Over the past year, economist Daniel Lacalle has repeatedly warned that the United States is in the midst of a “private sector recession” and that official GDP measures are being propped up by government spending. The latest GDP numbers from the federal government strongly suggest he is right.

Today, the federal government’s Bureau of Economic Analysis released its revised estimate for GDP growth in the fourth quarter of 2023. According to the report, total GDP increased $334.5 billion (quarter over quarter) during the fourth quarter. That’s down from the third quarter’s quarter-over-quarter increase of $547.1 billion, but is nonetheless an ostensibly robust rate of growth.

Yet, if we compare GDP growth during the fourth quarter to growth in the total national debt, we find that the numbers don’t look quite so robust after all. While GDP may have grown by $334 billion during the period, the national debt grew by more than twice as much: $834 billion. In other words, for every dollar of GDP growth, the national debt grew by 2.7 dollars.

Moreover, this is the third quarter in a row during which debt growth has substantially outpaced GDP growth. During the third quarter, the federal debt grew $1.5 dollars for every dollar of GDP growth. During the first quarter, the debt grew 3.5 dollars for every dollar of GDP growth.

The fact that this has now happened three quarters in a row is notable as well. Over the past fifty years, it is rare to find debt growth exceeding GDP growth for more than two quarters in a row except during periods of economic weakness when the federal government relies on monetary expansion and federal spending to “stimulate” economic growth. For example, we find a three-quarter streak during the Great Recession and the years immediately afterward—when job growth was extremely weak. The same can also be seen in the quarters following the 2001 recession.

This isn’t shocking. If the federal government is trying to boost GDP numbers through “stimulus” it will both spend freely and expand the money supply as the central bank purchases Treasuries to avoid a surge in interest rates. (See more on how the central bank enables deficit spending.) The current reliance on federal deficit spending to keep up the appearance of GDP growth further backs up Lacalle’s theory that the United States is in the midst of both a public-sector expansion and a private-sector contraction. That is, the private sector is experiencing many recessionary trends, such as falling real wages, a decline in manufacturing, and growing bankruptcies. Meanwhile, however, government spending is booming, so sectors of the economy that are closely tied to government spending continue to expand. In aggregate, total GDP numbers thus show an increase, even as the private sector stagnates.

After all, it’s important to keep in mind that GDP measures include government spending, and will also include the consumption that results from additional government spending on welfare programs, weapons manufacturing, and more. As the federal government spends its deficit-financed dollars, the recipients of these dollars consume more, thus pushing up current GDP.

The general problem with this trend can be seen if we apply it to a private firm. Imagine, for instance, that a private firm managed to increase its production by a million dollars, but at the same time took on an additional $2.5 million in debt to buy new sports cars for its least productive employees. Even worse, this new debt is in addition to a huge existing debt load.

This sort of debt should never be confused with good debt, which is debt taken on to fund new capital goods. That could potentially increase productivity later on. Government debit never good debt, however, because it is taken on for purposes of immediate consumption—usually on social welfare benefits or on bombing faraway countries.

Unfortunately, as we find debt growth repeatedly top GDP growth, we are likely to see more of this phenomenon moving forward. The federal debt is now larger than the entire GDP of the United States, and the gap between debt and GDP in each year has now widened to more than six trillion dollars. As this trend continues, expect to see deficit spending play a larger and larger role in GDP.

In Missouri, Rep Doug Richey filed HB1867 on Dec. 11. Rep. Bill Hardwick filed HB1955 on Dec. 15. The bills are companions to SB735 filed in the Senate by Sen. William Eigel earlier this month.

In Oklahoma, Sen. Shane Jett filed SB1507 and Sen. Nathan Dahm is running SB1508.

The enactment of any of these bills would eliminate state capital gains taxes on the sale and exchange of gold and silver bullion.

Both of these states are already among the 42 that do not levy sales taxes on gold and silver bullion.

Exempting the sale of gold and silver bullion from taxes lowers the investment cost of precious metals. It also takes a step toward treating gold and silver as money instead of commodities. Taxes on precious metal bullion erect barriers to using gold and silver as money by raising transaction costs.

Imagine if you asked a grocery clerk to break a $5 bill and he charged you a 35-cent tax. Silly, right? After all, you were only exchanging one form of money for another. But that’s essentially what a sales tax on gold and silver bullion does. By eliminating this tax on the exchange of gold and silver, Missouri and Oklahoma would treat specie as money instead of a commodity. This represents a small step toward reestablishing gold and silver as legal tender and breaking down the Fed’s monopoly on money.

“We ought not to tax money – and that’s a good idea. It makes no sense to tax money,” former U.S. Rep. Ron Paul said during testimony in support of an Arizona bill that repealed capital gains taxes on gold and silver in that state. “Paper is not money, it’s fraud,” he continued.

The impact of enacting this legislation will go beyond mere tax policy. During an event after his Senate committee testimony, Paul pointed out that it’s really about the size and scope of government.

“If you’re for less government, you want sound money. The people who want big government, they don’t want sound money. They want to deceive you and commit fraud. They want to print the money. They want a monopoly. They want to get you conditioned, as our schools have conditioned us, to the point where deficits don’t matter.”

GOLD AND SILVER AS LEGAL TENDER

Under provisions in the Missouri bill, gold and silver in physical or electronic form would be accepted as legal tender and would be receivable in payment of all debts contracted for in the state of Missouri. The state would be required to accept gold and silver for the payment of public debts. Private debts could be settled in gold and silver at the parties’ discretion.

Practically speaking, this would allow Missourians to use gold or silver coins as money rather than just as mere investment vehicles. In effect, it would put gold and silver on the same footing as Federal Reserve notes.

Oklahoma took a similar step in 2014. Utah and Arkansas also consider gold and silver legal tender.

The proposed Missouri law also includes provisions authorizing the state to invest in gold or silver “greater than or equal to one percent of all state funds” and to expressly bar any state agency, department, or political subdivision from seizing gold or silver bullion.

BACKGROUND

The United States Constitution states in Article I, Section 10, “No State shall…make any Thing but gold and silver Coin a Tender in Payment of Debts.” Currently, all debts and taxes in the US are either paid with Federal Reserve Notes (dollars) which were authorized as legal tender by Congress, or with coins issued by the US Treasury — very few of which have gold or silver in them.

