Currency Debasement

Currency debasement and debt restructuring are now what the world’s largest bond investor, dubbed the bond King billionaire Jeffrey Gundlach, sees coming.

The worst-ever Post-2023 Treasury Bond Crash was triggered by the Great Bond Sell-off 2023. In a few months, it sent treasury yields shooting 100 basis points higher.

The 2023 bond market crash was the most significant event in global finance this century, triggering five known domestic bank runs and sending financial shock waves across the Atlantic, which contributed to the collapse of Credit Suisse.

When investment-grade treasury bonds were perceived as a safe haven, prime collateral lost 6% of its market value in as many days. This could be more than a cyclical bear market; it could be the beginning of a systemic crisis.

As Darren Winters explains, some of the most conservative investors, banks, and pension funds piled into the perceived safety of treasury bonds when yields were 3% and below have been badly burnt.

Those treasury bonds issued at 3% and below have no buyers. Think about it. Would you lock up capital for ten years at 3% when you can buy Treasury Bills with maturity dates ranging from one month to a year at around 4.2%?  

Currency Debasement

Moreover, several banks offer 7% fixed interest payments on cash deposits for a year.

But check that the Federal Deposit Insurance Corporation FDIC covers the bank so you are not left holding an empty bag.  

Those who put their life savings into Fintech Synapse lost it all.

Losing money from bad investments is bad enough. Imagine that those who assumed no risks were not investors; they assumed no risk and lost everything.  

Evolve customers who have received payouts report receiving as little as $0.84 on more than $10,000 in funds and $9.01 on a $28,660 deposit.

Currency debasement worsens when central banks create currency to bail out banks so that they can honour their deposits

Monetary loosening policy in the form of bank bailouts so that failing banks covered by FDIC can honour saving deposits is the beginning of the end of fiat currency.

Voltaire famously said, ‘Fiat currency always eventually returns to its intrinsic value–zero.’ Unfortunately, we’re watching the final stages of that process unfold now. Currency failures are not new.

The current inflation-cost-of-living crisis means that a third of US households are struggling to put a roof over their heads, and cornflakes on the table are now one-third. So, this inflation is not driven by consumer demand, as households are broke. Even the low-cost dollar discount stores are going bankrupt. Farewell to dollar stores in the US—everything has changed, and the country is becoming a graveyard of closed stores.

When the currency becomes so debased, people can’t buy anything with it.

Abuse of Exorbitant privilege led to Currency debasement

The dollar plays a major role in global trade. As of 2022, the dollar was used in 54% of foreign trade invoices globally.

Darren Winters points out that the USD is the world reserve currency because global demand for dollars makes currency less volatile than other fiat currencies and reinforces demand for USD. The EURO, the second most traded currency since the peripheral euro sovereign crisis, has underperformed the USD as a store of value.

So, nations store their savings in the perceived safety of USD, creating global demand for US treasuries.

The exorbitant privilege of having the world reserve currency is that the government can comfortably spend more than it earns from tax receipts because there is global demand for the perceived safety of its bonds.

But exorbitant privileges are not a right; they are earned.

When public debts grow exponentially and tax receipts slow due to a shrinking economy, investors grow weary of pouring capital into sovereign bonds.  

The 2023 treasury bond market crash was a Minsky moment, the realisation that there is no safety in debt assets, even if they are premium investment-grade assets.

Demand for treasuries, US paper, is complementary to the demand for USD dollars. When there is an imbalance in the treasury market due to oversupply and lack of demand, the market price of bonds falls. Moreover, because USDs are needed to buy treasuries, demand for USD also falls.

Currency debasement is made worse when the Fed, the buyer of last resort, increases the supply of USD to buy up the surplus bonds

The fallout from currency debasement is a run on the bond market, pushing yields higher and destroying the bank’s collateral.

Emergency monetary policy and bank bailouts so that savings are not wiped out, forces the Fed to create even more currency, and this vicious cycle eventually results in a currency collapse.

A string of top world investors who don’t need to be part of an echo chamber warns us of the same thing.

Ray Dalio, Jeffrey Gundlach, and Paul Tudor Jone warn people to steer clear of bonds. The latter investor is shorting treasury bonds and is investing in Treasury Bills.

How do you invest during currency debasement and debt restructuring?

We are already witnessing the greatest transfer of wealth probably in history.

Confidence in a fiat debt monetary system is waning. The rise of Bitcoin, a bellwether cryptocurrency, says that investors have more faith in a computer algorithm restricting and managing the supply of a unit of perceived value than central bank monetary policy.

Any non-debt asset is likely to protect wealth against extended periods of inflation due to monetary debasement.

Monetary debasement and currency collapse lead to stagflation, declining economic activity and a melt-up in asset prices. A modern case study of this could end see Argentina, Venezuela and Nigeria   

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