US Economic Policies of Past 40 Yrs Intentionally Being ‘Trashed,’ Impact on Gold & BTC: Luke Gromen

this is about as big as when Nixon closed the gold window I mean it was a she announced a change to the system she just threw the last 40 Years of economic Orthodox in this country in the trash and I think it's super important this in my opinion was the fed's error this time around right the FED always makes new errors they learn from their mistakes they just make new mistakes or versions of the same mistake who cares what I'm telling you what Janet yellen's telling you what Jake Sullivan's telling you what the Department of Defense is telling you is that it's a national security interest of the US to get out of the treasury export business uh gold would have to go up 19x to match the price level it was at in 1980 relative to foreign held treasuries outstanding every single thing in macro is telling you what going to keep going higher you're seeing yelling throw 40 Years of economic Orthodoxy in the trash the $130 trillion bond market is the sucker at the card table and it's going to figure that out on the spot with Michelle mccy is brought to you by Swan Bitcoin hello I'm Michelle mccy thank you for joining us again billionaires Jamie Diamond and Ray doio are again sounding the alarm on the soaring US Government debt now at over $ 34.7 trillion JP Morgan's CEO Jamie Diamond is stressing the need for the US government to reduce its budget deficit before financial markets force a reckoning in what he called a far more uncomfortable way than if dealt with from the start anre Delio the founder of Bridgewater the world's biggest hedge fund says that he's very worried about the declining investor appetite for government bonds diio told the financial times that he's concerned about the softening demand to meet Supply particularly from international buyers worried about the US debt picture and possible sanctions against countries other than Russia andalo most likely referring to sanctions on China this after US Treasury secretary Janet Yellen said that the US is prepared to sanction Chinese Banks and companies as well as beijing's leadership if they assist Russia's Armed Forces with their invasion of Ukraine and this all comes as China just sold a record amount of Treasury and US agency bonds Beijing offloaded a total of $53.3 billion worth of treasuries and agency bonds combined in the first quar water meanwhile China continues to buy gold well my next guest says that these are the latest signs that the dollar system as we know it is dying that the US treasury bond is losing its position as the world's primary Reserve asset but that the dollar will still remain the global Reserve currency Luke groman says the dollar will not be replaced but it will be repriced and lays out what this means for gold inflation and how Bitcoin fits into the picture Luke is one of the most respected names in the Global Research sector he's the founder and president of forest for the trees or fftt which Aggregates macroeconomic thematic and sector Trends in an unconventional manner to identify investable economic bottlenecks he's also the author of the Mr X interviews volumes one and two and Luke was also the founding partner of Cleveland research company and was a partner at Midwest research Luke thank you for joining us welcome to the show thanks sh Michelle it's great to be here so Luke your research really helps investors see the big picture see the forest for the trees if you will and I want you to help us understand this theory that you have of us treasuries losing their dominance as the global Reserve asset but despite this the dollar maintaining its Reserve status but before we zoom out I do want to get your shortterm view and you've said that the fed's real top mandate is that it will not allow treasury market dysfunction so expand on that and what your current macroeconomic Outlook is yeah my current macroeconomic Outlook is uh bullish for risk assets uh I'm negative on a real basis on long-term US Treasury bonds and and longterm Western sovereign debt more broadly long-term bonds more broadly uh bullish on Commodities bullish on gold bullish on bitcoin bullish on nominal growth in the US bullish on inflation in the US bullish on employment in the US and I think ultimately the easiest way to break that down is global central banks stopped buying US Treasury bonds 10 years ago on a net basis and US debt has not stopped growing and so there is uh and not only is it not stopped growing it's growing exponentially and so there's a widening gap between supply of US Treasury bonds and demand from Global Central Banks and that Gap is being filled by the global private sector uh and then when there we had run into periods where there is insufficient demand from the global private sector for those bonds which manifests as a stronger dollar and US Treasury Market dysfunction uh the FED and/or treasury inject dollar liquidity uh and they've done so multiple times at an accelerating Pace accelerating in intervals over the last four to five years and when they do so it's it's good for uh all the asset classes and nominal GDP and inflation and employment that I just mentioned and and I think what we're seeing increasingly are markets reflexively beginning to understand that treasury market dysfunction will not be allowed on a sustained basis in which case you've got a $130 trillion Global bond market increasingly squeezing into the $65 trillion Us doll equity Market the uh roughly $4 trillion gold market and the $1.4 trillion Bitcoin market and so when you look at charts of S&P 500 over the long Bond it is uh spiking when you look at the NASDAQ over the long Bond it is spiking uh gold over the long Bond spiking Bitcoin over the long Bond spiking all of these Spikes have happened in the last 18 to 24 months and I think those are signs of the market recognizing the bond Market starting to recognize that on a real basis it is the sucker at the card table the bubble is in long-term US Treasury bonds and the way that is resolved is by moving into things that will better hedge inflation and I think that's what we've been watching and we'll continue to see over the course of this year all right and again before we get into your bigger picture thesis you have said that the fed and the treasury will continue to supply whatever dollar liquidity is needed in in what form is this does this mean you're seeing successive rate Cuts does this mean you're seeing uh quantitative easing in what form do they inject this liquidity and and what would be the ramifications uh any any form in in emergencies we've seen it injected as QE right so March 2020 uh the bond market uh the off the Run treasury market crashes at the bottom of covid rates start going up rapidly and the FED comes in with very large L QE uh you can see it in other ways they also shortly thereafter uh Exempted US Treasury bonds from SLR or supplementary leverage regulations supplementary supplementary leverage ratios easy for me to say regulations for the banks that's just QE done through the banks uh you could see um it done as not QE when the problem was at the short end in when in the repo rate Spike of September 2019 the FED began growing their balance sheet insisted it was not QE it was liquidity uh we could see it again uh in the form of Treasury uh in 3 q22 fed continued to tighten but treasury ran down the treasury general account injecting dollar liquidity into the economy that more than offset the de the the tightening the Fed was doing with QT uh in 1 q23 they changed the Playbook again uh btfp in order to uh ostensibly assuage a banking crisis it wasn't banking crisis it was a treasury market dysfunction problem again that they were trying to stop from spreading uh more dollar liquidity uh second quarter of 23 they ran down the TGA again that was more about the debt ceiling than about any particularly acute problem in the Treasury Market Per Se uh 3 q23 once we had treasury market dysfunction we had the FED come out within 10day span seven different fed speakers all saying the bond market had done their job for them then we had treasur uh treasury follow that up