The Federal Reserve destroys this constitutional monetary system by creating a monopoly based on its fiat currency. Without the backing of gold or silver, the central bank can easily create money out of thin air. This not only devalues your purchasing power over time; it also allows the federal government to borrow and spend far beyond what would be possible in a sound money system. Without the Fed, the US government wouldn’t be able to maintain all of its unconstitutional wars and programs. The Federal Reserve is the engine that drives the most powerful government in the history of the world.

Tax repeals knock down one of the tax barriers that hinder the use of gold and silver as money, and could also begin the process of abolishing the Federal Reserve’s fiat money system by attacking it from the bottom up – pulling the rug out from under it by working to make its functions irrelevant at the state and local levels, and setting the stage to undermine the Federal Reserve monopoly by introducing competition into the monetary system.

In a paper presented at the Mises Institute, Constitutional tender expert Professor William Greene said when people in multiple states actually start using gold and silver instead of Federal Reserve Notes, it would effectively nullify the Federal Reserve and end the federal government’s monopoly on money.

“Over time, as residents of the state use both Federal Reserve notes and silver and gold coins, the fact that the coins hold their value more than Federal Reserve notes do will lead to a “reverse Gresham’s Law” effect, where good money (gold and silver coins) will drive out bad money (Federal Reserve notes). As this happens, a cascade of events can begin to occur, including the flow of real wealth toward the state’s treasury, an influx of banking business from outside of the state – as people in other states carry out their desire to bank with sound money – and an eventual outcry against the use of Federal Reserve notes for any transactions.”

Once things get to that point, Federal Reserve notes would become largely unwanted and irrelevant for ordinary people.

These bills make up part of a broader movement at the state level to support sound money.

Globally, central banks added a net 337 tons of gold in Q3, the second-highest third-quarter total on record behind 2022.

Through the first nine months of the year, central banks bought a net of 800 tons of gold. That’s 14% more than through the same period in 2022.

The People’s Bank of China led the way, adding another 78 tons of gold to its holdings in the quarter. The Chinese central bank has bought gold for 11 straight months. Since the beginning of the year, the People’s Bank of China has increased its reserves by 181 tons, and it has added 232 tons since it resumed official purchases in November 2022. As of the end of September, China officially held 2,192 tons of gold, making up 4% of its total reserves.

China has a history of adding to reserves and then going silent.

The People’s Bank of China accumulated 1,448 tons of gold between 2002 and 2019, and then reported nothing for more than two years before resuming reporting last fall. Many speculate that the Chinese continued to add gold to its holdings off the books during those silent years.

In fact, there has always been speculation that China holds far more gold than it officially reveals. As Jim Rickards pointed out on Mises Daily back in 2015, many people speculate that China keeps several thousand tons of gold “off the books” in a separate entity called the State Administration for Foreign Exchange (SAFE).

Last year, there were large unreported increases in central bank gold holdings.  Central banks that often fail to report purchases include China and Russia. Many analysts believe China is the mystery buyer stockpiling gold to minimize exposure to the dollar.

The National Bank of Poland continued its buying spree in Q3 with a 57-ton increase to its gold reserves. That’s in addition to the 48 tons it bought in the second quarter. Year-to-date, Poland has bought 105 tons of gold, in line with a plan to add 100 tons to its reserves Bank of Poland President Adam Glapiński announced in 2021. The country currently holds about 11% of its reserves in gold. Glapiński recently indicated the buying will likely continue.

“This makes Poland a more credible country, we have a better standing in all ratings, we are a very serious partner and we will continue to buy gold. The dream is to reach 20 percent,” Glapiński said.

When he announced the plan to expand its gold reserves, Glapiński said holding gold was a matter of financial security and stability.

Gold will retain its value even when someone cuts off the power to the global financial system, destroying traditional assets based on electronic accounting records. Of course, we do not assume that this will happen. But as the saying goes – forewarned is always insured. And the central bank is required to be prepared for even the most unfavorable circumstances. That is why we see a special place for gold in our foreign exchange management process.”

Turkey sold 160 tons of gold last spring but returned to buying in the third quarter. The Turkish central bank bought 39 tons of gold in Q3, and its total reserves recovered to 668 tons.

According to the World Gold Council, the big gold sale earlier this year was a specific response to local market dynamics and didn’t likely reflect a change in the Turkish central bank’s long-term gold strategy. Although the Turkish government reinstated gold import quotas in early August, so far we haven’t seen a repeat of sales into the local market to meet elevated demand.

Eight more central banks made purchases of at least a ton during the quarter.

• India – 9 tons
• Uzbekistan – 7 tons
• The Czech Republic – 6 tons
• Singapore – 4 tons
• Qatar – 3 tons
• Russia – 3 tons
• The Philippines – 2 tons
• The Kyrgyz Republic – 1 ton

Russia announced plans to recommence buying foreign currency and gold in early August, but the government did not indicate the size or timing of future gold purchases.

The only seller of note was Kazakhstan. The country’s central bank reported a 4-ton decline in its reserves for the quarter. It is not uncommon for banks that buy from domestic production – such as Uzbekistan and Kazakhstan – to switch between buying and selling.

Looking at the entire year, China, Poland and Singapore bought the most gold.

The World Gold Council said it’s “all but certain that central banks are on course for another colossal year of buying,” after a record-setting 2022.

The strength of buying has, to some degree, exceeded our expectations. While we were confident that central banks would remain net purchasers in 2022, we thought it unlikely that it would match last year’s record buying volume. Should buying continue to be strong in Q4, the full-year total could get closer than we anticipated. Nevertheless, the historically high level of buying in Q4 2022 may be difficult to top.”

Total central bank gold buying in 2022 came in at 1,136 tons. It was the highest level of net purchases on record dating back to 1950, including since the suspension of dollar convertibility into gold in 1971. It was the 13th straight year of net central bank gold purchases.

According to the 2023 Central Bank Gold Reserve Survey recently released by the World Gold Council, 24% of central banks plan to add more gold to their reserves in the next 12 months. Seventy-one percent of central banks surveyed believe the overall level of global reserves will increase in the next 12 months. That was a 10-point increase over last year.

Chinese investors sold $21.2 billion in US assets in August alone – primarily US Treasury bonds. Meanwhile, the Chinese government has been buying gold at a steady pace.

Writing at FXEmpire, analyst Vladimir Zernov said there are two dynamics driving the Chinese to sell US assets. The first is an effort to boost the yuan.

China’s currency has struggled against the dollar of late due to softness in the Chinese economy and recently hit multi-year lows. Selling dollar-denominated assets for yuan boosts the local currency at the expense of the dollar. Zernov said, “Selling dollar-denominated assets to provide support to yuan makes perfect sense.”

