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The Dollar, Debt, Inflation, and why the Federal Reserve is stuck between a rock and a hard place 
Before 2020 began, US government spending was already on an unsustainable path
Now after trillions more in borrowed money for virus relief and stimulus, government debt is at an all time high and growing faster than ever
Now after trillions more in borrowed money for virus relief and stimulus, government debt is at an all time high and growing faster than ever
At this point it's infeasible the government will ever be able to pay off all the debt
Debt to GDP ratios are too high
They simply cannot bring in enough in taxes to pay off their obligations
As a result they are just borrowing more and more money to pay off what they owe
Debt to GDP ratios are too high
They simply cannot bring in enough in taxes to pay off their obligations
As a result they are just borrowing more and more money to pay off what they owe
This is the same as you maxing out a bunch of credit cards, each time paying off the previous one with a new card you just opened
You simply don't have enough income to pay off your debts, so you fall deeper and deeper into a debt spiral
You simply don't have enough income to pay off your debts, so you fall deeper and deeper into a debt spiral
Eventually your credit score would tank
You wouldn't be able to open another credit card
But the government doesn't have this problem, because they have a Sugar Daddy with endless money who let's them keep borrowing
You wouldn't be able to open another credit card
But the government doesn't have this problem, because they have a Sugar Daddy with endless money who let's them keep borrowing
The Federal Reserve is the US Government's Sugar Daddy
It enables this endless debt by printing money to fund the government
It does this by buying government bonds on the open market
As a result the Fed balance sheet has skyrocketed to all time highs this year (~$7 trillion)
It enables this endless debt by printing money to fund the government
It does this by buying government bonds on the open market
As a result the Fed balance sheet has skyrocketed to all time highs this year (~$7 trillion)
The Fed can print endless dollars, so no bad credit score can prevent the government from borrowing
But in economics, there is a saying: "there is no free lunch"
There are more dollars in the world than ever before, and basic supply/demand principles tell us that increased supply of dollars will decrease the dollar's value
There are more dollars in the world than ever before, and basic supply/demand principles tell us that increased supply of dollars will decrease the dollar's value
This is beginning to show up in the DXY index (which compares the dollar to other government currencies)
It has started to fall convincingly lower over the past few weeks, indicating a weaker dollar
1 Year chart:
It has started to fall convincingly lower over the past few weeks, indicating a weaker dollar
1 Year chart:
It's also showing up in an increased gold price
The dollar is becoming less valuable compared to gold
Just yesterday, gold had an all-time-high weekly closing price in dollars
15 year chart:
The dollar is becoming less valuable compared to gold
Just yesterday, gold had an all-time-high weekly closing price in dollars
15 year chart:
Both the DXY index and the Gold price are indicating declined confidence in the dollar globally
This is a clear warning that we all need to pay attention to
If these trends continue, we are likely to start seeing inflation in the price of goods
This is a clear warning that we all need to pay attention to
If these trends continue, we are likely to start seeing inflation in the price of goods
But why haven't we already seen dramatic inflation already?
One reason is that the Velocity of Money is still at an all-time low
When money is not changing hands, it puts a damper on inflation
Here's a 20 year chart of M2 Money Velocity:
One reason is that the Velocity of Money is still at an all-time low
When money is not changing hands, it puts a damper on inflation
Here's a 20 year chart of M2 Money Velocity:
If the increased money supply is a tinderbox waiting to be lit, then the money velocity is the spark that could cause the explosion
Right now confidence in the dollar is still pretty high, but the DXY index and the Gold price are showing that confidence is decreasing
If this trend continues, and you see money velocity reverse and start to increase - watch out
If this trend continues, and you see money velocity reverse and start to increase - watch out
So what's the end game?
How can our government make it out of this mess?
Well, there are two extreme options for them going forward:
How can our government make it out of this mess?
Well, there are two extreme options for them going forward:
Option 1: Austerity
The Fed could sell their government bonds for dollars and decrease the supply of dollars
This would send interest rates skyrocketing, crash the stock market, and strengthen the dollar immensely.
The government would need to cut spending and increase taxes
The Fed could sell their government bonds for dollars and decrease the supply of dollars
This would send interest rates skyrocketing, crash the stock market, and strengthen the dollar immensely.
The government would need to cut spending and increase taxes
This would be extremely painful and would be political suicide
It is not likely to happen
It is not likely to happen
Option 2: Inflate it away
We are trending towards this path
The Fed can keep financing unbounded spending and can keep increasing the supply of dollars
This will inevitably weaken the dollar and lead to price inflation of goods and services
We are trending towards this path
The Fed can keep financing unbounded spending and can keep increasing the supply of dollars
This will inevitably weaken the dollar and lead to price inflation of goods and services
Eventually it could lead to a loss of confidence and possibly devastating hyperinflation
Now it's possible that the Fed and the Government can finesse their way through this storm.
It seems that the current plan is to start with Option 2, hoping that this jumpstarts the economy enough for a smooth transition into Option 1
It seems that the current plan is to start with Option 2, hoping that this jumpstarts the economy enough for a smooth transition into Option 1
But I'm extremely skeptical that this will work
We are in the biggest debt bubble in the history of the world, and it seems the era of US Dollar world-reserve privilege is coming to an end
World reserve currencies generally last around 100 years, and we are reaching that point
We are in the biggest debt bubble in the history of the world, and it seems the era of US Dollar world-reserve privilege is coming to an end
World reserve currencies generally last around 100 years, and we are reaching that point
So how can you protect yourself, as we trend toward an inevitable decline in the dollar?
Gold and Bitcoin are my bets in a time like this
I especially like Bitcoin because of its strictly fixed supply and hard money properties
Gold and Bitcoin are my bets in a time like this
I especially like Bitcoin because of its strictly fixed supply and hard money properties
What do you think?
To learn more about bitcoin, check out my educational threads https://twitter.com/dannydiekroeger/status/1282000262782042117?s=20
To learn more about bitcoin, check out my educational threads https://twitter.com/dannydiekroeger/status/1282000262782042117?s=20
Unlike dollars... bitcoin and gold cannot be printed
Gold must be mined out of the ground, and bitcoin must be mined by an algorithm, according to a fixed issuance rate
Both supplies are constrained, and therefore protected against inflation
Gold must be mined out of the ground, and bitcoin must be mined by an algorithm, according to a fixed issuance rate
Both supplies are constrained, and therefore protected against inflation
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