, central banks are increasingly exploring diversification into Emerging Market currencies to hedge against volatility.”
10) Everyone wants to de-dollarize. “People have been looking for alternatives to the dollar and euro for a long time and they would’ve gone to them already if there were any suitable alternatives.”
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In summary, they’re buying gold, holding it in vaults, and preparing for high levels of inflation. They’re reallocating capital away from volatile bonds, investing in India, and expecting the yuan to be used for trade rather than stored in reserves.
And they’re all seeking alternatives to the dollar, but haven’t found it yet. However…I think their actions show that the alternative to the dollar is already here, even if not recognized as such.
De-dollarization is decentralization.
The reserve role is being taken up by hard assets like gold (and Bitcoin, as even Blackrock now admits). The trade role is taken up by currencies like the yuan (and rupee, and others). And other roles like payments, smart contracts, and the like are being taken up by different states or networks.
So the dollar is getting unbundled. When there’s an alternative in every situation, much of the dollar’s coercive power goes away. And that’s the theme of this report — sovereigns are seeking an exit from the dollar, and a hedge against its uncertain future.
Foreign demand for dollars is what has allowed the US to run a fiscal deficit for so long. US Treasuries – paper – are our biggest export. This allows us to buy things incredibly cheaply. They give us stuff and we give them paper. If foreign governments don’t want our paper any longer, their stuff is going to be a lot more expensive.
Tying it all together
The four factors I explore above all point to the dollar being significantly devalued over the next few years. As the chart at the top of this post shows, when a currency collapses it usually does so quickly and dramatically. Quickly in this case meaning over a few years.
The Israeli inflation crisis of the 1980s was one of the most severe inflation crises of any industrialized economy. Here’s a brief overview:
Hyperinflation: In the early 1980s, Israel experienced a period of hyperinflation. The annual inflation rate reached a peak of over 400% in 1984. This means that prices were quadrupling every year.
Causes: The hyperinflation was caused by a combination of factors, including high government spending, large budget deficits financed by money creation, and external shocks such as the 1973 oil crisis and the 1979 energy crisis. The economy was also strained by the high costs of absorbing a large number of Jewish immigrants.
Effects: The hyperinflation eroded the real value of wages and savings, leading to a decline in living standards. It also created uncertainty and discouraged investment, which hurt economic growth.
Returning to Gromen’s prediction of 100-300% inflation for 2-3 years, let’s look at the best case scenario there of 100% inflation for 2 years. This means that the price of everything would double, two years in a row – for a total of 4x original cost. This means gas would go from $3/gal. to $12/gal. If that 100% inflation persisted for another year prices would double again, putting gas at $24/gal.
What can we do about it?
So what can we as ordinary people do to prepare ourselves for this? This is not financial advice.
- Increase self-sufficiency: Grow your own food, etc. The more you can meet your needs without money, the less inflation will affect you.
- Exit dollar denominated assets: Cash in the bank, bonds, etc. Dollars and dollar derivatives are likely to be extremely devalued.
- Buy assets and commodities: Precious metals like gold and silver are time tested to hold their value. Bitcoin and crypto are a riskier option, with potentially higher returns. Land is almost always a great investment.
- Also simply useful things like a new car, computer, etc. If there’s something you’ll need soon, better buy it now before the price goes up.