The second potential reason to sell US dollar-denominated assets is for further de-dollarization. In other words, the Chinese may be trying to minimize their exposure to the US currency for economic and geopolitical reasons.

From an economic standpoint, the Chinese have to be keenly aware of the US government’s budget problem. The US ran a $1.7 trillion deficit in fiscal 2023 and has a national debt north of $33.5 trillion. Why would any country want to be exposed to that kind of risk?

Furthermore, the US has a long history of using the dollar’s position as the reserve currency as a foreign policy hammer. By minimizing dependence on the greenback, countries can blunt America’s ability to control their foreign policy decisions.

This is why many countries are trying to minimize their exposure to the dollar. Confidence in the greenback continues to erode thanks to the profligate borrowing, spending, and money creation by the US government, while America’s use of the dollar as a foreign policy weapon also makes many countries wary of relying solely on dollars.

Zernov said that if China is trying to shift some of its money away from the US-controlled, dollar-dominated global financial system, there aren’t many options other than gold.

Gold is one of the few markets that has sufficient liquidity to absorb billions of dollars of China’s funds.”

The Chinese central bank has been on a gold-buying spree. As of the end of August, the People’s Bank of China had bought gold for 10 straight months and ranked as the largest central bank gold buyer this year. The Chinese central bank has increased its official reserves by 166 tons since the beginning of the year and 217 tons since it resumed official purchases last November. As of the end of August, the People’s Bank of China officially held 2,165 tons of gold, making up 4% of its total reserves.

China has a history of adding to reserves and then going silent. The People’s Bank of China accumulated 1,448 tons of gold between 2002 and 2019, and then reported nothing for more than two years before resuming reporting last fall. Many speculate that the Chinese continued to add gold to its holdings off the books during those silent years.

In fact, there has always been speculation that China holds far more gold than it officially reveals. As Jim Rickards pointed out on Mises Daily back in 2015, many people speculate that China keeps several thousand tons of gold “off the books” in a separate entity called the State Administration for Foreign Exchange (SAFE).

Last year, there were large unreported increases in central bank gold holdings.  Central banks that often fail to report purchases include China and Russia. Many analysts believe China is the mystery buyer stockpiling gold to minimize exposure to the dollar.

Zernov pointed out that the Chinese tend to move slowly and it remains to be seen if the recent selloff in dollar-denominated assets translates to even more gold demand.

We will see whether the country decided to boost its gold holdings sometime in the first half of the next year. Any signs showing China decided to increase its gold reserves will be bullish for gold and may send its price toward new highs.”

The big increase in debt occurred despite tightening credit conditions, and it is an increasingly worrisome problem because the “free lunch” of artificially low interest rates is over.

Over the last decade, global debt has increased by a staggering $100 trillion.

Combined government, household and corporate debt hit 336% of global GDP in the second quarter of this year. The global debt-to-GDP ratio has increased by 2 percentage points this year. Prior to 2023, the global debt-to-GDP ratio had declined seven straight quarters after reaching a record of 360% at the height of the global pandemic government lockdowns.

About 80% of the new global debt was piled up by developed nations, with Japan, the US, Britain and France leading the way. Among emerging markets, the largest economies saw the biggest debt increases, including China, Brazil and India.

“As higher rates and higher debt levels push government interest expenses higher, domestic debt strains are set to increase,” the IIF said in a statement.

Peter Praet served as chief economist at the European Central Bank. He told Reuters that the debt levels are still sustainable, but the outlook is worrying given the fact that spending needs aren’t going to decline.

You can take many, many countries today, and you will see that we are not far away from a public finances crisis.”

Praet seems over-optimistic.

The US government is over $33 trillion in debt. In fact, the Biden administration managed to add half a trillion dollars to the debt in just 20 days. Meanwhile, with rising interest rates, the federal government is now spending as much to make interest payments on the debt as it is for national defense.

And there is no end to the borrowing and spending in sight.

More than a decade of interest rates pushed artificially low by central banks worldwide incentivized a tidal wave of borrowing. This was intentional. The thinking was that borrowing and spending would “stimulate” a global economy dragged down first by the Great Recession and then by government-instituted pandemic policies. Nobody ever stopped to think the easy-money gravy train might run out of track.

But as Fitch Ratings managing director Edward Parker put it, “That free lunch is over and interest payments are now rising faster than debt or revenue.”

The US economy in particular was built on borrowing and spending. Easy money is its lifeblood. It simply can’t run without artificially low interest rates. The global economy is in much the same boat.

That puts the Federal Reserve and other central banks between a rock and a hard place. They need to keep interest rates high to counteract the trillions of dollars they created and injected into the global economy as stimulus causing a rapid increase in price inflation. But these higher rates will ultimately break things in the borrow-and-spend economy.

The prevailing attitude is that the US government can borrow and spend indefinitely. After all, it hasn’t caused a problem so far. But a long fuse can burn for a long time before it finally reaches the powder keg.

I don’t know how long we have before the debt bomb explodes, but I do know we get closer and closer every day. And sadly, very few people care enough to address the problem. The recent government shutdown drama is a case in point.

A stopgap spending deal swept the shutdown threat out of the headlines, but it’s still there lurking in the shadows of the halls of Congress. If lawmakers don’t figure something out by Nov. 17, the government will be forced to shut down.

There isn’t much talk about a shutdown right now, but when people do discuss the possibility, they almost always focus on the mythical crisis that shuttering the federal government might cause. That sidesteps the real problem — out of control government spending.

Conventional wisdom is that Congress needs to do whatever it takes to avoid a shutdown. If that means maintaining spending at current levels or even increasing spending, so be it. The handful of intransigent members of Congress who want to hold out for spending cuts are always cast as the bad guys in this kabuki theater.  As economist Daniel Lacalle put it in a recent article published by Mises Wire, “The narrative seems to be that governments and the public sector should never have to implement responsible budget decisions, and spending must continue indefinitely.”

But the whole government shutdown charade is merely the symptom of a much deeper problem. The US government is over $33 trillion in debt. In fact, the Biden administration managed to add half a trillion dollars to the debt in just 20 days.

It’s hard to overstate just how bad the US government’s fiscal situation has become. We have a trifecta of surging debt, massive deficits, and declining federal revenue, and the federal government’s spending addiction is at the root of the problem. Lacalle summed it up this way.

The problem in the United States is not the government shutdown but the irresponsible and reckless deficit spending that administrations continue to impose regardless of economic conditions.”

In August alone, the Biden administration spent over $527 billion. In fact, the federal government has been spending an average of half a trillion dollars every single month.