uh about two weeks later in the quarterly refunding Announcement by yelling surprisingly shifting issuance from the long end to the short end of the curve and drawing down the reverse repo uh that the effects of what she did mimicked QE exactly but it was not QE according to purists markets reacted like it was QE markets don't care liquidity is liquidity uh first quarter of this year we've once again seen after the latest quarterly refunding announcement treasury didn't change their duration issuance but the FED cut their duration duration issuance right uh QT was was was cut back and so the amount of duration issuance in total between fed and treasury was once again cut so there's a lot of different ways to do this I tip my cap to them they keep uh switching it around as so as to not make it obvious uh they are talking right now there's an article this week in the Wall Street Journal about changing Basel banking regulation as soon as August people should read that as more dollar liquidity uh last week there was a two weeks ago there was an article in the Wall Street Journal talking about Freddy Mack uh using its balance sheet capacity to guarantee second mortgages in other words Freddy Mack could get into the business of guaranteeing vacations and pools and decks and consumer spending that is effectively a basically just through through Freddy Mack uh no different than a stimi that was handed out to everybody in co uh that could start as soon is tomorrow uh so there's a lot of different ways they're looking at and talking about doing this um and the purists will all say it's not monetizing the debt it's not QE blah blah blah markets are like Tommy Lee Jones and the fugitive when Richard Kimble's pointing his own gun at him I don't care so Luke we've got liquidity injected in Disguise or in various other ways but at the same time as you were running through the ways that the fed and the treasury were injecting liquidity into the markets we have the FED hiking rates now keeping them higher for longer at least so it seems so it's sort of negating the inflation fighting mandate if you will right it's like cutting your nose to spite your face you're saying you want inflation lower you're hiking rates to get there but you're aren't you negating all of those efforts by liquidity coming in through other means in the short run yes and in the long run paradoxically the fed's rate hikes are probably now adding to inflation uh in the initial stages in 2022 they were absolutely very the Fed rate hikes were absolutely very disinflationary to the private sector they arguably still are uh in terms of a lagged effect of the rate hikes the problem is is that there is nobody alive and operating in markets that was alive the last time the FED raised rates that fast when US debt to GDP was 120% of GDP uh and so this in my opinion was the fed's error this time around right the FED always makes new errors they learn from their mistakes they just make new mistakes or versions of the same mistake whatever initially Fed rate hikes were disinflationary to the private sector they probably we still are however as $35 trillion in debt is repriced higher interest expense for the US government goes up deficits go up and unless the US government slashes spending on the only other two line items big enough to cut to offset the increase in the deficit from interest expense which are defense and entitlements and we're not cutting either of those things they're both going up as well uh then you're going to have a much bigger deficit as a result of Fed rate hikes and deficits all else SQL are stimulative particularly when you have a Fed that refuses to allow High deficits to caused treasury dysfunction so if the Fed was willing to stand aside and let treasury auctions fail treasury dysfunction happen because the deficit is so big that it's crowding out Global dollar markets that there isn't enough balance sheet to finance us deficits without much higher rates then yes Fed rate hikes would be disinflationary they'd be they'd be deflationary but the fed's not allowing that treasury market dysfunction to to do that process and so what we're ending up with on a lag now is higher deficits because of interest expense and a shrinking private sector and or a disinflationary private sector it's not shrinking but it's disinflationary that's the same combination just a little bit more mild that we had during Co we had a huge deficits and we had a disrupted or slowing private sector and we know how that ended up it was extremely inflationary on a leg and I think now that we're uh over two years into Fed rate hikes I think we're starting to get on the bad side of that whole dynamic where government deficits against a disinflationary private side is adding to inflation SEC sequentially so uh they they're in a real pickle and and again unless they're willing to stand aside and let us def either slash entitlements slash defense to make room for the interest or if they're not going to slash those two then stand aside when the higher deficits cause treasury market dysfunction uh let treasury auctions fail which is never going to happen or let Banks fail without bailing out depositors over 250,000 which is never going to happen then it's going to continue to be inflationary um sequentially going forward in my view so if these rate hikes are in fact inflationary does it stand to reason that there's more likelihood that the FED will move to cut them I think there's a growing view there that you all credit on this deserves or belongs to Warren Mosler and and who's one of the one of the leading thinkers and theorists on the modern monetary Theory School they've gotten this whole rate hike cycle exactly right in terms of raising rates dramatically on 120% debt to GDP is going to add to deficits and ultimately unless you cut other things add to inflation um you saw Rick reer last week the CIO of fixed income at Black Rock talk about this that they need to cut rates to slow things down um yes and no right it we're going to get back to you know it will slow the deficit side but it's going to stimulate the private side and how do those two things net out um we're very much in a US Latin American problem us with Latin American characteristics problem Brazil Argentina Etc we have a fiscal problem the mistake the FED made was not letting inflation run hot enough for long enough to get that the GDP down before they raised rates so aggressively which is the same mistake that some of these Latin American countries made in the late 90s and 2000s and we know how that worked out okay let's let's zoom out again and look at what this means for the treasury market as you've said the top Mandate of the FED is to maintain treasury market function but you're saying that there's declining demand for treasuries from central banks in from central banks but you've said that foreign private investors are poised to step in and overtake central banks from buying us treasuries for the first time on record so break that down for us yeah you've seen the global private sector buy uh treasuries uh they will be the biggest buyer of treasuries surpassing central banks soon if they're not already that has an asteris needs an asterisk which is to say the global private sector foreigners in total I should say own $8 trillion in treasuries uh roughly uh as long as the dollar is low enough and moving lower they will buy once they start to get squeezed in other words foreigners in addition to owning $8 trillion in treasuries own about another 122 trillion in other us do assets net but they also have about $13 trillion dollar in dollar denominated borrowing uh and then who knows how big the euro dollar market it's estimated at anywhere from 10 to $50 trillion uh the dollar borrowings and the euro dollar market represent rather large dollar shorts so as the dollar goes up the balance sheet and economies of the foreign buyers foreign owners and and prospective buyers of treasuries the balance sheet capacity starts to shrink uh the way to think about this is say we have aund trillion do Global GDP economy say it grows 6% omally per year so that's $6 trillion do of growth every year the US