‘Fiat’ And The Treasuries Are Dead! Long Live The New Gold Standard!

(Left: Tricky Dick, who was President when the export of American Gold could no longer be sustained and the ‘Fiat’ System was implemented.)

While the Stock Market was roaring the last few years, the far more important Bond Market has suffered historic losses, never seen before in America’s history. Older Treasuries can no longer be liquidated at full value, and have lost their functionality as reserves, heralding the end of the ‘fiat’ system which is built on them. The long awaited demise of the Dollar as World Reserve Currency happened while we were enjoying the post Lockdown reprieve.
An even much greater storm will hit any time now.

Treasuries, the Bonds that the US Government sells to finance its deficits, have been the primary reserve asset for Banks, Central Banks and States since 1971, when Nixon was forced to close the Gold Window and the ‘fiat’ financial system was born. They were solid and ultra liquid, meaning they could always be converted into Dollar at full value on the Bond Market. They were considered the Gold Standard of the ‘fiat’ system. And now they have been shot to pieces since the Fed started raising rates, and older Treasuries sold at low interest rates can only be converted with major discounts of about a third up to 50%. They can no longer reliably function as reserves.

The problem is twofold: current high rates mean that there is a big difference in returns on Treasuries sold before June 2022, when the Fed started hiking, and those sold between 2008 and 2022 at close to 0%. It is natural that investors prefer new bonds at 5%.

The second issue is that the supply of Treasuries has been stunning over the last few years. In the first place: all major States have been dumping up to a third of their holdings. We’ll discuss that further below.
Secondly, the National Debt is now simply too big. Last year the Government announced that it would have to roll over $7,5 Trillion of its debt in 2024. This number was fairly widely reported, but I added the deficit, which is expected to be $2,5 Trillion, and this results in the total financing requirement of the US Government, which is then $10 Trillion.

Ten Trillion Bucks.

As you will appreciate, on Dutch Twitter I immediately declared this the Number of the Year. Even now, a year after the fact, this number boggles my mind. It is astounding. Washington needs to rake in $10 Trillion in one year to keep everything going. That truly is a massive amount of cash, even for US standards. This number, of great symbolic value, was only seen here and there months later.

Previously, differences in interest rates did not matter much, because supply was not so enormous yet, and there was eternal great demand for the Treasuries as primary reserve asset in the Financial System and for States.

But recently supply on the legendarily liquid NYC Bond Market has been overwhelming, and investors have a choice between 5% and 0,5% bonds. As a result, older Treasuries with low rates can only be liquidated at steep discounts of on average a third, and up to 50%.

This has never happened before, and indeed, the Bond Market’s losses since 2022 have been unprecedented. Never, in the entire history of the United States has the Bond Market seen losses as high as in particular in 2023. The Bond Market has twice the market capitalization of the Stock Market and is thus much more important and always the main concern of the Fed.

It is astounding that this fact of enormous significance has made no impression on the Media, investors, politicians, and the public, but the fact is that this means that the unavoidable and long awaited Debt Crisis has already begun.

What happened with the Treasuries the last two years
As said, since the Fed started hiking, older, low interest rate Treasuries can now only be liquidated on the Bond Market at a discount of up to 50%. This does not mean that their nominal value is down: when retained until maturity, the full nominal value of the Bond will be repaid by the US Treasury.

However, it does mean that these older Treasuries are no longer liquid. And liquidity has always been key feature of the Treasuries and is simply necessary to serve as an effective reserve asset. Nobody wants to hold reserves that cannot be liquidated at full value when needed.

It has enormous consequences for all the key holders of these Treasuries and we will discuss them per category.

States
All major State holders of Treasuries have been liquidating them at a frightful pace. Not just China, which has been cutting its holding slowly but surely for years now, but the World’s biggest economies and America’s closest allies. The UK, France, Japan, Zion, Saudi Arabia, all have dumped up to a third of their Treasuries over the last two years.

This move was the direct result of the loss of liquidity of the older Treasuries, and clearly these States no longer consider Treasuries viable reserve instruments. Even America’s closest allies don’t want them any longer. Their liquidation has been controlled and partial, because likely they want to avoid the discount and prefer holding older Treasuries until they mature and they receive full value. Or they plan to sell at a later date, hoping rates will decline to close to zero in a few years.

But that this has happened has forever destroyed the credibility of the Treasuries, because States cannot afford the risk of a recurrence when rates should rise again at a later stage, not with hundreds of billions involved. What this means is that the Dollar has already lost Reserve Status, and Dollar Primacy is now solely dependent on being the default choice in international payments, which are still 80%+ in Dollar.

This happened while nobody noticed, while we’ve been expecting it for decades now. The deed is already done.

Central Banks
This is closely related to the States’ position of course, but there is a vital additional consideration: All major Western Central Banks are deeply under water as a result of their Treasuries losing so much value. The Fed up to a Trillion, BoJ $200 billion (at least), BoE more than a $100 billion, the ECB God knows how much, likely about as much as the Fed.