And there is no end in sight. There is no political will to substantially cut spending. Meanwhile, the federal government is always looking for new reasons to spend even more money. With war raging in the Middle East, there is already a proposal to send aid to Israel and possibly add more aid to Ukraine to that deal.

As Peter Schiff said in a recent podcast, the US can’t afford peace, much less war. Lacalle summarizes the current fiscal condition of the United States government. It’s not a pretty picture.

In the Biden administration’s own projections, the accumulated deficit between 2023 and 2032 would be over 14 trillion US dollars, assuming that there would be no recession or employment decline. Public debt has risen above 33 trillion US dollars, and the budget deficit in a period of growth and strong job creation is over 1.7 trillion US dollars. As of August 2023, it costs $808 billion to maintain the debt, which is 15% of the total federal spending, according to the U.S. Treasury. Interest rates are rising at the same time as the government rejects all budget constraints. This is a monetary timebomb.”

And as Lacalle pointed out, the government keeps spending no matter what’s happening in the economy. According to government people and their academic support staff, there is never a good time to cut spending.

When the economy grows and there is almost full employment, governments announce more spending because it is ‘time to borrow,’ as Krugman wrote. When the economy is in recession, governments say that they need to spend even more to save the economy. In the process, government size in the economy increases, and record tax receipts are fully consumed in no time because expenditures always exceed revenues.”

The constant borrowing and spending is fueled by the myth that borrowing doesn’t really matter, and the rise in popularity of Modern Monetary Theory (MMT) put that myth on steroids.

MMTrs claim that spending doesn’t matter. As Lacalle notes, they even go as far as to claim that the world could “run out of dollars” if the federal government took significant steps to rein in deficit spending causing a “monetary meltdown.”

It is so ludicrous that it should not even have to be discussed. The world does not run out of dollars if the United States government cuts its imbalances. Global dollar liquidity is a result of central bank swaps between monetary institutions. There is no such thing as a global dollar liquidity crisis because of a United States surplus, as we saw when it happened in 2001. Furthermore, the idea that the dollar supply is created only by government deficit spending is insane. This distorted view of the economy places government debt at the center of growth instead of private investment. It tries to convince you that a deficit is always positive and that the only creation of currency must come from unproductive spending, not from productive investment credit growth. Obviously, it is wrong.”

But no matter how loudly contrarians sound the warning, people in the mainstream continue to shrug their shoulders at the mounting debt and ever-growing deficits. They seem to believe that since it hasn’t mattered yet, it won’t matter ever.

The dollar’s status as the global reserve currency enables the US government to get away with a lot. As Lacalle explains, global demand for dollars is still high. The dollar index (DXY) is rising because the monetary imbalances of other nations are larger than the United States’ challenges.

This has lulled Americans into a false sense of security. A lot of Americans, including most in positions of power, seem to think the US can do whatever it wants when it comes to borrowing and spending.

Lacalle makes a sobering point — “All empires believe that their currency will be eternally demanded, until it stops. ”

When confidence in the currency collapses, the impact is sudden and unsurmountable. Global citizens may start to accept other independent currencies or gold-backed securities, and the myth of eternal U.S. debt demand vanishes. Unfortunately, governments are always willing to push the limits of fiscal responsibility because another administration will face the problem. The United States’ rising debt and deficit irresponsibility means more taxes, less growth, and more inflation in the future. Government debt is not a gift of reserves for the private sector; it is a burden of economic problems for future generations. Sound money can only come from fiscal responsibility. Currently, we have none.”

The bottom line is the dollar is not invincible. The fuse is burning.

So why are recession warning signs still flashing?

Most major financial institutions and high-profile economists have abandoned or significantly downgraded their recession projections. Those that still still forecast an economic downturn predict it will be short and shallow.

For instance, during the last FOMC meeting, the Federal Reserve upped its economic forecast, characterizing economic activity as “expanding at a solid pace.” It increased its GDP projection for 2023 to 2.1%, more than double its 1% projection in June. Fed economists do expect growth to slow to 1.5% next year, but any talk of a recession is completely out of the discussion.

But one major financial institution still sees a recession in America’s future — Deutsche Bank.

The German bank was the first major financial institution to project a recession in the US, and it’s sticking to its guns.

Deutsche Bank isn’t just making a calculated guess. It has solid data to back up its projection. The bank’s head of global economics and thematic research Jim Reid and a team of economists recently analyzed 34 US economic downturns dating back to 1854 and identified four macroeconomic “triggers” common to past recessions.

Bad news — all four are flashing red.

In its analysis, the Deutsche Bank team calculated the percentage of times these four events led to a recession. They call this the “hit ratio.” Based on their analysis, they determined that no single trigger can predict a recession. Nevertheless, all four of the triggers most commonly associated with US recessions are in play now.

Reid cautioned that it’s impossible to accurately predict every recession using macro triggers.

But it’s fair to say that the most significant ones [triggers] have been breached this cycle and that the US tends to be more sensitive to these historically.”

The Four Triggers

Following are the four triggers identified by the Deutsche Bank team and their hit rates.

An Inflation Spike (77%) — There’s no question that this trigger is in play. Price inflation soared to a four-decade high in the summer of 2022. While it has cooled in recent months, the CPI began creeping up again in July and continued to rise in August.

Reid said the US economy “seems to have the most sensitivity to inflationary spikes.” Since 1854,  a 3% rise in price inflation over a 24-month period caused a recession within three years 77% of the time.

Note that there can be a significant lag in time between the initial inflation shock and the recession.

And while price inflation might be down, it isn’t out. During a recent podcast, Peter Schiff said, “It’s obvious to anybody who opens their eyes that inflation is not topped out and coming down. It’s bottom out and going up. And the people who are blind to this, who are asleep, they are in for a rude awakening.”

An Inverted Yield Curve (74%) —Typically, longer-term bonds offer higher yields than short-term bonds. A 10-year Treasury generally features a lower yield than a 30-year. This is because investors typically factor in more risk on a longer-term loan. When this flips and short-term bonds start yielding more than long-term bonds, it’s called a yield curve inversion.

The US Treasury yield curve has been inverted since July 2022.

Yield curve inversions have preceded a recession 74% of the time since 1854. If you consider a more modern period since 1953, the hit rate increases to 79.9%.

A Rapid Rise in Interest Rates (69%) — To fight price inflation, the Federal Reserve has hiked rates by more than 5% in just 18 months.