deficit is projected to be $2 trillion a year for the next 10 years assuming no recessions so the United States needs to borrow two trillion needs to borrow a third of global GDP growth just to finance itself as the US borrows a third of global GDP growth every year it's going to put upward pressure on the dollar we're going to crowd out Global dollar markets problem with that is as the dollar goes up the global economy slows that's a very wellestablished correlation so Global GDP growth goes from six to five now there's only five trillion of global GDP growth for $2 trillion doll in deficits and with slowing Joy GDP growth globally us tax receips are probably going to disappoint which means us issuance the death it's probably not going to be 2 trillion it's probably be 2 and A2 trillion so now you need to borrow 2 and A2 trillion on 5 trillion so now it's not 33% of the global GDP growth anually the United States government needs to borrow it's 50% and so the higher the dollar goes the faster that math flips and it is very nonlinear so at you know you don't even need to grow you don't even need a massive Global recession you just need a bit of a Slowdown such that nominal GDP globally only grows three on 100 trillion now you're looking at $3 trillion worth of global growth us deficit is probably closer to 3 trillion at that point us needs to borrow almost all of global growth just to finance itself dollar is going to go up fast and now foreigners again because they're short dollars the and long treasuries are going to sell treasuries to raise dollars so now you're going to have the three trillion the US government selling plus foreigners going to be selling some portion of their 8 trillion to finance themselves you can quickly see how this gets into a net effec supply problem uh for the US government and that's going to try create rates up dollar up treasury market dysfunction and that's the moment where If the Fed wants infl or deflation they have to say let rates go to seven let them go to 10 on the tenure we're going to force the US government to collapse we're going to force them to basically cut everything except the interest expense and there is zero chance that's going to happen and so what ends up happening and I think the Market's starting to recognize this is well before it gets that point fed or treasury will inject doll liquidity to make sure that foreigners have enough balance sheet to make to to finance this stuff without creating this debt spiral and as the market gets conditioned to this markets are forward-looking they're reflexive they'll start to see that you don't actually want to own the bonds you want to own the stocks you want to own gold you want to own Bitcoin you want to own Commodities because those are the things that are going to see inflation on a lag benefit from the dollar inflation as you repeatedly inject dollar liquidity to support the treasury market which is what we've been doing for five plus years now so I get that from an investment point of view why you would be looking at other assets but in terms of central banks because your thesis is that us treasuries no longer have the dominant position of the global Reserve asset for central banks now currently uh currently it's uh 58% uh the dollar share of global Reserves at 58% as of Q4 of 2023 according to the IMF now we just started this interview by saying how China is selling its uh us treasuries uh but beyond China what do you see happening with central banks to make the US treasury bond lose its position as king of the global Reserve Central Bank assets yeah I think the reason why the US Treasury Market is is losing it sh's primary Global Reserve asset um and we can see that since 2014 Global central banks have sold $400 billion of treasuries on net and they've bought $600 billion do worth of gold on net so from a marginal perspective uh for the last 10 years gold has uh central banks have bought gold and sold treasuries the reason I think this is happening is is is multiple number one uh for the reasons I just highlighted some of it's mechanical when the dollar gets too strong you sell what you can to raise dollars not what you want to that's treasuries um number two some of it is geopolitical treasuries for central banks are no longer risk-free instruments if you do something the United States government doesn't like they will take your treasuries full stop they've done it to Russia they've done it to others and that has opened eyes uh the third point is a little more um subtle but it is in a world where you have Peak cheap oil which is to say we're not running out of oil but we're running out of cheap oil it it costs more and more to find marginal barrels of oil when we're in a peak cheap copper world uh where again we're not running out of copper but the copper we find the prospective supplies are much much higher and everyone wants to Electrify everything um then you can't store the reserves that you're going to need to at some point as a nation deploy possibly into oil into copper into Commodities you can't store that in bonds you need to store that in a reserve asset whose value either stays flat or gains versus oil and copper and gold has a very long history of maintaining or increasing its value in oil copper and other commodity terms for example in the last 15 years oil or gold is up roughly 4X uh about 3x to 4X versus oil and a little over 4X against the Goldman Sachs commodity index and in contrast treasury bonds are certificates of confiscation against Commodities in a uh in a peak cheap Copper Peak cheap oil world now if the US debt load was modest such that the FED could credibly say we will raise rates as high as we need to in order to contain inflation and keep treasury bonds as good as gold for oil and for Commodities then we wouldn't be seeing this switch in my view but the problem is with the debt at 120% to GDP and deficits at 7% with near or full employment the United States cannot credibly say we're going to raise rates as much as we need to to stop inflation they can't United States government can't afford much over five or six% on the 10 year we know that we saw it last fall so if you've got a bond that can only raise rates so much in a world where the geology of copper and the geology of oil and Global growth in the global South suggests that the prices of those things are probably going to go up pretty notably over time then you you better store more of your surpluses more of your Central Bank FX reserves in a reserve asset number one that the Americans can't take which is gold in your Vault not treasuries and number two that preserves your country's purchasing power in oil and copper and and commodity terms which is also gold not treasuries so gold therefore becomes the leading Reserve asset for central banks I mean we have seen uh Central Bank purchases of gold at record levels in the last two years uh according to the world gold Council Central Bank net demand uh totaled 290 tons in the first quarter of this year that's the strongest start to any year on record you're saying that as a reserve asset gold is going to overtake us treasuries is that correct yeah it has for the last 10 years and it's really blown out in the last two since we grabbed Russia since we seized Russia's FX reserves absolutely uh it's it's that's exactly what's happening and I think it's going to continue so of course there are lots of ramifications for that including what it means for the price of golden will get there but I want to go back to how in the scenario though you still see the dollar being the global Reserve currency if treasuries are no longer the primary Global Reserve asset us treasur how does the Dollar then maintain its position as the global Reserve currency I think via its usage right it's it's down the doll the treasury bonds are down to 58% of of global reserves and and falling um certainly when you include gold in those numbers which a lot of times they don't when when you look at the dollar share of reserves they usually leave gold out of that because it doesn't paint a nice picture for the dollar it's not what they're trying to sell uh but when you look at do usage it's still 