politics

You are absolutely correct, and we are running headlong into a financial crisis that will make the 2007 crisis look quaint. You can run 2% budget deficits indefinitely if your economy is growing by 3% per year. However, Trump's budget deficit is closer to 6%, and his stupid trade wars and actual wars, and general belligerence has been constraining growth and shrinking many areas of the economy. If it weren't for the spending associated with the AI bubble, which cannot go on forever, the U.S. would be in a clear recession.

Worse, the U.S. already has a massive amount of accumulated debt, a huge chunk of which has to be rolled over into new bonds issued at a much higher rate this year. The 30 year Treasury is now consistently over the 5% threshold, the longest run since the 2007 financial crisis. This is not sustainable, as it inherently increases the financial burden of the national debt and widens the budget deficit.

Why is the previously so called "risk free" rate so high? Three main reasons. First, the U.S. is not being fiscally responsible, and bond buyers are waking up to that risk. Second, U.S. belligerence on the world stage is terrifying everyone, and central banks are diversifying away from the U.S. because they no longer see the U.S. as a benevolent peacekeeper. They don't want to be caught depending on payment from an enemy that has shown a propensity to sanction by freezing assets. Third, a big reason to hold dollar denominated assets is trade, and the U.S. does not honor its trade agreements so there is a shift underway to trade more with others and less with an unreliable partner, so there is simply less reason to hold dollar denominated assets. There is a reason gold has been in the greatest bull market since the 1970s, and it's not because the U.S. is a paragon of stability.

How do I see the situation unfolding and what people should be doing to protect themselves? With the midterms approaching and Trump terrified of the results, he's going to do everything he can to juice the economy and the stock market. His handpicked Fed chair will do everything he can to lower rates. Jerome Powell still sits on the board, which has the potential to stymie Warsh's efforts, but only one board member needs to flip to give him free reign, and I expect Trump to either fire someone, cut a secret deal to get them to resign, or use stochastic terrorism to take them out. Alternatively, the path may be the Fed's balance sheet, with the Fed printing money to buy treasuries. The effect will be the same.

This will ignite a boom and inflation, already an issue, will go through the roof in a way that we've never seen in our lifetimes. There will be a mass exodus from the dollar and it will collapse. It will no longer be the world's reserve currency, and the "exorbitant privilege" the U.S. has enjoyed during our lifetimes will be gone, ushering in what I am calling The Greatest Depression.

What to do? Buy hard assets, particularly gold. We are at the beginning of the downward slope, and as things come unglued there will be a massive rush to get into gold as more awaken to the events unfolding. To quote Hemingway "How did you go bankrupt? Gradually, and then suddenly." We are still in the "gradually" phase. Don't be caught with your pants down in the "suddenly" phase. Finally, if you can get out of the U.S., do it. This is not a situation that will resolve itself in a decade. This is a historical unwinding that will take generations to recover from, and there will be much suffering along the way. Thank you for attending my TED talk.