Since 1854, a 2.5% increase in short-term interest rates over a 24-month period led to a recession 69% of the time. As Reid put it, interest rate hikes haven’t ended well for the economy. He said, “The US seems to have the most sensitivity to interest rates. The US cycle has historically been more boom and bust than others in the G7.”

That’s likely because the US economy runs on borrowing and spending. It can’t function for very long in a high interest rate environment. Schiff summed it up in another podcast.

The economy is built on a foundation of cheap money. It’s not just the economy; it’s every facet of it. The government, the deficits, the government budget is built on cheap money. And it’s not just the federal government that’s been gorging on this cheap money. A lot of the state governments, municipalities — they’ve all issued a tremendous amount of debt over the last 15 years.”

The last time rates were at this level was in 2006. We know how that ended. But there’s a big difference between then and now. There is even more debt in the economy. Consider that in 2006, the national debt pushed above $10 trillion for the first time. Today, it is more than three times that level.

Oil Price Shock (45%) — The price of Brent crude has spiked by about 33% since June. This has thrown cold water on the “disinflation” narrative.

When oil prices have spiked 25% over a 12-month period, the US economy has gone into a recession 45.9% of the time.

Conclusion

As you can see, all four of these triggers are in play today. This is yet another reason to question the mainstream’s sanguine view of the economy.

As Schiff explained, most people in the mainstream don’t seem to grasp the gravity of the situation. They don’t realize that we are at the beginning of the end of this whole phony economy. He said Fed chair Jerome Powell could put off the implosion in the short run by doing something drastic to change the narrative. That would entail at least hinting at interest rate cuts.

Otherwise, this is going to happen. Whether it’s tomorrow, the next day, or the next week is hard to tell. But what seems apparent to me is that we’re about to go over a cliff. I just don’t know how much more distance there is between where we are now and the edge of that cliff. But we’re going there.”

This article describes just how precarious the fiat dollar’s position has become.

For now, the dollar appears to be buoyed up by rising bond yields. However, as they rise further portfolio losses for foreign investors are likely to increase, leading to dollar liquidation. It is not generally realised how many dollars and dollar securities are owned by foreigners, the bulk of them being held outside the US banking system. And the quantity of foreign currency owned by Americans to absorb this selling is very small in comparison.

Higher interest rates and bond yields also threaten to destabilise the banking system, a problem equally faced by the Eurozone, the UK, and Japan. But how can the US Government protect itself from this danger?

The only answer is to admit to the end of the fiat era and put the dollar back onto a gold standard. However, the US Government does not have the mandate to take the required actions and officially at least is still in denial over the need to stabilise the currency. The legal position referring to the constitution is briefly touched upon, because laws will have to be considered to secure the dollar’s future.

Unfortunately, the US Treasury’s gold holdings are almost certainly compromised. Furthermore, since the Asian hegemons have accumulated substantial holdings of bullion in addition to their official reserves, there is bound to be a strong reluctance to hand economic power to Russia and China by endorsing a return to gold standards.

My conclusion is that the era of the fiat dollar based global currency system is rapidly ending, and for America and the dollar there can be no Plan B. It will almost certainly lead to  the end of the fiat dollar, and the end of the US hegemony.

Introduction

It is dawning on increasing numbers of analysts that the era of the fiat dollar might be drawing to a close. Very few investment professionals know what to expect. Being thoroughly Keynesian in outlook, most still believe that by the Fed managing interest rates consumer price inflation can be contained and that recessions can also be avoided by expanding fiscal deficits. But the contradictions arising from a deteriorating economic outlook and CPI inflation continually rising completely scuppers these macroeconomic theories. Blaming it on Russia and OPEC+ is tempting, but not a good enough argument.

It is becoming clear that fiat currencies have become increasingly unstable. The only solution for the dollar is to fix the value of credit: but to what? It has been gold or silver throughout the history of national economies. But a denial of returning to exchanging the dollar for a fixed quantity of gold is so systemically embedded in the administration that it is difficult to see this solution even as a last resort.

In this article I look at the background to what is sure to become a dollar crisis. The urgency of this matter has been brought forward by America’s declining global influence compared with that of the Asian hegemons, and the US Government’s profligacy. Almost certainly, exposure to the dollar will be unwound by foreign actors, and that exposure, which must include dollar credit originated outside the US banking system is colossal. The table below illustrates the approximate position.[i]

To summarise the evidence, foreigners own or are exposed to a massive $137 trillion dollars. As a cohort, if they decide to begin reducing their exposure US residents have less than a trillion equivalent in foreign currencies to sell in exchange. In the jargon of the markets, the dollar will become “offered only”.

This is the true danger from rising interest rates. As they rise, the declining value of foreign-owned long-term securities totalling $37 trillion will simply accelerate generating widespread investment and dollar liquidation. This will not be offset by US holders of foreign investments liquidating their positions for a simple reason.

US holders of foreign securities hold almost all of them in ADR form, being listed and priced in dollars. In a rising interest rate environment, they will also be declining in value and so we can expect US investors to sell them as well. The sale of an ADR does not lead to a sale of an underlying foreign currency, whereas a sale of a dollar security by a foreign holder will almost certainly do so – unless the foreign investor cohort overall is content to add to its holdings of short-term dollar securities.

Foreign liquidation of dollar investments is a largely unseen danger to the dollar by US-centric commentators who are stuck with the belief that foreigners need to accumulate them. A further rise in interest rates or bond yields, which appears to be underway, far from protecting the dollar will almost certainly lead to portfolio liquidation, dollar liquidation, and therefore its collapse, there being almost no foreign currency in US residents’ hands to absorb it.

And finally, in the run up to a presidential election year it is becoming clear that the US’s proxy war against Russia is turning into a political and military disaster. Ukraine is running out of men, and Russia is reaping the benefit of western-imposed sanctions. Disagreements between NATO members are beginning to surface.

What will that do to the dollar’s credibility? It all feels like a fin de siècle, the end of the fiat era and the beginning of a new currency regime.

The background to a new dollar crisis

It is never wise to pursue political and economic policies to the end of the road. But that is what the US Government appears to be doing.

In 1971, having embarked on a policy of replacing gold with the dollar as everyone’s currency and valuation standard, there is every reason to fear that for the US Government to return its fiat dollar to sound money is politically impossible. The reasons this might now matter are twofold: the dollar is losing its grip as the world’s reserve currency, and interest rates are rising into a recession which could turn into a slump, destabilising the mountain of debt which is the other side of too much unproductive credit intermediated by over-leveraged banks.