88 or 90 or 92% of global transactions even though foreign you know reserves the dollar share of FX reserves is way below that and falling so I think people are going to be happy to continue to use the dollar I think they'll continue to be happy uh to recycle them the dollars into assets that preserve their purchasing power into American Capital markets uh that preserve their purchasing power but I don't think they're going to be storing their reserves and treasury bonds uh for any number of reasons that we just discussed and I think that's the difference is we're really 10 years into seeing a separation of church and state between the dollar stay's Global Reserve currency uh but the treasury bond loses its status as primary Global Reserve asset uh and ultimately that's a really good thing for America uh that's hugely bullish for America it's not good for uh the America as we've come to see it over the last 20 years which is Wall Street does great Washington does good and the rest of flyover country sort of muddles along uh the treasury bond losing its primary Reserve asset status is wildly bullish for America for American industrial production for the American working class the American middle class it's not as good for Wall Street on a relative basis it's not as good for Washington on a relative basis and those are the types of things that need to happen uh to be blunt for the political stability of America and for American National Security in terms of reshowing the defense industrial place before we unpack why it's good for America I want to go back to this idea that you say the usage of the dollar will continue and look we have this dollarization trend gaining momentum globally various countries taking significant steps to trade in their own currencies instead of the US dollar uh the brics countries for one um Russia and China they've certainly intensified their efforts to bypass the dollar uh President Putin says that 90% of their trade is now conducted in Yuan and rubles uh Indonesia has established a national task force to promote the use of local currency transactions with its trading partners we know Brazil Argentina India Saudi Arabia they've all publicly said and encouraged to trade in their own currencies they're exploring various strategies to diversify their financial systems and reduce dollar dependence uh China and Brazil the world's most populous and six most populous countries working to trade more in their local currencies and uh last year China Saudi Arabia signed a local currency swap agreement worth around7 billion dollar to shift more of their trade away from the dollar according to JP Morgan Chase when it comes to oil an estimated 20% of global Global oil last year was bought and sold in non US dollar terms you know we've got the bricks wanting to launch their own currencies I'm not even getting into the cryptocurrency side of things but the the usage angle I have to question why would the dollar still be used when you have so much of the world actively saying we don't want to use the dollar well I think there's sort of two things two two tracks within that I think in global commodity markets there's absolutely a trend to move away from from pricing selling in the dollar um and I think that will continue because for those countries it's a matter of National Security the brics currency I don't think there's going to be a bricks currency I think the bricks currency is gold I think the bricks currency deal is we're going to trade in local currencies and we're whoever ends up with a surplus is going to redeploy that Surplus back into their counterparties uh local Goods right so you if if you're trading with China and your Russia uh you're going to end up with some Yuan you're going to buy some uh Chinese Goods uh because China is still the factory of the World by a pretty wide margin and anything left over you're going to redeploy into gold and so to me the bricks currency if you will is really gold um in terms of broader usage around the world the dollar is easy to use uh why not spend it right it's it's there's a there's a Gram's law Dynamic to it right which is is you save the good money and you spend the bad the dollar is the bad money fiat currency is the bad money so I think it's the dollar is the best bad money it's easy to spend uh so you're going to spend in dollars and you're going to save in gold and you're going to save in Bitcoin you're going to save in Commodities and heart assets as opposed to saving in treasury bonds that's really what we're watching here which is just a separation of the spending and saving into a non-currency a neutral settlement asset the savings vehicle is becoming neutral and inflation hedged as opposed to just being a treasury bond which is a derivative of the dollar of course like you know so just to play devil's advocate here Luke if other countries want to spend dollars because it's easy to use and you say the systems are all set up to accept dollars they still need to buy dollars right I mean in order to spend them so what does that mean for for the dollar strength and dollar demand Americans are still emitting what uh trillion dollars a year in trade deficits and $2 trillion a year in in fiscal deficits and you know as much as the US government wants to crack down on China with its you know trade policies and and separate from China us has running a$3 trillion combined fiscal and trade deficit and a whole bunch of that's going to China so you know every you know last year we sent I believe it was $280 billion in dollar terms to China so uh that's why I think when you've got these the these the you're going to continue to see those those dollar emissions from the United States um and this is also driving kind of this change because we're seeing what China's been doing with these dollars in the in the old days they bought treasury bonds and they bought stocks and and they bought and they still do buy some stocks but now what they've been buying for the last 105 years are copper mines and oil fields and ports and financing their own military so the dollars are still getting emitted uh but then they're basically getting marked Return to sender and they end up back in the US which over time secularly adds to US inflation so what you have is the world basically saying this is the bad money here America you have it back we'll take the copper mines we'll take the PTO perus in Greece we'll take all these Cobalt mines in Africa we'll take uh a military so that we can guard our own Supply chains in case the Americans want try to cut off the straights of Mala with their carriers we'll take all this hard hard assets Americans you can have your dollars back and as that plays out you're going to see secularly Rising inflation in the US which is I think partly contributing to the secularly rising inflation the sticky inflation we've seen I think it's still early days but we'll see I get that what I'm still not fully understanding Luke is how the dollar then does not get dethroned as the global Reserve currency if everybody's like here take your dollars back and give us these hot assets how does the Dollar by your thesis maintain its status as the global Reserve currency I guess it's a question of how fast it happens I mean ultimately if this happens in the next month um look we go to war with China open War the Dollar's status as structured will have ended in terms of reserved currency what I'm really describing is a version of the dollar having been the reserve currency from 1946 to 1971 right the dollar was a reserve currency from 46 to 71 that's what we called it but the reserve asset was gold pegged to the dollar uh this is where the reserve asset's going to be gold at least for the time being but it's not Peg to any currency it's going to float in all currencies it's really going to be um steady against Commodities steady to Rising slightly against Commodities especially once it gets to a higher level a gold that is so that's it's really a Back to the Future in terms of the structure of the global Reserve currency status dollar was a reserve currency from 46 to 71 it's just a treasury bond wasn't the primary Reserve asset it was