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The Dollar, Debt and Gold Link

By Andrew LaneCommoditiesJan 17, 2023 02:44AM ET
The Dollar, Debt and Gold Link
By Andrew Lane   |  Jan 17, 2023 02:44AM ET
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Since COVID, central banks across the globe have attempted to create liquidity by printing their way out of trouble. Quantitative Easing (a euphemism for money printing) isn’t new – Japan are widely accepted as the instigator back in 2001 where their economy was weakening and against a backdrop of falling sentiment they attempted to stimulate by increasing the money supply and maintaining low interest rates. The world joined in the party in 2008 following the global financial crisis. There are problems with this of course.
Firstly, dependant on the volume of money supply and the end user, it doesn’t necessarily inspire responsible spending, after all it is seen by some as tantamount to “free money.”

There is no better example than in the last few years where the US stock markets were fraught with the millennial generation buying up Tesla (NASDAQ:TSLA), Gamestop, AMC and Bitcoin to name a few. And losing, heavily. Rather than giving the money to employers to invest back in to their businesses, the US decided to give it to the end user. This created inflated prices and sets up for a boom and bust style market whilst also leading to an even bigger problem, courtesy of the central banks and that is debt.
Also, printing money isn’t exactly free. Governments are borrowing this from their central banks and paying back the money over time with interest. Of course this principle wouldn’t apply to you or I, as we have stress tests, affordability and salaries for lenders to consider, however none of these matter for central banks. Take the US for example, they have a debt to GDP ratio of around 121%. World debt is over 330% of GDP. We are however heading into troubled times as recession fears tend to front run a liquidity crisis.        
Towards the end of 2022, Janet Yellen stated she is “worried about a loss of adequate liquidity in the market” This has become more and more prevalent in the US Treasury market which amongst other things can be put down to the Fed's tightening of monetary policy, but also the downward slope following high levels of inflation. Yellen should be more concerned however about the global waning in attractiveness for purchasing US debt. The world it seems is losing faith in the US currency.
China's US Treasury holdings fell to a 12-year low last October. China is continuing to de-dollarise and recent reports have suggested they are swapping their greenbacks for Gold. Of the $7.5 Trillion in US debt, Japan, China and Great Britain account for over 1/3rd of the entire pile. China's holdings of US Treasury bonds decreased to around $900 billion by the end of last year, the lowest level since June 2010. Japan's holdings of US Treasuries fell $42 billion to $1.078 trillion in October, marking the fourth consecutive month of selling and the lowest in more than three years.

Recently, liquidity in the US Treasury market has deteriorated significantly. The market liquidity index has fallen to the level of March 2020 when US Treasuries sold off dramatically, and the deterioration in market conditions is approaching that of the global financial crisis.

The reduction in global demand for US debt should have us all worried and for good reason. The bond markets are over ten times the size of the stock markets, and if this trend continues, all these dollars are going to land back on the shores of the US. It has the potential to blow up the world economy.

So what has the Fed done previously in times of slowing demand, economic instability and a liquidity crisis? They’ve raised the debt ceiling and printed money. Yellen recently notified Congress that the US is projected to reach its debt limit on Thursday, 19 January, and will then resort to "extraordinary measures" to avoid default. Congress needs to pass legislation in order to raise the ceiling or temporarily suspend it. One thing is for sure, it won’t default. Greenspan famously said that the US could never default as they just print money.
It will only take one big bank or institution to default (and Credit Suisse came very, very close last year) and the masses will panic. The US dollar index has lost 10% in the last three months. That is a rapid decline; however charts show that every time the dollar has peaked and become over extended, the resulting decline has been spectacular. The traditional flight to safety of the US dollar looks to be on the way out.

China – astute to this impending doom are exchanging their dollars for Gold. At just over $1900/oz it is still comparatively cheap, and the only money via an FX cross that is appreciating in the current market conditions.

The reckless lending and money printing has created the inflation and debt we experience today. The East appears to be well underway in dumping the dollar, and would appear Gold is their preferred exchange. After a 50 year life span and 99% of purchasing power lost in that timeframe, it would appear fiat currencies are at the end of their life – it’s a matter more of when not if. Let’s all hope there is a rulebook on what to do if the debt bubble bursts. 

The Dollar, Debt and Gold Link

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The Dollar, Debt and Gold Link

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Comments (1)
Paolo Bertozzi
Paolo Bertozzi Jan 17, 2023 7:45AM ET
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beautiful analysis. Thank you Andrew
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