In previous articles, I have shown the importance of anchoring the value of credit to gold to ensure its stability, particularly at a time when credit’s instability becomes beyond the state’s control. Such a time has clearly arrived. I have described the practicalities of how to do it, which is to simply ensure that a currency is freely convertible into gold coin and bullion. A modern version of this has been proved to work time and again in the form of currency boards recommended and implemented for a number of governments by Professor Steve Hanke, tying collapsing currencies to a relatively stable dollar. But the dollar itself is now becoming highly unstable.

For the US Government, the urgency of considering a gold standard for the dollar is now upon it, because the Asian hegemons — Russia and China — are in a position to put their roubles and yuan on rock-solid gold standards. The ease with which Russia can do this was demonstrated in my recent article, here. Furthermore, it is increasingly in Russia’s interest to take this step. But if Russia does so, it is bound to fatally undermine the fiat dollar’s position. And it is not widely realised that China is again encouraging its citizens to buy gold. This is from the Jerusalem Post on 7 June:

“Last week an event occurred which was completely missed by the mainstream media. The People’s Bank of China (PBOC) took the next important step to encourage a wider and less wealthy section of Chinese citizens to purchase gold and silver bullion. The PBOC opened the facility for citizens to convert renminbi cash savings held in the public’s own bank accounts to be converted into physical gold at the click of a button.”

Does that indicate that China feels the time has come to protect even her poorer citizens and the yuan from global currency instability?

Perhaps the hegemons are positioning themselves. While putting the rouble onto a gold standard would be seen as an act of extreme monetary aggression against the fiat dollar, Russia urgently needs to stabilise her currency. In a dollar-centric world suffused with anti-Russian propaganda, any weakness in the dollar is simply multiplied in the rouble exchange rate. This the flaw in Putin’s agreement with Saudi Arabia to drive up energy prices. As I put it in the article referenced above, if they shiver in Germany, they will freeze in Russia: that is without massive energy subsidies for the Russian people.

Feedback from readers exposes an erroneous belief that it is the trade balance which matters. They correctly say that higher energy prices improve Russia’s balance of trade. So why should the rouble’s exchange rate not benefit? The answer is that the purchasing power of a fiat currency depends totally in the belief in its validity as a medium of exchange. And while it is true that Russia’s exports benefit from higher oil and gas prices, in a global inflation crisis such as we now face, the rouble’s credibility is unlikely to improve, particularly when it is off-limits for western speculators and the Russians are demonised in capital markets.

Therefore, we should assume that Russia will be forced to take meaningful steps to stabilise the rouble, which can only be done by returning the rouble to a gold standard. Furthermore, Russia’s economy has the low tax environment that would benefit hugely from interest rates that reflect gold as money as opposed to fiat roubles. From an interest rate on one-year rouble credit currently at 16% we can expect this to decline towards 3% over not very much time with enormous economic benefits. There is evidence that senior Russians, including Putin, understand this point.

If only the US could achieve similar benefits from sound money! Unfortunately, it requires a totally different political, strategic, and economic mindset to those currently operating in Washington and Langley. Instead, the Keynesian playbook is for the state to increase its fiscal and monetary support for the economy to prevent it running into a recession. And policy makers are more informed in their policies by the recent price stability at lower interest rates than the instability of the 1970s when the fiat dollar was bedding in. They believe that the consumer price inflation problem is exogenous and not the consequence of earlier monetary policies. And they aver that a period of current interest rates, or at least levels not much higher, will be sufficient to return CPI inflation towards the 2% mandated target.

America is trapped in a political and economic version of Stockholm syndrome. But there are some influential analysts who are beginning to see this as wishful thinking, and that energy prices in particular are not only going higher but will continue to do so. This creeping suspicion is likely to permeate official thinking over time and in the light of developments.

As part of this enlightenment, JPMorgan’s Global Equity Research unit is now forecasting $150 prices for Brent. The consequences for heating oil and diesel prices are particularly pernicious. These values are already rising, as the snapshot of energy and commodity price moves over the last three months indicates.[ii]

Other prices rising ahead of the US winter include some basic foodstuffs, indicating that any move towards CPI normality is a long way off. And then there is the widespread ignorance that surrounds the consequences of the bank credit cycle which is entering its contractionary phase. The effects are to wrest control over interest rates from central bankers, as desperate borrowers with deteriorating cash flows scramble for scarce credit: they will simply have to pay up to remain in business.

The consequences of the credit cycle

It is too simplistic an argument to blame depressions, slumps, and recessions on the failings of the private sector. The cause is always a contraction of credit. But that is created by a previous overexpansion of bank credit and by its nature is a correction of a previous condition. The greater and the longer the expansion is prolonged, the more destructive the contraction that follows.

Ignoring this reality, Keynes and others invested in a role for governments to intervene in economic affairs. It required the eventual abandonment of sound money. The original idea was for governments to take up the recessionary slack, stimulating the economy by deliberately running a budget deficit, and recovering public finances subsequently through increased tax revenues when the economy recovers. By these means, it was believed that recessions would be minimised, and government finances would be balanced over the economic cycle.

It was an argument which was applied with apparent success in the post-war years until the end of the Bretton Woods Agreement, when the inflation of the dollar’s M3 had doubled from $27bn in July 1950 to $59bn in August 1971, without the inflationary consequences that followed the suspension of Bretton Woods.[iii]

When the Bretton Woods Agreement began to fall apart following the failure of the London gold pool in the late sixties, for America’s high priests of macroeconomics the strictures of a gold standard straitjacket were the problem, not the failures of their economic and monetary theories. Bretton Woods was abandoned, and ever since government-inspired economic theory has doubled down on failure. The FRED chart of the US’s budget position illustrates the consequences of every time things go wrong, blame free markets and just double down on a policy of government stimulation by fiscal deficits.

To put these deficits into context, in fiscal 2021, Federal Government outlays were $6.822 trillion, and revenues were $4.047 trillion. In other words, the deficit on expenditure was 31.4% of revenue. After a brief recovery in fiscal 2022, the current fiscal year which is ending shortly will see a further deterioration in the deficit to $2 trillion. But with the prospect of a now widely expected recession and interest rates higher for longer, fiscal 2024’s deficit will likely be significantly worse.

Clearly, with recession expected and despite record government deficits, the Keynesian stimulation theory has run its course and has failed completely. But that is not all. Lower interest rates are meant to rouse an economy, and in that they have also failed. Macroeconomic theories become so far removed from economic reality that the whole establishment of the economic profession needs to reset its approach to free markets.