gold but what was supporting the American economy then to make that status for the dollar whole lot of manufacturing we were the world's biggest oil producer we had the only standing army um we we were in we were the factory of the world um none of those things are true largely anymore the oil is but sort of well well that's just it and although I know you've mentioned that both Democrats and Republicans both the Trump Administration and the Biden Administration do have one major economic policy in common and that is returning the US to that industrial base restoring us manufacturing but you know that takes a while right you said that the dollar had its strength back then because the US was the dominant Factor of the world we actually made stuff we're not really making stuff anymore other than financial products I mean to a degree so how how does it maintain its status and on what timeline does the US need to resore production for that to happen well the that's a it's a complicated question and and some of it depends on how much inflation you think the electorate is willing to take some of it is dependent on the polic itics of this country we're going to have regardless of who wins we're going to have sort of a lame duck who can't get reelected and so if they're going to do some extreme things relative to the Orthodoxy of the last 40 50 years economically the time to do it is in the next four years uh so look if if we could resore immediately and have the FED yield curve control the whole thing the fed's balance sheet goes to I don't know pick an extreme number $30 trillion they finance5 trillion you know7 trillion deficits for the next four years you know the dollar will probably reprice I don't know dxy 40 you know down from 104 inflation will go nuts Bond holders will lose every you know lose everything in terms on a real basis they'll lose their purchasing power they'll get paid every dime they owe uh in terms of Treasury holders uh but if you did it really fast like that that gives you if if you assume extremes and form the means that gives you some sense I'm still to using the dollar most of the world's still going to be using the dollar just you're not going to be holding treasury bonds you're going to be holding gold and you'll be selling your gold for dollars you'll be selling your stocks for dollars Etc the dollar is not going anywhere um ultimately we would in theory still have an open Capital account that's open for debate but that's why I say it'll still be the reserve currency it's still going to be the most used currency in my view just given as we reshore we're going to have more stuff to buy in dollars so assuming the whole reshoring plan works out now you you mentioned uh the the dollar at 40 referring to the Dixie which is a bosket of other currencies that the dollar is measured against currently it's at around 104 and and in that basket we've got the Euro the pound the Yen the Canadian dollar the Swedish ker and the Swiss frank right no Emerging Market currencies in there so when we measure dollar strength and weakness is the Dixie really the best way to be doing that especially as we're having the Spy forcation of the global monetary system and the bricks positioning differently uh you make a strong case that no it's not the right one that a better one would be some sort of trade weighted basis and you know that's that's certainly a discussion that you can have all right let Let's uh okay we agree we agree on many points I'm just pushing back to play Devil's Advocate and didn't help our viewers understand your theories here Luke by the way let's go back to this idea of of the dollar being repriced and not replaced so repriced according to what repriced based on on the trading partners currency the dollar is wildly overvalued if you want to reshore us industrial production um if if that and and the mechanics of that really right is is we consider what would happen if we aggressively rebuilt out our defense industrial base we would need to run bigger deficits we're already seeing little symptoms of that with what Biden's doing with with with what Trump did uh you run much bigger deficits but again the bond market the US Treasury Market is 120% debt to GDP the United States government cannot abide sustained positive real interest rates without creating this debt spiral we discussed earlier and so if you want to resure you're going to need to have the FED involved basically capping interest rates one way or another or treasury one way or another capping interest rates um and doing that will be negative for the dollar in my view uh and so mechanically how it would work out one way or another in my view so what is the timeline for this that you see happening and why do you think that ultimately this is good for America and you said the America as opposed to uh you know Wall Street and Washington real America why is this a positive and in what timeline do you expect this playing out well we can just take a look at the last 25 years um they've not been good for Washington or for for for real America for the for the bottom 90% most of the gains of the last 35 years have accured to the American 1% not to the not to the middle and working classes the the policy of America really since the mid 80s has been to subjugate the middle and working classes in order to support the real value of the bond market send the jobs to Mexico send the factories to Mexico to keep wage inflation down to lower um to to lower uh wage inflation lower uh rates and make it cheaper for the government to borrow good for the bond market send the jobs and factories to China same reasoning this runs everything in Reverse uh if we're going to reshore and sending all this stuff to China was disinflationary it's going to be inflationary in the other direction uh it stands to reason uh but the differ is it will be American wages will rise so if you are the average American homeowner and you've got a 30-year fixed rate mortgage and it's fixed at three and a half 4% and your wages start growing 6% 7% 8% 10% uh you're getting a uh you're getting a debt Jubilee your house is getting five to six% cheaper every year in real basis relative to your salary your mortgages uh you're basically a debt Jubilee on your mortgage uh yes your costs of living will be higher your your uh food bill and what have you but relative to the the break you're getting relative the gains you'd be getting in your wages um you're going to end up ahead and the flip side of it is is for the holders of those Bonds on a real basis it's terrible it's great for a nominal you're going to get paid homeowners credit risk of mortgages will you know and the duration of mortgages will extend out the credit risks of mortgages and what have you they'll plummet because the inflation will make sure if if a homeowner is getting a 6% wage increase he has a 4% mortgage his credit risk is phenomenal he's going to make that payment no problem downside is is you're going to get done with that mortgage and and it's going to you know that node is going to buy you a lot less real stuff Commodities Etc than it did when you took it on so it's just a reversal of the trend of the last 30 to 40 years that needs to happen because it's simply gone too far it's hollowed out the defense industrial base we're reliant on China to build weapons to face down China using borrowed money from China and components from China and we can see that the middle and working class of any country in the world is its political stability when you Hollow it out you begin to get political extremism political instability and we're seeing that and it's understood at some level in Washington that hey this has gone too far you know there's a there's a Sir James Goldsmith highlighted everything that's happened around this over the last 30 years Sir James Goldsmith highlighted on 60 Minutes with Charlie Rose in 1994 he laid it out exactly and so that's what that's why it's really good for America uh in terms of of reshoring and you've uh recently said that you believe that Yellen US Treasury secretary Janet Yellen wants to effectively undo the economic policy of the last 40 years the on that has benefited