20Feb
"IF YOU WANT TO GO THIRD WORLD STATUS,LOSE YOUR RESERVE CURRENCY"__PRESIDENT D.TRUMP.
Yesterday,February 18, 2025, The Spike in the price of Gold. It trades around record highs, and is now closing in on $3,000 an ounce. And also rectified higher in the price of Gold over the past five years, and the catalysts -- which, in all cases, were initial inflationary policies, from fiscal profligacy.
Most recent run-up in Gold fits the bill -- aligning with the January 1st reinstatement of the debt ceiling, a debt ceiling that was shockingly suspended (conveniently through the end of Mr.J.Biden's term) in a deal made in May of 2023, which led to an explosion of new debt issuance.
The Mr.Biden's Treasury has left Mr.Trump Treasury with record debt, record debt service, a record peacetime budget deficit, and a third of the debt to refinance in year one of the Mr.Trump administration -- and with bond yields already at vulnerable levels, with a bond market anticipating an onslaught of supply coming.
It's all a formula for rising bond yields, which means rising debt service, with a larger budget deficit, which means an even larger debt load. And this self-reinforcing cycle (doom loop), left to market forces, has a path: debt downgrades (which there was in 2011), which would drive the cost of debt higher, which would accelerate the cycle (higher deficits, higher debt).
And the three Ds would be the natural progression: Default, (currency) devaluation, depression. With all of this said, the sovereign debt doom loop is global.And the U.S. still has powerful relative strengths, and has plenty of (relative) appeal for global capital.
The most important strength is the world reserve currency status of the dollar. Having the reserve currency has historically dampened the penalties for fiscal profligacy. While it clearly can lead to bad behavior, maintaining the dollar's dominance is paramount. It provides flexibility in working through problems.
The agreement to trade global oil in U.S. dollars (i.e. "petrodollars") has been the cornerstone of the dollar's role as the "world's reserve currency," since the end of the gold standard. And the world reserve currency status has been key in building and sustaining the United States' position as the economic superpower.
Conversely,Mr. Trump made it clear on the campaign trail that he may put the highest priority on preserving the dollar's reserve currency status. He said, "if you want to go to third world status, lose your reserve currency."
And Mr.Scott Bessent, his Treasury Secretary, made it clear, right up front, in his opening remarks of his Senate confirmation hearing that it's critical that the dollar remains the world's reserve currency. And when recently prodded for an official statement on the dollar he said "there is no alternative to the dollar."
Aside from embracing oil again and restoring global confidence in America's economy and global leadership position, what move can the Mr.D.Trump administration make to shore up the dollar's dominance and very importantly, create a new source of very deep demand for Treasuries?
Regulated dollar-based stablecoins (not a central bank digital dollar, but private stablecoins).
Dollar-denominated cryptocurrency, pegged to the dollar, backed by Treasuries or cash, and with a regulatory framework determined by Congress (with a bank deposit-like safety profile).
This would potentially solve a lot of problems.
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