The Treasury is not “debt”; it is the dollar of the future!

It doesn’t take any special number-cruncher to see that the history of the past 30 years has shown a strong correlation between the rise and fall of the gold price and the US federal government debt /GDP.

A linear regression analysis of monthly gold price data and Treasury /GDP data since 1993 shows an R-squared ratio of 89%. In specific investments, this high correlation means that linear modeling can be done directly.

Why is that?

Why America’s debt is so closely linked to the price of gold?

In the article “The Big picture for gold Depends on the U.S. Economy,” I have done the following analysis:

When the US government debt /GDP are low, it means that the government’s debt burden is light and the government can pay a higher interest rate on its dollar debt. In other words, it means a higher Treasury yield. On the premise that inflation can be controlled, a higher Treasury yield means a higher real interest rate on the dollar, which often means a lower gold price.

Conversely, the higher the ratio of government debt to GDP, especially after it exceeds 90% (according to Reinhart and Roof’s study of 41 countries from 1790 to 2009, when a country’s government debt to GDP exceeds 90%, it has a significant negative impact on the economy), The US government will not be able or willing to pay higher interest rates on its debt, in which case the Fed will surely choose to help it hold down Treasury yields, which means lower real dollar interest rates and, of course, higher gold prices…

Government debt /GDP→ Treasury yields → real interest rates → gold prices, that’s the logic.

In today’s article, however, I want to analyze the problem from a more direct and essential perspective.

For thousands of years, what was gold?

Gold is real money and has been the most effective weapon against government-created inflation for 3,000 years.

In fact, just over 50 years ago, under the Bretton Woods system, gold was regarded as the ultimate money. The dollar, the pound, the yen, the mark and even the Soviet ruble were simply gold proxies for the gold standard.

$1 =0.888671 g gold;

1 pound =2.488276 grams of gold;

1 mark = 0.222168 g gold;

1 ruble =0.222168 g gold;

1 yen =2.46852 mg gold;

Whatever currency it is, it can be converted into dollars, and then it can be taken to the U.S. Treasury and converted into real gold.

Unfortunately, on August 15, 1971, U.S. President Richard Nixon announced the closing of the U.S. Treasury’s gold exchange window in the face of global default. Since then, mankind as a whole has entered the era of credit money, which is now only 50 years ago.

In January 1976, major Western governments collectively signed the Jamaica Agreement, which agreed on the de-monetization of gold. In principle, gold became useless — but in fact, central banks in major Western countries, and later many developing countries, continue to buy and hold large amounts of gold.

Obviously, central banks know exactly what they’re printing.

Although it is no longer convertible into gold, the dollar is still the world currency of choice, and gold, as a currency that has never been devalued for 3000 years, is always a potential challenger and rebel to the dollar, as well as a real competitor to the dollar.

In this case, we can simply say:

If there are more dollars, gold will go up;

If there are fewer dollars, then gold will go down.

Picture

What many people don’t realize is that if broad money is the current dollar —

The essence of US Treasuries is the dollar of the future.

Unlike the private sector, the US Treasury, in coordination with the Federal Reserve, can create dollar money whenever necessary. When the U.S. tax balance falls short, the Treasury Department issues a future dollar — this is the U.S. Treasury bond. The Treasury would then exchange future dollars for existing dollars to meet its spending obligations. When the future dollar date arrives, the Treasury pays back the existing dollar, but more often, rolls it over to another future dollar (rolling the bond).

So you can’t understand the debt of the United States in terms of private debt.

Treasury bonds and the dollar, after the abandonment of the gold standard, are the liabilities of the US sovereign sector. Specifically, the U.S. government borrows current dollars from the economy and replaces them with something called a “Treasury bond,” a special interest-earning “dollar,” which is as liquid and tradable in the economy as the ordinary dollars it borrows.

The US government’s “borrowings” will never really be paid back. A $1,000 Treasury bill is just as good as or better than $1,000 because it earns interest. More importantly, it would be used by the Federal Reserve as the underlying asset (collateral) to issue current dollars, which would instantly transform future dollars into current dollars.

Simply looking at the federal debt of the United States, a higher limit means that more future dollars will become real dollars, which means that the dollar itself will increase in quantity and decrease in value, and gold, which is a dollar competitor, will automatically increase in value.

By contrast, the U.S. GDP (or world GDP in dollar terms) represents the amount of dollars required by real exchanges of goods and services, and if the U.S. debt-to-GDP ratio increases, the amount of dollars is more than the economy currently needs; If that ratio goes down, that means there is a shortage of dollars, then of course gold should go down.

Thus, a strong correlation between gold and US Treasuries /GDP is formed.

Many people know that in the Merrill Lynch investment clock of the four stages of recovery, overheating, stagflation, recession, buying gold at the end of the stagflation or the beginning of the recession, usually do better, and this is why?

The answer is not complicated.

In the period of economic recession, in order to save the stagnant economy, the government will generally introduce large-scale stimulus policies. Under the credit monetary system, most stimulus policies are realized by borrowing. GDP growth stops superimposed with the skyrocketing government debt, which means that the government debt /GDP will rise rapidly, thus leading to the surge of gold.

This correlation, in the benign state of government debt /GDP below 60% (pre-2003), allowed the economy to sustain or reduce the debt ratio through economic growth, even if the economy fell into a short recession. So the relationship between gold and debt is not obvious.

After 2004, the debt /GDP of the United States continued to rise to an unsustainable state. Every recession would bring excessive issuance of national debt, which would lead to an explosion of debt /GDP, which would lead to a surge in the number of “future dollars”, which would lead to a surge in gold prices.

Picture

Look at how gold has moved in the seven recessions since the credit era began (the gray area in the chart below).

1973.11-1975.03 Recession: Debt /GDP declines, gold price spikes, then stabilize, recession ends and crashes;

1980.01-1980.07 Recession: Debt /GDP stabilize, gold spikes, and then stabilize, recession ends and crashes;

1981.07-1982.11 Economic recessions: debt /GDP rose, gold plunged to the bottom and then skyrocketed, and the recession ended and plunged;

1990.07-1991.03 Economic recessions: debt /GDP raised, gold price rose slightly and then continued to decline, the recession ended to decline;

2001.03-2001.11 Recession: Stable debt /GDP, slightly higher gold price, continued to rise after recession;

December 2007 — June 2009 Recession: Debt /GDP soared and gold prices rose sharply, then fell, then rose again, and gold prices continued to rise after the recession ended;

2020.02 — 2020.04 Recessions: Debt /GDP spike, gold spike, gold rally after recession ends.

Picture

Obviously, the federal government debt /GDP ratio of around 60% is a hurdle, and after that, the financial crisis of 2008 and the pandemic crisis of 2020, gold prices basically rose sharply.

 

Leave a Reply

Your email address will not be published. Required fields are marked *