Wall Street and Washington it's exactly what she said in the Wall Street Journal she said for 40 years I thought that if someone wanted to send you cheap Goods you should send them a thank you note I would never ever again send China a thank you note um she basically announced the end of 40 Years of US economic Orthodoxy a month ago um and I think it's a really big deal National Security adviser Jake Sullivan announced it to the Brookings Institute about a year ago and and his speech uh was detailed back in February in Politico magazine same thing he said the last 40 Years of US economic policy have been wrong um that's where we are and this is you know critically this is not the Republican Party these are the Democrats so it's fascinating to me to see uh someone sitting in Yellen seat whose perview is the dollar as treasury secretary who has served as fed Governor or excuse me fed president um chairman of the FED obviously uh saying these things these are this this is I mean this is about as big as when Nixon closed the gold window I mean it was a she announc a change to the system she just threw the last 40 Years of economic Orthodoxy in this country in the trash and I think it's super important and how would you encapsulate that change a weaker dollar and a more manufacturing based economy how would you encapsulate that that change that she's now shifting to I think you're going to start to hear it from Washington spun as preparing the American economy for growth and it will be not Nal GDP growth the dollar will be weaker wages will be higher inflation will be higher the bond market will be managed uh the banking system will be turned into a monetary utility to finance the government which is already started but there'll be some sweeteners in there for the banks uh in terms of capital uh roll backs so that they can make uh a nice margin buying negative real yielding treasury Bonds in whatever sizes are required but but I think that's how you're going to hear it is it'll be preparing the US economy for growth um the debt and deficit are not a the debt and deficit are only a problem when the dollar is too strong if you weaken the dollar enough there won't be a deficit there won't be a debt problem uh the issue is really that dollar is too strong for purpose of of growth in this country so intentionally weakening the Dollar by Design is is the new policy how does this tie into this new ex cutive order that President Biden issued in December that vested the treasury secretary with the authority to sanction financial institutions uh particularly those aiding Russia's military industrial complex Yellen said that the treasury Department hasn't use this tool yet how do you see this tool being used in this picture now it's it's kind of a double-edged sword one edge of it is in the very short term and one edge of it is in the longer term right so in the very short term when you do these types of sanctions you're going to create if if they're used you're going to create a shortterm Scramble for dollar liquidity which will create upside to the dollar not downside in the long run what you're going to do is further discredit the US Treasury Bond as a safe store of value at the central bank and foreign official level they will simply stop buying treasuries and as they do that ultimately that will force the US policy makers whether they be fed treasury eventually Congress to create regulations uh take steps whatever to basically create new dollar liquidity to buy these bonds and you basically under they'll be printing money to buy the bonds and they'll call it other things and and it'll be the goal will be not making it look like they're printing money to buy bonds but that's what they're doing and the dollar will follow over time and so that's why I say it's a double-edged sword in the short run you'll create some dollar upside but in the long run you will be dis further discrediting because they've already discredited it by what they did with Russia discrediting the US treasury bond is primary Reserve asset at the Central Bank level further boosting the case for gold becoming that primary Reserve asset for central banks which brings us to the question then Luke what is your outlook for gold then and I believe you said that well the timeline for this playing out I know when we chatted previously you said by around 2030 is that correct I think that's fair I think the next four years are going to be really something because again we've got two presidents no matter who wins they're both going to run industrial policy and they both can't run again so like the time to do this is now and when you look at what is happening with the rate at which US debt and deficits are compounding with the dollar where it is the fiscal situation is acute in America um and so it that all also suggests you know over the next four years we're going to see a lot of progress on this front so I do think it's going to be um I think the world's going to look very different when the next president comes into office in 2028 so let's go 2030 right let's have that as our timeline here what does that mean for gold prices by then I think gold is has barely with even with its 30% move higher since November call it uh has barely begun to reflect a reversion to the mean that if I'm right about it returning to being the primary Reserve asset uh for much for for at the global Central Bank level it needs to be made orders of magnitude bigger in price and and something I've highlighted before for clients has been the uh market value of Us official gold relative to the foreign treasuries foreign heeld treasuries out outstanding that's simply market price of gold times 261 million ounces that the US owns as a percentage of foreign heal treasury outstanding and so when we go back through history what we find is the long-term average of that ratio is 40% roughly 40 per. uh in 1989 when the USSR fell the last time we were in a great power competition or cold war whatever you want to call it that percentage was 20% uh and when we had an honest to goodness dollar crisis like 1979 and 1980 the percentage was 134% now that is a gold bubble that meant that foreign holders of treasuries could have showed up at treasury or fed and said give us our gold and exchanged all of their treasury bonds for gold and the US still would have had a third of its gold left over that's a bubble in in gold fast forward to today this ratio is at 7% seven so gold would need to Triple just to get back to the very bottom of the long of this of this range where we were in 1989 the last time we had a great power competition gold have to rise roughly 6X just to get back to the long-term 50 60y year average of where it traded um in that ratio and and if we like I said if we had an honest to goodness dollar crisis uh gold would have to go up 19x to match the price level it was at in 1980 relative to foreign held treasuries outstanding which just gives you a sense of exactly how exaggerated the growth in US debt has been and how subdued the price of gold has been uh since those periods of time 19x gold at its current price now only if that's where it was in 1980 do the math for me Luke uh 42,000 44,000 now I don't think that's going to happen unless there's an honest to goodness dollar CR which I'm not foreseeing but I think the 20 to 40% ratio right which is 3x to 6X like to me that's just getting back to the long-term average that's like that shows you exactly how much debt we have thrown off over the last 40 years we got very good at exporting treasury bonds and very bad at exporting everything else that's what that tells you and what I'm telling you is and what who cares what I'm telling you what Janet yellen's telling you what Jake Sullivan's telling you with the Department of Defense is telling you is that it's a national security interest of the US to get out of the treasury export business and to get into the stuff export business again but we can't do that without a much weaker dollar and the Arbiter of that's going to be the price of gold mik which brings me to an interesting point regarding the gold oil ratio because that's something that you've recently posted about