Trump Says ‘No’ to World Money: This Mess Will be Good for Gold Holders
‘The US would never default,’ my new co-worker told me around this time 13 years ago.
In spite of a near decade of lending and credit experience, I was still pretty green when it came to understanding the inner workings of the markets.
I was a few weeks into my job at a derivatives firm, and each week a co-worker was tasked with teaching me a bit about their speciality.
The guy assigned to me for that week knew markets. He’d spent the better part of his career on credit swap desks in London and parts of the US. And if memory serves, he even did a stint in Japan.
The point is, when institutional banks went looking for a way to bet on their own debts, this guy could find a way.
It was April 2007 when I was trying to understand how the US government could continue to write cheques against falling tax income and rising debt.
The takeaway from that conversation, was that the world had more faith in US government debt and the currency it printed, than any other financial instrument in the world.
What’s even timelier about that conversation, is that it happened mere weeks before the housing bubble in the US began to unravel…
Yet for many, the financial viability of the US government and Federal Reserve Bank never really came into question at the time.
Although for Jim it did. In fact, since then, he has persistently questioned the viability of the Fed and US government’s ability to remain at the heart of the monetary system.
Of course, in the early days few took Jim’s points seriously.
Nonetheless, Jim has given more than 20 interviews in the past three weeks alone. Perhaps after all these years, many really do want to know who will bail out the Fed this time.
Read on and he’ll tell you exactly who saves the Fed.
I’ll give you a hint though…
The end result of this mess will be good for holders of gold.
Until next time,
Trump Says ‘No’ to World Money
Over the course of 13 years as a media commentator and nine years as a bestselling author, I’ve had frequent occasion to state the following:
‘In 1998, Wall Street came together to bail out a hedge fund. In 2008, the Federal Reserve stepped forward to bail out Wall Street. Each crisis was worse than the one before. In the next crisis, who will bail out the Fed?’
This was more than just rhetoric.
It was a clinical description of a pattern of worsening crises on an approximately 10-year tempo, along with escalating bailouts.
Now the worst economic crisis in US history is here and the Fed itself is in need of a bailout.
But what is the source of that bailout?
We now know part of the answer…
Bailout fund drying up
A few weeks ago, the US Congress passed a US$2.2 trillion bailout bill called the CARES Act.
This is the law that provided US$349 billion in small business loans, which are forgivable if the employer does not lay off its employees.
That fund has dried up already with most businesses getting either no money or not enough to survive more than a few weeks.
Also buried in that law was a US$425 billion bailout fund for the US Treasury to recapitalise the Fed.
Since the Fed operates like a bank, they will leverage that US$425 billion of new capital into US$4.25 trillion of new money printing to buy corporate debt, municipal bonds, mortgages, and other assets in order to keep liquidity in the system.
Still, that’s also a temporary solution when many more trillions of dollars of new money will be needed.
US GDP is expected to lose an annualised US$6 trillion or more in output in the second quarter.
I estimate that 50% of retail and 90% of office rents aren’t being paid right now.
Many small businesses will fail and probably never reopen.
US holds up IMF emergency plan
I had always suggested that the IMF has the only clean balance sheet and would be the only source of liquidity in the world once the Fed was tapped out.
That’s exactly what we’re seeing now.
The world is turning to the IMF for help.
And that means printing the world money called special drawing rights (SDRs) to bail out the global financial system in the current economic and financial crisis.
SDRs were used in a small way during the 2008 financial crisis.
They didn’t have much impact because the quantity was relatively small (about $250 billion equivalent) and it took a long time to get done.
The SDRs were issued in August 2009, almost a year after the acute phase of the crisis and after a recovery had already begun.
Still, the 2009 issuance was a good dry run in preparation for the next crisis. Now the next crisis is here.
The world has never been so deeply in debt.
Societies with low debt burdens are robust to disaster.
They can mobilise capital, raise taxes, increase spending, and rebuild when the crisis is over.
But heavily indebted societies are much more brittle. They just don’t have that flexibility. Meanwhile, panicked creditors demand repayment that causes distressed sales of assets, falling markets, and defaults.
That’s the situation we’re facing today.
Still, nothing this momentous happens without a heavy injection of politics, especially while Donald Trump and his ‘America First’ agenda are in place.
A normal SDR printing exercise requires that the total SDRs be issued to all IMF members in proportion to their voting rights in the IMF.
This means that US adversaries such as Iran and China would get part of the bailout money along with more needy countries in Africa and Latin America.
The US is now holding up the new issuance of new SDRs for exactly this reason.
We’ll see how this impasse gets resolved.
Perhaps new SDRs will be issued right away. But as the depression lingers and the Fed’s impotence is exposed, the issue of printing a trillion SDRs will be back on the table.
China may have their own conditions such as a diminution in the role of the US dollar as a global reserve currency. The US may be more desperate when the time comes. Either way, this issue will not go away.
SDRs were originally intended as a kind of ‘paper gold’.
Once the IMF starts the printing presses, investors will probably favour real gold as the proper antidote.
I have explained before why gold is coming back to the global monetary system.
All the best,