Who Buys American Debt?
Central banks acquired 1,136 tons of gold worth nearly $70B in 2022, which is the most in any calendar year going back to the end of WW2 when tracking of their purchases began.
What’s this all about?
Why are central banks filling up their vaults with gold to the tune of $70B in one year if the age of the gold standard is behind us?
For some 70+ years, the arrangement under the Bretton Woods system has been that countries transact in dollars and fund the issuance of Treasuries, which are the most reliable form of debt backed by the greatest-ever economic engine the world has ever known, the American middle-class Baby Boomer.
What the global healthcare crisis has expedited is the mass retirement of this generation. No longer are the richest demographic group to ever exist providing capital for growth or running America’s best businesses. Instead, they are liquidating portfolios, moving them to bonds and cash, and reviewing brochures of golfing communities and worldwide cruises.
It’s like a giant vacuum of available funds exiting the financial markets, and it means that Washington is rethinking its debt issuance strategies along with the Federal Reserve’s QE debt monetization.
In other words, the government hit a debt ceiling and is losing tax receipts, and it is probably entering a low-return environment for stocks and housing so something has to give.
Here it is in the numbers:
Baby Boomers want exposure to risk because they’re banking on these savings to last them 10-20 years.
Since 1982, holding U.S. debt was a winning strategy. It experienced a bull market that lasted 39 years until November 2021 when inflation was formally recognized as a national and global problem.
Treasuries don’t offer any protection from inflation.
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Central banks know they’ve got a multi-year crisis unfolding and aren’t willing to drown in U.S.-denominated debt to fund wars, healthcare costs, and social safety programs in a country that has expressed the view that globalization is winding down, so foreign aid and military protection are slowly ending.
For the past 80 years, the U.S. Navy has served as the police force for nearly all Western nations, which barely invested in their own military forces.
This is not how you avoid a hard landing and a recession… this is how you get one handed to you.
It will start in emerging markets, trickle to Europe and China, and then come full circle and hit America.
It’s true that unemployment is the lowest in 50 years, but that’s actually the problem – we have labor shortages, and that’s going to keep inflation with us.
The reason we have a sudden shortage of workers is that America is moving supply chains back to North America and Mexico and leaving China.
In total, we believe the shortage might reach as many as 9M workers, 400% more than the current deficit of available employees to fill all openings.
Central banks are buying gold because they know globalization is ending and the petrodollar dynamics are shifting. It doesn’t mean the dollar is about to collapse overnight, but it means that the dollar isn’t viewed as risk-free anymore, and that is probably worth a 20% decline.
In a 20% decline, gold easily goes to $3,000 if not more.
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