saying that um we should think of gold oil ratio as a pressure gauge on US Treasury as the primary Global Reserve asset explain that for us yeah so historically gold oil ratio uh a low gold oil ratio is a healthy you know that that's a dominant treasury market as primary Global Reserve asset because you've got a low price of gold which means gold is not competing with treasuries as a reserve asset and you've got a high relatively high price of oil which means there's a lot of uh Petro dollar surpluses being thrown off uh flowing into US dollar denominated assets treasury bonds so low gold to oil ratios that's that's a that's a dominant treasury dominant treasury is primary Global Reserve asset flip it over High gold the oil ratio means Rising High gold high gold price lot more competition for treasury bonds as a reserve asset uh and or relatively low oil price and in a relatively low oil price there's either not a lot of Petro dollar surpluses being thrown off to be recycled into uh treasuries or worse yet it's too low and the price of oil is too low and OPEC plus Etc have to be redeploying their treasuries selling treasuries to smooth over current account deficits to you know fund social programs over there to prevent political instability so uh that's why the gold oil ratio I think think Rising is conveying a really important message which is you know it's at a key level here it's at 30 or 31 and and like almost everybody thinks okay well it's been at 31 before and it rolls over except basically every single thing in macro is telling you it's going to keep going higher you're seeing the bricks recycle into gold you're seeing Yellen throw 40 Years of economic Orthodoxy in the trash you're seeing the FED say we're not going to let Treasury auctions treasury market dysfunction we will add liquidity when that's it's needed so I think ultimately again nobody trusts a Chinese and even if they did China doesn't want to open their capital account and issue debt they don't want the system the Americans had from 1971 to to present they want to use gold no one trusts the Russians they will want gold the Japanese don't want it even if they could they're not big enough gold Europeans don't want it even if they could gold so gold is is is doing what it's doing because gold is taking the place of Treasury bonds as a primary Reserve asset globally at the Central Bank level and as that happens that's a whole lot of buying against a gold market whose annual production is 240 billion look the oil Market globally is like 13 times that annually in physical production terms that's just the oil market so the if you want to start fitting commodity surpluses into gold price pricec is going to have to get a lot higher and so I think the gold to oil ratio is going to go a lot higher over time so Luke where does digital gold fit into this picture how does Bitcoin play into this scenario where gold takes over the US Treasury as the primary Global Reserve asset but the dollar maintains its status as the global Reserve currency how does Bitcoin fit into this I think it's really good for Bitcoin I look at Bitcoin as a as an energylink new mutal Reserve asset for the people uh the energy link is the proof of work algorithm where you have to spend uh a lot of electricity to to create a Bitcoin and then to continue to spend electricity to maintain the network uh and so it is it is a digital gold like instrument in that way uh when you then layer over what we're really talking about here which is increasing periods or more frequent periods of increasing dollar liquidity injected in order to us deficits because Global central banks aren't anymore they're buying gold uh ultimately that means you know more dollar liquidity weaker dollar that's good for Bitcoin so I I really like Bitcoin as well it does a lot of things that gold does arguably better than gold um but again it's got a lot more volatility it's a much smaller market so I'm I I think it's everything we've discussed here is very good for Bitcoin do you see central banks buying Bitcoin as a reserve asset maybe someday when it gets a lot bigger uh it's just too small right now but conceivably there's no reason they couldn't and if the Dollar's usage continues right and the central banks are buying gold what role do you see Bitcoin playing as a currency as um a medium of storing value what is the primary function of Bitcoin in this scenario I think it's primarily a store of value a pristine store of value a very hard and increasingly hard store of value uh over time um you that can then get into discussions of of uh usage as as collateral uh for other markets Reserve asset usage at some point uh conceivably you could see it move so to speak right to be used it as a medium exchange but I don't think it makes any sense it doesn't make as much sense to use as a medium exchange until way down the road when the price is much higher and the volatility is much lower so uh for the moment for the foreseeable future I just see it as a a very hard asset store of value with an energy link uh for the people and what about for the still foreseeable future that uh what four and a half year outlook that you have for 2030 where you have your potential anywhere from 3x to 6X to 19x Gold what does that mean for Bitcoin in that time frame Bitcoin I think probably would go up more than gold would uh in that scenario um on higher volatility so if gold goes up 3x I wouldn't be surprised if if Bitcoin goes up I don't know four five Sixx in that world so uh I think I think they can both win but why why would gold but Bitcoin be going up we we've you've made the case for gold with central banks but why do you see Bitcoin even potentially outperforming gold in the scenario of laid out oh that's that's simple the $130 trillion bond market is the sucker at the card table and it's going to figure that out and as it figures that that out it's going to sell bonds buy me something that holds value and then that something that holds value will be 65 trillion of US stocks right now 14 trillion of gold right now 1.4 trillion of Bitcoin right now and that process will continue until the bond selling gets so high that it forces treasury dis dysfunction or it forces rates to a point where the US government cannot afford its debt load and then the fed and treasury will come in and print more money to constrain that which will only back feedback into gold Bitcoin stocks the incentive of whatever is left in the $130 trillion bond market to get out into those other assets faster wash Rin repeats so there's a way in which this goes without a massive productivity Miracle uh that things could really feed themselves very quickly so you mentioned that this is also beneficial for equities which will function as an inflation hedge as well in in this kind of scenario what particular sectors do you think would do well I prefer Industrials uh in the US but really globally I think Japanese equities would do well I I personally really like electrical infrastructure equities so uh us uh Industrials that have huge uh or that have big exposure to uh expanding and maintaining the grid um those types of things uh those are the those are some of the things we have talked about that I think will do well but ultimately uh you know it's a$1 130 trillion doll bag trying to fit into a $65 trillion bag so I think uh in terms of the bond market scrambling into to stock market and then getting backfilled by us authorities printing more money to make sure yields don't go too high that they can't afford them wash Rance repeat so I think it's you know we we're watching stocks rate against bonds we're watching gold rate against bonds we're watching Bitcoin and and and the NASDAQ rate against bonds and we're like 12 to 18 months into it and most Market participants as far as I can see don't even understand what they're watching yet so I think we're still very early days okay so you think Bitcoin will do three times what gold does in the scenario if if I can just circle back to that to get clarity on there con con conceivably yeah I mean that's now why three times three times is a big enough number that expresses The View that I think it will