Why The Gold & Bitcoin Surge Is Just Starting: “Real Yields Will Be Negative Until The Financial System Collapses”

Tuesday, August 11, 2020
By Paul Martin

By Mark Cudmore
Tue, 08/11/2020

The Gold and Bitcoin Bull Run Is Just Beginning
A long-term trend of investor demand for stores of value has only just begun, with policy doors now open that won’t be easily closed again. That’s a huge mark in favor of gold and Bitcoin.

Something changed this year. After sparking years of heated debates on the sidelines, the once-seen-as-preposterous concept of Modern Monetary Theory is being adopted by stealth with barely a whimper of protest. That means a new market paradigm that brings an end to the “default” state of U.S. real yields being positive.

It’s beyond the remit of this piece to discuss the pros and cons of MMT; I’m just drawing attention to the fact that it’s happening and suggesting that those who fail to adapt their investment approach accordingly will regret it. If orthodox economic theory is being upended, then conventional market approaches also need to be reexamined.

The U.S. has three choices in the coming decades for how to deal with the government’s extraordinary debt burden:

1.Default on its debt;

2.Inflate it away;

3.Impose sufficient austerity to slowly pay it down.

Option 1 is politically unfeasible and completely unnecessary given that the U.S. controls the dollar printing presses. The decades ahead might bring the occasional nod toward option 3 but that is politically unsustainable for more than a few years, especially now that both sides of the political divide have shown a willingness to significantly increase borrowing.

That leaves option 2 — already the assumed base case for many investors in the wake of the 2008 financial crisis. The difference now is that recent actions have rendered moot any further debate. The market consequences — which investors have yet to fully register — include that the default state for U.S. real yields will now be negative until the financial system gets completely overhauled. Or collapses.


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