Politics, the economy and Gold

 

As the US becomes increasingly politicized and polarized the economy is inevitably effected.

A major issue that is often neglected is the fact that the United States Economy enjoys the global advantage that accrues to the world's reserve currency: the US Dollar.

For a country that has run massive deficits for over 50 years and has also run a massive current account deficit for nearly as long - the one thing that has kept inflation and interest rates relatively in check has been the dollar's reserve status.  Until recently.

Because so many global contracts settle in dollars: many natural resource contracts as well as many large financial contracts and most financial derivatives (a quadrillion dollar OTC market) every country has need of US dollars and every country carries dollars as part of their reserves so the bid on dollars has been high keeping the dollar interest rate low.

This entire construct is predicated on the stability of the US Justice system that will enforce the integrity of dollar dominated contracts.

Until recently this system has been the bedrock of US financial superiority.  Until recently.

The other contingency that has kept interest raters and inflation low is the fifty year movement towards globalization.  Until Recently, cheap labor, cheap production costs, competitive sourcing have all been a deflationary power.  Until recently.

Finally the third huge contingency that has floated the US advantage is the fact that Paul Volker raised rates to nearly 19 percent to crush the inflation of the 70's.  He was able to do so in part because of the total independence of the Fed combined with that fact that the US was a creditor nation with low debt.  So the high rates were not crippling.  For the last 50 years every increasingly politicized Fed Head has simply lowered rates to iron out economic problems.  Until rates hit ZERO.  Recently.

Now, all the things that kept the dollar in control and rates and inflation in check have reversed.

The world is deglobalizing. The US - and every other first world county - is a massive debtor nation. And the US justice system is under constant attack by the Trumpist wing of the Republican party which insists that the US Justice system is corrupt and can't be trusted.

Add to that massive supply chain disruptions from covid and a war in the world's largest grain and oil producing region and you have a perfect storm for inflation.

The very worst thing we could do as a nation under the circumstances is politicize the inflation problem.  It is not a political problem but the result of several 50 year trends violently reversing all at once.  

This creates massive instability.  To politicize the problem magnifies the instability.  

We are in the process of politicizing this problem.  And in doing so we will tear down faith in the last institutions where faith has held: the Justice System and the Fed.  This reaction in a massively polarized country will serve as the coffin nail that tips the country from a place where international businesses prefer to write their contracts in dollars to a place where international business decides that dollar denominated contracts no longer provide the necessary stability.

That will be crushing for the dollar.  But great for gold.