We have a problem. And it is so big nobody can see it.
We like to talk about American Exceptionalism. We're better, we works harder, we innovate better, we out negotiate, out manoever, out hustle our enemies and our freinds in every deal.
But really American exceptionalism is due to our performance in World War II. We came through that war with the world's victorious military, and with the only intact economy because the war was not fought on our soil. So we ended up with the world's RESERVE CURRENCY.
When you have the world's reserve currency you have the privilege of printing money to buy your own debt. And, at first, everyone buys your debt because it is the safest and most stable investment, and it is needed to settle large international commidity trades like oil. And so that is the instrument of exceptionlism - as long as you prudently manage your economy.. And as long is you prudently resist the urge to WEAPONIZE your currency.
That is American Exceptionalism. Before that it was British Exceptionalism. Before that it was Dutch Exceptionalism. All the way back to Roman Exceptionalism and Athenian Exceptionalism.
And America did manage its economy prudently and resisted the urge to weaponize its currency - Until Nixon took America off the gold standard in 1971. What ensued was a steady increase of debt that culminated in a massive inflation, But Volker and Carter raised rates to over %20 and broke inflation.
Then the 1980's came and we began to amass debt in unprecedented quantities. And when anything bad happened all we had to do was lower rates back below the cost of money, bail out the bad actors with printed dollars, and the debt orgy continued. And we turned from a surplus economy to the world's biggest debtor economy.
Then Clinton did away with Glass Steagel and we discovered financialization. And that allowed for debt to become an instrument for gaining tremendous wealth if you were able to borrow deeply below the real cost of money to buy up real assets. Wealth became increasingly concentrated in fewer and fewer hands of those with access to cheap debt, and inflation became embedded.
This weakened our reserve currency position but only marginally. But eventually the debt bomb exploded in 2008 and rates went to zero and the we printed trillions and trillions to bail out the bad actors.
Then covid. And rates stayed at zero and we printed 9 trillion dollars to bail out everyone. Meanwhile we began to to toy with tarrifs. Now tarrifs have a place in a Mercantilist economy. And many of our trading partners were acting in a Mercantilist manner. So it can be argued tarrifs were a proper response. However, we are the only party with a reserve currency. And you have to resist the urge to weaponize the reserve currency or risk other countries trying to de-dollarize in response to the weaponization.
Then Biden committed the ultimate transgression for a reserve currency. He kicked Russia out of Swift (a system to clear dollar denominated transactions) and he confiscated their Dollar denominated debt instruments.
The dollar was suddenly the ultimate financial weapon.
This works as long as there is no alternative to the reserve currency.
But what it does is incentivize other powers to aggressively de-dollarize and set up atlternatives for settling and clearing tranactions. China, Russia, Middles Eastern oil powers, India, Brazil, and many other sattelite countries have begun to aggressively de-dollarize.
And the first step is shoring up your resereves by replacing dollars with GOLD,
That is the drive of the Gold trade, and it is irreversible until a new global equalibrium is established with new clearing and settling currencies that aren't weaponized or laden with debt.
This will take time. The dollar and Eurodollat debt markets are massive. But so is the impetus for other powers to get out from under the weight of a weaponized dollar.
Meanwhile, what nobody seems to see is that the continued weaponization of the dollar through ever more aggressive Tarrifs is forcing all of our trading parners to ever more aggresively de-dollarize.
So nobody is buying our debt now. While the debt sprials out of control.
Therefor we have to buy our own debt with printed dollars. But this causes inflation to spiral out of control. And it causes the long end of the yeild curve to spiral out of control.
And here we are. Racing towards an end game where yeild curve contorl and hyperinflation destroys the economy.
And somehow nobody seems to see it coming.
