Many investors have warned of the risk of a debt crisis, but the government is ignoring all signs.
In an inflationary crisis, governments need to cut spending to control price increases, while expecting large increases in borrowing costs. But in this crisis, the US government has ignored all the red flags and continues to borrow money at a record pace.
Debt crises always occur when even the most conservative investors refuse to add to their originally loss-making sovereign debt portfolios. The central bank may decide to buy those unwanted government bonds, in which case the inflation problem will worsen and the central bank’s losses will accumulate.
The huge problems created by the monetary and fiscal madness of 2020 are difficult to solve. Central banks have already announced losses on assets, and the negative consequences must be covered by taxpayers.
Government bonds were a terrible investment in 2022 and continue to produce negative outcomes for investors in 2023. Moreover, sovereign debt is growing at a record pace, defying the maturity wall the global bond world faces in 2024 and 2025.
The US national debt has soared by $550 billion in less than a month. Total debt jumped from $31.4 trillion in July to $33.5 trillion in less than four months. This came as the 10-year US Treasury yield rose from 3.7% to 4.6%. According to Goldman Sachs, there is a $500 billion investment-grade maturity barrier in 2025, and governments are facing $7.6 trillion in public debt maturities over the next 12 months at a record pace. Imagine significantly increasing debt. At the same time, Goldman Sachs also noted that CFTC statistics show net long positions in two-year and 10-year U.S. Treasuries have fallen to their lowest levels since October 2018. This is a dangerous scenario in the midst of geopolitical tensions. Reaching new highs.
The U.S. government hopes that rising global demand for dollars will offset rising fiscal imbalances and that the Fed will change monetary policy as necessary. It’s a risky bet as the treasury holdings of China, Saudi Arabia and other countries have fallen to multi-year lows. Also, in the midst of a global geopolitical conflict, it is extremely imprudent to believe that the world will absorb America’s fiscal imbalances at all costs. Moreover, it is foolhardy to believe that the Federal Reserve will buy all the government bonds it needs when central banks are already losing money. This level of irresponsibility could put the US dollar at risk in the long run.
While US fiscal imbalances are large, so are deficit levels in many other developed countries, and the combination of rising interest rates, central bank losses, and an impending huge maturity wall is likely to be similar in the euro area. ing.
All of this is evidence of a process of currency deterioration that started in 2009 and accelerated in 2020. Governments are destroying the purchasing power of their currencies to hide high debt and deficit levels, and inflation is eating away at people’s savings and wages. In such an environment, sovereign debt never protects investors.
Governments are unwilling to pay for the risks they take and seek to absorb other people’s wealth through negative real interest rates and falling prices of outstanding bonds. The inflation spiral is likely to continue, the prospect of further quantitative easing may not be able to offset the cumulative losses in bond portfolios, and the currency depreciation scenario is certainly not corrected. During times like these, gold becomes the cheapest asset. Although it is cheap compared to its historical purchasing power and monetary nature, it is even more attractive than fiat currency, which loses its monetary value through mass printing. Current debt issues and geopolitical risks show that gold is a safe option in an unstable world.
Written by Daniel Lacal, Via Zerohedge.com