do a lot more than gold without being crazy like there's no science to that in terms of it uh some of that will depend on uh acceptance rates some of that will depend on volatility Etc but I think go Bitcoin would outperform gold in that scenario just by of look you have a $130 trillion bond market it's going to have more of an impact on a $1.4 trillion Bitcoin Market than it does on a $14 trillion gold market all El equal as an individual investor a lot of people have money parked in the treasury market because you're getting a risk-free you know 5% more or less right are you saying that it's time to start moving away from that play or still a good place to park money in in the short term I think it depends on on what your individual investment needs are uh for me personally and and I think for a lot of individuals I still own a lot of t- bills uh five and a quarter I have a portion of my portfolio and five and a quarter t- BS I have no allocation to tenure treasuries at 4.4% I don't know why I would own long-term treasuries at 4.4% when the short term is at 5 and a qu quarter when I know I've done the math that a US recession will increase net treasury supplies so much that the 10-year treasury yield will probably go up not down in a recession and as such a US recession is really number one it's not going to be a palatable policy option so they're going to react very quickly because deficits will absolutely explode but number two in light of everything we've discussed you really it it's when you're run into 2 trillion deficits it's really impossible to have a nominal recession unless you want to stand aside and either slash entitlement slash defense to make room for interest or the fed and treasur are willing to stand aside and let the treasury market dysfunction up to an including failed treasury auction and failed banking system and they're not going to do that so if they're not going to do that then failing a productivity Miracle uh which is a big caveat like there's there's there's almost no way to have a nominal recession real Rec sure but nominal recession I don't want to buy long-term bonds if there's not if there really can't be a nominal recession you're not going to get you know there's a lot of people own long-term treasuries on this view that you know growth's about to collapse or if there's a recession that you know the yields going to go from 44 back to one and I'm G to make a lot of money like if we if if if growth collapses the US deficits going to go from 7% to nearly 15 or 20% and foreigners are going to be add add on top of that you're going to need to finance like 20 to 25% of GDP in treasuries on a net effective basis and I think yields go up in that world in a recession so I just for me I think T bills fine I I I think that makes perfect sense like I said I own I own a slug of them myself for the average individual investor four 4.4% 10e treasuries and they don't make any sense to me the long end to me is is the bubble right so you mentioned a caveat uh of productivity what could happen to derail this entire thesis of yours um if you have ai or some sort of automation show up basically on the exact perfect time scale so not too fast not too slow it's got to be like Goldilocks arrival because if it arrives too slow then it doesn't change anything that we just discussed and if it arrives too fast you're going to be talking about unemployment rates shooting F higher much higher much faster which is going to send tax receipts through the floor it's going to send counter cyclical payments for unemployment what's what what have you up nonlinearly and so your deficits are going to blow out and you're right back to the scenario I just highlighted you're going to have a recession you're going to have consumers unable to pay their Consumer loans Etc you basically get into a sort of a great financial crisis scenario if automation AI productivity gains arrive too fast so it has to arrive at sort of Just Right which I think is a small and and shrinking possibility uh there's geopolitical sides I mean look if if there's some sort of political turnover in China and Russia such that either or both leaders are replaced by us friendly that you know the Chinese begin stocking up on Treasury bonds that lose 2 to 4% a year in against inflation so they can Finance our deficits and finance their own military encirclement and you know Putin gets turned over and they replace them with some puppet that sells us Commodities at a really nice price and only in dollars to everybody then that would work too again I don't think either one of those are very likely to happen but those are the types of things that could completely change that um you know so we'll see uh there are productivity things they could do in terms of healthcare and such like if we you know if if in theory if if you replace you know you put up an app that allows everybody to to to be able to see a doctor very efficiently and get rid of a lot of Administrators and paperwork Etc you could do that but again if it happens too fast Healthcare last I checked was like 16 177% of GDP you start firing a whole bunch of people you're going to create unemployment you're going to create deficits on top of the deficit that's too big already and top of the debt that's too big already and it creates a fiscal a fiscal crisis and a debt crisis so uh the debt debt kills debt kills and leverage Cuts right so the problem is we're so highly levered our wiggle room is very very small in terms of these types of productivity Miracles that could arrive in time not just in time but at a pace that doesn't create a bigger problem than it solves all right Luke thank you for helping us see uh the forest for the trees here final thoughts as we wrap up I think it's you know the final thoughts I would have is is understanding that position sizing is really key is this is I would not be all in Gold I'd not be all in Bitcoin it's going to be very important to be uh Diversified and to be unlevered uh because I think everything we've just described here given the political nature of it uh and seemingly increasing political nature of it is is likely to be an environment of increased Financial Market and possibly geopolitical volatility so it's something to be aware of all right stay Diversified and of course make sure to uh read your newsletters uh Luke thank you so much really really appreciate your time and your Insight and breaking all of this down for us Luke groman thank you thanks for having me on Michelle it's great talking with you all right thanks again Luke look forward to having you back on and I do want to say a special thanks to our sponsors Swan Bitcoin just a reminder to our viewers that Swan does offer an IRA product which allows you to invest directly in Bitcoin with your IRA there is a way to set it up that you're basically buying Bitcoin on autopilot which allows you to take advantage of dollar cost averaging as you accumulate Bitcoin in your IRA and there is a special link in the description with a special offer for Kitco viewers to help facilitate that process so make sure to check that out and thank you again for checking out this video remember if you're watching us on YouTube make sure to subscribe and leave your comments feel free to praise wine or just opine we do read them for me Michelle mccy and the rest of the Kito team we'll see you again soon on the spot with Michelle mccy is brought to you by Swan Bitcoin Swan Bitcoin Ira your legacy your way real Bitcoin not proxies traditional and wroth IRAs fast easy setup start now at swan. c/ retire

Channel: Kitco NEWS

Views: 204,086

Keywords: gold, silver, finance, news, investing, investing news, finance news, financial news, economy, precious metals, gold price, silver price, gold price today, silver price forecast, gold price forecast, kitco news, Bitcoin, Fed, inflation, dollar, USD, reserve currency, global reserves, dollar status, Treasuries, US Treasuries, bonds, luke gromen interview, Janet Yellen, economic policy, luke gromen fftt, luke gromen bitcoin, Michelle Makori, de-dollarization, debt, BRICS

Id: DD1CnjI2Z3k

Length: 71min 50sec (4310 seconds)

Published: Fri May 24 2024