The Doom Loop:
The Doom Loop.
We’re in one right now.
The Fed is screwed.
There’s no way out.
Whatever decisions they make in the next few years will be bad.
Asset prices are about to get crushed with interest rates are where they are.
That means business failures, people losing jobs and millions going unemployed.
They’ve said they’re going to let that happen to get inflation under control.
That’s the choice they’ve made.
Or so they say.
Instead, they’ve chosen to print in an inflationary environment.
Let me explain.
Most transactions in the last 75 years since World War II have occurred in US dollars.
Why?
The US had the global reserve currency.
It was the most trusted after the Bretton Woods Conference in 1944.
They also strengthened it with the Petro Dollar.
Agreements they made, specifically Kissinger, with gulf nations in the 70s.
All the oil nations would sell their oil in US dollars in exchange for defense and military aid.
The best military in the world guarding you in the 70s probably made sense.
It doesn’t today.
So when countries transact with each other, they need dollars.
Dollar supply was always needed by the world.
Everyone needs dollars to do business.
What does that mean?
It means the US had the ability to print unlimited money.
Why?
Because demand was always there.
Foreign governments and businesses always needed US dollars to do business.
But now the demand is not there.
People don’t want to buy US debt.
Why should they?
Democrats and Republicans have blown the budget.
Trump did it by cutting corporate taxes but didn’t increase rates and didn’t cut spending.
Biden ramped it up with the Built Back Better multi-trillion dollar stimulus bill.
That was debt taken out when rates were ~0%.
Now they’re 5%.
Interest expense is about to surpass defense spending and Medicare.
That’s horrifying.
The entire global monetary system is built on this dollar.
And the ability to always have supply to transact globally.
Now the Federal Reserve is restricting dollars.
Or so they say with QT.
Turns out they’re lying.
They’re just hiding their QE in other ways.
See the Reverse Repo Market.
And the BTFP.
Trillions of dollars supplied to the banks to keep them alive.
Valuing bond prices at par when they’ve fallen almost 50%.
The US bond market is in the worst bear market EVER.
Who owns US bonds?
EVERYONE.
Global central banks.
Commercial banks.
Pension funds.
Everyone.
And the value of those bonds are 50% less today than they were a year ago.
That’s significant.
US treasury bonds are supposed to be golden collateral.
They backstop the global monetary system.
And now no one wants them.
It’s not only that they don’t want them, but it’s also that countries are dumping them.
Why?
Because they need to defend their currency.
This is where Japan enters the picture.
This video by Peruvian Bull is a must watch.
Most Westerners don’t understand how significant Japan is in the global economy.
They own tons of US debt.
And have basically been running yield curve control for decades.
What does this mean?
It means they cap yields.
So the yields on their debt never went above 0.5%.
If they did, they printed their currency to protect it.
But recently they changed their policy.
Their letting yields rise.
What happens?
It means they’re releasing some of the bonds through their currency.
It’s inflating.
So to defend their currency, they have to buy it on the open market to create demand.
How do they do that?
Sell US treasury bonds.
What happens when they sell treasury bonds?
Yields go up.
As treasury bond yields go up, more people and countries start to go bankrupt.
Like I’ve written before, America will suffer but other places will be worse.
But we’re now hitting breaking points.
We’re in the doom loop where no one has any good choices.
If the Fed keeps rates high with inflation this high, we enter a stagflationary lost decade.
If the Fed cuts rates, inflation will run off.
Then watch revolutions and the cost of everything rise quickly, especially in developing countries.
If they keep increasing rates, they increase the cost of their debt.
Right now their debt is unaffordable.
They’ve been drunk on free demand and liquidity for decades.
American politicians don’t understand how powerful their currency is.
The power they’ve yielded over the world for generations.
That won’t last forever.
Countries are already moving away from it.
There’s a reason more countries are applying to be a part of the BRICS nations.
There’s a reason trade deals are getting done in other currencies.
There’s a reason oil is getting traded in other currencies.
It means the dollar loses power.
Countries don’t need as much of it anymore.
That means demand for dollars decreases.
That’s bad for America.
So who’s gonna buy the debt?
The Fed.
How are they going to do it?
Print the money.
I don’t envy the Fed.
Or some people in power like Jerome Powell and Janet Yellen.
Given policies and decisions for the last 30 years, they’re left in impossible situations.
There is no good way out.
It will be painful.
It will be hard.
There will be lots of conflict.
It’s just starting with Ukraine/Russia and Israel/Hamas.
Remember, war is good for business.
Ask the American military-industrial complex.
Who have dominated American foreign policy for generations.
Eisenhower warned the world about them in the 50s and nothing has changed.
Factors outside the Fed's control are also contributing to this problem.
Under investment in natural resources in the last decade.
Ongoing labour disputes for higher contracts.
Deglobalization.
The shift to green energy.
Onshoring.
The US Strategic Petroleum Reserve at its lowest in 40 years.
All these are inflationary.
As history has taught us, inflationary decades are hard.
This decade will be hard.
Genuinely hope we make it.
Because we’re in a doom loop with no way out.
So what can you do?
Get educated.
Learn.
Focus on the moment.
Focus on what you can control.
Don’t watch the news.
Don’t focus on the negative.
Don’t worry about things outside your control.
Gold, commodities, hard assets and good companies with no debt, solid MOATs and good cashflow are things to own (*wink Gamestop*).
Stocks and bonds, not so much.
Stay vigilant.
Don’t fall victim to your phone and propaganda.
It will be rampant trying to politicize and divide opinion.
Love those around you.
Support them.
Be there for them when times are difficult.
What am I doing?
Educating myself and the world as much as possible.
All I’m doing is trying.
Trying to navigate the world.
Trying to do my best.
Trying to foresee what’s coming.
All I see is we’re in a Doom Loop.
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