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Thursday, September 4, 2025

"EL DÍA DEL JUICIO" DE LA DEUDA PUBLICA SOBERANA (II; "POR QUÉ EL ORO SIGUE BRILLANDO Y LA DEUDA Y LAS DIVISAS NAUFRAGAN")

 

THE GLOBAL DEBT CRISIS: WHY GOLD KEEPS SHINING WHILE DEBT AND CURRENCIES CRASH

Everyone is now watching long-term government bond yields going through the roof, from Japan to the UK, from France to the US. A few months ago, Wall Street’s analysts’ expectations, along with those of many other “experts” (that I am not sure how they can be defined as such, considering events proved them consistently wrong over and over again through time), were quite different and broadly expected interest rates to come down instead. The same happened in 2024: “The Fed Will Cut Interest Rates (Six Times!) in 2024, According to Wall Street.” And prior to that, in 2023: “Fed’s No-Rate-Cut Mantra Rejected by Markets Seeing Recession“. What are all these people missing and, as a result, continuing to misread market dynamics? We are now in a high-inflation environment.

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As you can see from the chart, the global M2 money supply continues rising, non-stop, without any sign of slowing down.

The assumption that a central bank can print an infinite amount of currency without consequences is simply WRONG. If you visualize cash as a government bond with a zero interest rate and zero maturity, it will be easier to understand what I just stated. If you assume a government can print infinite currency without consequences, then you also have to assume it can carry infinite debt without consequences. But mathematically, what is the real value of a unit of currency if the total supply goes to infinity? The result is: ZERO. Who’s willing to lend money to a government when the expectation is to receive much less (in real economic terms) in the future? No rational thinker will reply “Me!” to this question. As a result, the whole attempt perpetrated by the governments of developed countries all around the world for decades to “inflate their debts away” rather than repaying them is now backfiring spectacularly. There is no better example of the disconnect between the world of economists basing their research on completely wrong assumptions, theories, and data disconnected from reality than this paper that was literally presented 2 weeks ago during the Jackson Hole central banks’ yearly meeting: “US Debt-to-GDP of 250% Won’t Push Up Rates: Jackson Hole Paper“. Clearly, traders aren’t sucking up this garbage anymore.
 

It is what I am describing an isolated case or a broader one?

  • The most recent year France recorded a government budget surplus was 1974.
  • The most recent year the UK recorded a government budget surplus was 2001.
  • The most recent year Germany recorded a government budget surplus was 2019.
  • The most recent year the US recorded a government budget surplus was 2001.
  • The most recent year Japan recorded a government budget surplus was 1992.
  • The most recent year China recorded a government budget surplus was 2007.  

OK, maybe it’s easier to take a look at which developed economies’ governments managed to close their 2024 budget with a surplus: Norway and Denmark. Yes, only two, not even Saudi Arabia, which is sitting on biblical US oil wealth, managed to avoid closing 2024 in a deficit despite the flood of revenues it is blessed with.

Yesterday, one of my followers argued that when the current stock bubble bursts, investors will be forced to buy government bonds again. Furthermore, he claimed, long-term yields are not a major problem for government refinancing that is mostly done with short-term T-Bill notes whose yields are highly influenced by the Fed Fund rates. What he said, I am sure many out there share his view, has been true for a long time. I do not disagree, but it is wrong to assume it will continue to remain the case when the structure of the economy, now in a high inflation environment, is dramatically different. T-Bills are simply USD postponed a few months into the future; as a result, skewing the financing of government debt too much to the short part of the debt curve will simply accelerate currency devaluation. Isn’t this exactly what happened to Japan? Or more evidently in countries like Argentina, Venezuela, or Turkey?

 If a government tries to limit its interest expenses, the currency will lose purchasing power faster. If a government tries to limit the amount of debt it repays in the future, preferring to postpone it into the future, then yields will rise to reflect that. What happens if the central banks step in, implementing Yield Curve Control and artificially limiting the rise of yields on the long-term part of the curve? In order to achieve that, it will have to print currency today to purchase those bonds from the market and keep a constant bid to put a ceiling on yields. This, of course, will accelerate the present devaluation of the currency. This is literally a doom loop Japan has been through for decades (“A PEEK INTO THE FUTURE: USD/JPY ROAD TO 300“), and yet nobody, apparently, is treasuring that evidence to avoid repeating the same mistakes.

What alternatives do investors have if every single country out there is effectively playing the same game? True, if you look at FX rates between countries, investors seem trapped, and the best investment choice might be to bet on the country that will be the first to put its finances in order in the future so its currency will appreciate, relatively speaking, against others. However, when it looks like nobody intends to put its finances in order anytime soon, the options are limited to alternative forms of currencies like physical gold and silver. Period. This is exactly the reason why gold and silver continue to appreciate dramatically, even outperforming the euphoric stock market, and as a matter of fact, they will continue appreciating in value for the foreseeable future simply because the real value of fiat currencies continues to decrease.

 

The most striking example of fiat currency collapse is perhaps given by the gold chart against JPY, and I bet many other comparisons in the future will look similar. 

 

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