The cyclical problem of bank credit

One of the extraordinary failures of modern thinking concerns an almost total blindness to the cyclicality of bank lending. And what is nominal GDP, which is used to measure economic performance? It is no more nor no less than the deployment of credit for qualifying transactions making up GDP. Yet no one appears to understand the consequences of this important fact. GDP rises and falls, not driven by consumers but by changes in the availability of bank credit. Consumer behaviour is not the source of recessions in consumer activity; it is the availability of the credit that drives it.

Those who do not understand the cycle of bank credit and its implications are the large majority of economic actors, both in the financial and non-financial sectors. And the most stubborn cohort of deniers is to be found in governments and their bureaucrats. From the major central banks to banking regulators, a group-thinking blindness to the causes of regular booms and busts is the source of an evolving cyclical credit crisis. Unfortunately, if a government and its agents continue with wrong policies for long enough, instead of being derided public belief in them grows. It is a particular problem in capital markets which have now bought into central bank group thinking policies without reservation.

Bank executives are not immune to this trend. Consequently, instead of sticking to their business objectives properly, they are beholden to central banks and government regulators. Their true business is to be dealers in credit, not to bear responsibility for those who claim to be stakeholders and regulators, but to achieve returns for their shareholders.

Few bankers seem to realise that they are trapped in a cycle of bank credit of their own creation. That is why the cycle has existed for as long as credit statistics have been available. But combine a lack of understanding of the cause of the cycle with the absence of shareholder responsibility, and we can expect the management of large banks to think that with regulatory support they can trade their way out of economic downturns by simply adhering to the regulations. The few banks that have failed this time have been dealt with by the regulators, restoring faith in the regulatory regime for the others.

But when bankers have the wake-up call, that their balance sheets are over-leveraged and producer input prices are rising, unless they urgently reduce their lending exposure they will risk bankruptcy from bad debts and falling collateral values. That is why bank lending is contracting, and why in real terms GDP will decline. And the contraction of GDP feeds into yet more credit contraction, driving up borrowing costs. The pressure on banks to liquidate both on-balance sheet investments and collateral against loans is bound to intensify.

The pressure on the dollar from foreign holders selling down their exposure will naturally follow. As seen in the table in the introduction to this article, the pressure on the dollar from these combined events threaten its continuing existence. Other than accepting the reintroduction of a credible gold standard, what fiscal measures will be required to make a gold standard sustainable?

Cutting out excess spending

The current fiscal year, which ends on 30 September will see a deficit on US Government spending of $2 trillion. $Nearly one trillion of that is debt interest:

The way that debt interest has soared indicates that the US Government is already in a debt trap. Furthermore, in its last estimates of debt interest costs (May 2023), the Congressional Budget Office assumed that the average interest rate on debt held by the public in this fiscal year would be only 2.7%, and in 2024 2.9%. With 3-month T-bills already yielding 4.8% and 10-year Treasury notes over 4.5%, these forecasts are already out of date. And with a recession now more certain than at the time of the CBO’s forecast, on current spending plans plus the fall in tax revenues the budget deficit for 2024 is headed for over $2.5 trillion, even assuming no further rises to borrowing costs. But they are likely to rise to over $1.5 trillion, taking the likely deficit into covid lockdown territory.

In the fiscal year just ending, the average rate of interest paid works out at 2.9%, which compares with a current rate in excess of 4.5%. The consequences of deteriorating tax revenues, increasing welfare costs, rising price inflation, yet higher bond yields, a credit squeeze, and the refinancing of $7.6 trillion of existing debt make the current position unsustainable.

The best solution is to radically cut spending. But given the scale of the problem as part of the solution taxes might have to be increased as well, though the emphasis must be on spending cuts. If there was time to implement these cuts, they could be spread over a few years, but time is of the essence.

Otherwise, the US Government will merely fall deeper and deeper into its debt trap.

This will be the minimum required for the US Government to put its finances in order and to implement and maintain a gold standard for the dollar. Contrary to Keynesian theory, the economic benefits of balancing the budget would be substantial. This was proved in the UK when 364 Keynesian economists signed a letter to London’s The Times criticising the 1981 budget. In that case, at a time of rising unemployment, high inflation and recession, Chancellor Geoffrey Howe raised taxes to close the budget gap. This represented 2% of GDP, which compares with a prospective US deficit of over 9% of GDP. The Keynesian economists opined that tightening monetary policy at a time of recession was wrong. But no sooner was the letter published, than the economy began to improve.

Admittedly, the British deficit as a proportion of the total economy was far less than that faced by the US Government today. But the disproving of Keynesian theories of deficit stimulation, and the benefit to the economy of a balanced budget cannot be denied. Furthermore, if in balancing the budget expenditure is cut allowing taxpayers to keep more of their earnings, the economic benefits are even more obvious. Hence, the recommendation that as much as possible the reduction in government spending is the best way to balance the budget and achieve a better economic outlook.

Not only will balanced budgets have to be run thereafter but spending must be firmly capped in nominal terms. A free market, non-interventionist philosophy must replace state intervention and management of the economy. Central bank credit must be contained, and commercial bank credit allowed to respond to demand for productive credit.

Business must be permitted to dance to the tune of consumers, and not the regulators. Bad businesses hide behind regulation, which through licencing disadvantages competition. Regulators are not motivated by what the consumer wants and is often ignorant of his trade. They produce unnecessary bureaucracy. Where they exist to deter fraudulent and unfair practices, they rarely succeed. Not only should consumers be free to choose the products that they want, but they must be responsible for their actions. The idea that the state can replace the principle of caveat emptor is ridiculous.

The same goes for trade. Traditionally, trade tariffs have been a source of government revenue, but they have evolved into politically driven means of penalising nations which are successful exporters in favour of protecting uncompetitive domestic production. This disadvantages the domestic consumer and manufacturers sourcing raw materials and machinery from abroad.

The setting of interest rates must be to regulate the balance of gold reserves, and not, repeat not to regulate the economy. The source of investment capital in the form of savings should be permitted to return, encouraged by removing all taxation from savings and trading profits. Consumer debt, other than mortgage finance, will wither under these conditions. A savings driven economy, such as Japan’s and China’s, is less prone to consumer price inflation and interest rate volatility. And if savings are not taxed, they become encouraged.

And lastly, government statistics should be banned, because they only serve to encourage state intervention. If there is demand for any particular run of statistics, then private sector actors can provide them.

