Paul Tudor Jones was on TV the other day saying he was shorting T-bills and buying hard assets. He knows that America is going bankrupt unless it drastically cuts spending and ramps up tax revenues. And there is zero political will to cut spending and increase taxes.
We are two weeks away from an election and the subject doesn’t even come up.
Jones is the ultimate insider. He knows that there are only three ways out of our current debt problem. We can default, we can drastically cut spending and increase taxes, or we can inflate it away.
The governing elites have chosen to inflate the debt away by debasing the currency. Because it is politically easiest and the poor people that will be harmed most won’t figure it out until it is too late.
Real Rates
To understand what will happen you need to grasp the basic idea of real rates. The real rate of interest is the spread between a bond yield and inflation. So, if you have 10-year treasury with a 5% yield, and inflation is 4% – your real rate of return after 10 years is 1%. $100 turned into $105 with the purchasing power of $101.
It goes the other way as well. If the 10-year has a 5% yield and inflation is 6% this means that you lose 1% after a decade. The real rate is -1%. Your $100 has the purchasing power of $99.
When the real return is positive the government is losing money and the debt pile is getting worse. When real rates are negative the government is making money and the debt load is shrinking.
The government funds the current debt by issuing bonds that make a positive real return otherwise who would buy them? This works well until the debt gets too big and the government needs inflation to reduce it.
As I wrote on Monday we are getting close to that magic 130% of debt to GDP where people start demanding more yield for their bonds and currency meltdowns happen.
Our current debt is $35 trillion. Interest payments alone are 25% of tax receipts. The longer this problem is ignored the worse it gets.
Free Markets
So how do they do it?
Nobody wants to lose money on an investment, especially the bond investors (the smart guys on Wall Street). When they see future inflation going up, like they do now, they demand higher yields. This is why rates are going up despite the Fed cutting 50 basis points last month.
Like all markets that are allowed to trade freely, It is a self-correcting market. If inflation looks like it will go up, they sell (increasing yield) – and if they think inflation will drop they lock in the high rates.
Government Needs Inflation
That said, to inflate your way out of debt this bond market must be controlled. Yields must be capped below what investors would want to pay for them.
Japan capped its yields with something called Yield Curve Control. The government prints money and uses that money to buy bonds which pushes yields down. They print as much as needed to keep the yield where they want.
In the first 9 months of 2024, the government issued $21.4 trillion in bonds – a jump of 34% over last year. Not all of this is new money, as they use this money to pay off old debt – kinda like paying your Visa with your Mastercard.
However, in terms of Yield Curve Control, it doesn’t matter. The Fed will print enough money to bring the yields down. This is what you can look forward to. In some ways, I think they want
Trump to be elected so they can blame him for all the financial pain that is coming down the pipe.
It’s Happened Before
After World War Two something similar happened. They capped yields and printed money. Real rates were negative 15% and inflation ramped up. It was only the U.S. being the factory of the world, pent up demand and the men driven by need to put the war behind them and get on with their life that brought us out of the mire.
We don’t have that anymore. We buy from the world. There is no drive and we are swimming in surplus.
The EU is worse off than we are, China is in real trouble and an oil shock is expected out of the Middle East.
During Covid, the government printed $5 trillion and we saw inflation like we haven’t since the 1970s. What happens when they try to reduce the debt by 50% and $5 trillion a year for the next four years?
As an investor, you should consider owning hard assets like gold, silver, or real estate. There could be some nice buys in parts of Flordia and Dallas over the next year – blood in the streets and all that.
All the best,
Christian DeHaemer
Outsider Club
Brit Says Buy Silver:
https://www.outsiderclub.com/economy-points-tosilver/
https://www.outsiderclub.com/silver-breaks-out-2/
I Talk Debt
https://www.outsiderclub.com/silver-breaks-out-2/
Boeing Has A Hard Landing:
Boeing Has A Hard Landing:
https://www.outsiderclub.com/boeing-down-in-flames/