The US faces problems with a gold standard[iv]

As a matter of fact, gold as money is written into the US constitution as well as in the definition of the dollar. It will surprise readers to know that what commonly circulates as dollars are not dollars at all, being Federal Reserve Notes (FRNs). Under constitutional law, United States money is expressed in dollars, while FRNs are redeemable in dollars which is the lawful money. Therefore, the FRN dollar bills in circulation are not lawful money.

It might seem a pedantic point perhaps, but it should be respected and addressed in any future legislation. And the dollar itself was defined in gold. Article 1 Sec. 10, Clause 1 of the Constitution states:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts…

There is much to unpack in this clause, but it is money that concerns us. In 1785, Congress unanimously resolved that the money unit of the United States was to be the dollar and that the dollar would contain 375.64 grains of fine silver. The same resolution determined that there shall be two gold coins, one equal to 10 dollars and one equal to 5 dollars. And subsequently under the Coinage Act of 1792, the coinage of gold Eagles was mandated, “each to the value of $10 containing 247.5 grains of pure gold”.

Dollars and dollar-substitutes such as the FRN were the medium for payment because they specifically represented gold and silver coin in the prescribed weights. In 1834, gold became the de facto standard, confirmed in the Coinage Act of 1900 at 23.22 grains of fine gold, the equivalent of $20.67 to the ounce, a standard that operated for nearly a century until 1933.

It would appear to be a simple matter to return to convertibility in accordance with the law, but instead of the earlier fixed weight, a new relationship would have to be determined for the constitutional dollar and the FRNs if they be permitted to continue to exist: the future of the Federal Reserve system must be called into question, having presided over a failed fiat currency of its own issuance. Either way, the Treasury’s promise to pay the equivalent in its gold reserves to the Fed at $42.22 to the ounce, must be addressed.

Some commentators posit that to define the dollar by weight of gold and to make it fully exchangeable requires a substantial devaluation of the dollar, perhaps to $5,000 or $10,000 per ounce of gold. And that in order to do so, it would be declared over a weekend. Presumably, it is thought that this new rate would ensure that gold would be redeemed for dollars, allowing a new gold exchange rate to operate without undermining the Treasury’s bullion reserves. This appears to be a muddled Keynesian way of thinking, in the belief that devaluation is necessary to ensure a favourable exchange rate with other currencies, whether exchangeable for gold or not, and to ensure there is sufficient economic stimulus to support the mountains of debt in the private sector. But it would also be a default on the US Government’s debt by devaluing it in terms of legal money, which is still gold despite current denials by the US authorities.

Such a substantial devaluation is clearly intended to allow headroom for the US Government to continue with its current fiscal and monetary policies. But without the fundamental reforms outlined in the previous section, it would probably be only a very short time before a devaluing dollar forces yet another reset. In short, it would fool no one for long.

Then there is the problem of verifying US official reserves, which at 8,134 tonnes have been almost unchanged since 1980. Rumours about their condition and the extent to which they actually exist makes them uncredible. To what extent have they been swapped and leased over the decades, if indeed they exist in bars of LBMA deliverable standards?

The experience of Germany seeking repatriation of some of its gold reserves stored as earmarked at the Federal Reserve Bank of New York rings alarm bells over the entire situation. And as long ago as 2002, Frank Veneroso, who was a highly respected analyst at the time concluded that between 10,000—14,000 tonnes of central bank gold reserves had been either swapped or leased and sold into the market.[v] The latter figure was half the declared official reserves of the entire world.

Since then, the leasing game and price suppression of gold has certainly continued. But there is a difference today, with increasing numbers of central banks accumulating bullion reserves, currently recorded at 35,731 tonnes. Much of this increase has to do with China, Russia, and their rapidly expanding spheres of influence, who do not lease or swap their gold reserves. Germany’s experience of the US idea of property ownership of gold, and the Bank of England refusing to deliver Venezuela’s gold when demanded plus the leasing shell game amounts to strong circumstantial evidence that the US Treasury and the New York Fed vaults do not have the gold they say they have.

This in itself suggests that there really is almost nothing backing the fiat dollar when the fall-back position becomes a return to gold as the money-anchor for credit. Furthermore, there is the geopolitics of gold to consider. Not only has Russia been accumulating bullion reserves, but informed sources believe that there is further bullion in state funds, bringing Russia’s holdings to about 12,000 tonnes. And China has had a policy of accumulating gold “off balance sheet” since 1983, accelerating mine output, importing large quantities of bullion, and not permitting any bullion to leave the country. Overnight, China could probably increase her official reserves to a level in excess of 30,000 tonnes.

We can be sure that the US’s intelligence services have an idea of this situation, and the geopolitical disadvantages to the US and its dollar of a return to gold as the monetary standard. In London, where the bullion banks offer unallocated gold accounts, a substantial rise in the gold price such as that recommended by some US analysts would lead to bankruptcies among the LBMA member banks with extremely serious consequences. And on Comex, it would be likely to lead to implementation of force majeure clauses.

The consequences for commodity prices from a de facto devaluation of the dollar would also be to drive them significantly higher. On all practical grounds, a substantial gold revaluation/devaluation of the dollar can be ruled out.

Conclusion

The hurdles in the way of the fiat dollar’s survival are steadily mounting, and the US Government does not know how to secure its future. The state theory of money is turning into a total failure. Interest rates, which more correctly are the time preference required to ensure foreign holders of dollars continue to hold them are rising. This tells us that markets expect the purchasing power of dollar credit to continue to decline, so if the monetary authorities attempt to stop them rising, the currency will fall, and foreigners will sell. Equally, as bond yields rise the value of all financial assets will decline, portfolios will be sold, and presumably the currency raised will be as well.

Either way, the days of the fiat dollar are numbered. The politicians have no mandate to protect it by balancing the budget, returning to a gold standard, and taking the economic measures necessary to make it stick. Furthermore, America’s existing bullion holdings appear to be badly compromised – the cupboard is bare.

Not only is it the end of the fiat federal dollar note, but it is the end of empire, which the administration is reluctant to accept. We must hope that some strategic sense prevails, and the Doctor Strangeloves at Langley do not have their way.

• [i] See my article for Goldmoney quantifying the eurodollar market: https://www.goldmoney.com/research/theres-a-herd-of-elephants-in-the-room
• [ii] See https://finviz.com/futures_performance.ashx?v=14#
• [iii] See St Louis FRED, Currency in Circulation.
• [iv] The legal and historical basis for the dollar, to which the analysis refers is curated from Pieces of Eight by Edwin Vieira Jr., published by The Goldmoney Foundation
• [v] See https://www.gata.org/node/4249