Ultimately, these Central Banks would have to be recapitalized by the taxpayers of their respective countries. Which is not acceptable. Central Banks are hardly the most popular institutions in the best of times, but as long as they are profitable and add billions per year to the States’ coffers (the Fed has been paying $80 billion or more per year in profits to the Government over the last decade or so), nobody cares. Very wrongly so, but it is at it is. Furthermore: Central Banks have been usurping State might for centuries and are at the very summit of their power, while they will have an absolute key role to play in the further consolidation of wealth and power in the hands of the Bank in the years ahead. They will for instance operate the Central Bank Digital Currencies, taking over the payment system from the Commercial Banks. They cannot suffer real loss of face.

But as always: they have planned ahead, and they’re planning to repair their balance sheets with the coming and already started revaluation of Gold. This will compensate them for their paper losses. And it coincides with that other key priority: stopping debt growth, and thus initiating the deleveraging of the mega Debt Bubble, see the next point.

Banks
The Banks face the same problem as the Central Banks: their balance sheets have been shot to pieces by the enormous ‘unrealized losses’ on their reserves, which are all but exclusively Treasuries. Again, these losses are ‘unrealized’ because as long as they don’t liquidate these Treasuries they will receive full nominal value upon maturity.

But they can no longer be booked as liquid assets on their balance sheets. And if they are forced into liquidation, they will indeed realize these losses. This happened to Silicon Valley Bank last year, the first major bank to go down in what will prove a very, very long list of banks in the years ahead. This was after getting confronted by a huge drain of their deposits because Banks were too slow to pass higher interest rates on to their savers, who went looking for greener pastures in the money markets. They had to liquidate tons of their Treasuries to acquire the cash to pay out fleeing savers, and lost $40 billion on them, bankrupting them.

But it’s not just regional Banks suffering: the top five of Wall Street are all insolvent as a result of this disaster: Bank of America, for instance, bought $500 billion worth of Treasuries to prop up reserves, and are now faced with unrealized losses of about $100 billion. JP Morgan, Citigroup, Wells Fargo, etc. are all facing similar problems.

While mostly all Banks are also facing brutal losses on Commercial Real Estate, their CMBS (Commercial Mortgage Backed Securities) holdings are down up to a third, another matter of Trillions.

The situation is totally underreported, but critical and requires immediate resolving. Central Banker Thomas Hoenig recently straightforwardly asked the Banks in a meeting: “Guys, how long before you fail?” It’s not a matter if, but when. And the answer to the question is: soon, very soon. Here’s a useful Twitter thread on the matter of the Banks, the vital issue is totally un(der)reported.

Gold
Gold, and Silver, have been rising precipitously the last twelve months, with 40% for Gold and 50% for Silver. Another crazy trend that has gotten far too little attention, other than with the Gold bugs. Crazy, because this kind of appreciation has happened only during very hard times, the last fifty years: during the stagflation of the early eighties, and in the aftermath of 2008. Meanwhile, the pretense of the Mainstream is that nothing is happening.

Revaluation is now simply necessary for two reasons: The Central Banks want to repair their balance sheets, and the Financial System needs a solution to the loss of Treasuries as reliable reserve asset. For this reason the BIS promoted Gold to primary reserve asset status in 2019, in Basel III, the new set of regulations that the BIS has floated the last few years and which has recently been implemented everywhere. However, Gold needs to become much more expensive for World Gold reserves to be sufficient to play this role.

And the fact of the matter is that this revaluation has started already, over the last year. Much more is to come. How much more? Hard to say. In the early thirties, Gold was revalued from $20,67 to $35. This was when the Income to Debt ratio was about 1:1. It now stands at 4:1. So one could speculate Gold will have to revalue about four times the amount of those days, which would be about plus 267%.
Another indicator would be how much higher Gold needs to go to repair CB balance sheets, but I don’t know that number. A third notable number is that the Fed itself said that Gold could go up to $20k, which implies a seven fold appreciation. I do reckon that’s the absolute best (or worst) case scenario, though. But clearly, it will be very substantial.

Silver will likely see a short lived but very steep peak at some point, I expect it could go even more than ten times higher at its peak. The trick then will be to exit timely, before it depreciates again, and settles at the new normal, set by Gold.

Currently, future contracts in NYC are worth 130 times the total reserves of Gold there, and 450 times the amount of Silver. Silver is a small market, very small compared to Gold, hence its much, much higher volatility. The Silver/Gold price ratio is also historically very high: it now stands at about 80:1. In the past this was about 15:1, but it must be kept in mind that Silver has lost its monetary status since the early 20th century, and this is likely the main reason for today’s high ratio.

Why the ‘Fiat’ System is now obsolete
It’s simple: since 1971 Treasuries were the main reserve asset, soon it will be Gold. How soon: immediately after the next Crash, which is in fact imminent. The ‘necessary’ changes will be implemented soon after that event.

The reason that this ends ‘fiat’ is not only because Treasuries were the corner stone of ‘fiat’, but they are created at will, and can grow ‘eternally’, well, as long as the American economy can carry the growing debt load, which it no longer can, witness the destruction of the value of older Treasuries.

Gold cannot grow. And this is the reason that eternal debt and money growth will be forcibly stopped. Banks will no longer be able to find an ever growing supply of reserves necessary to keep meeting the BIS’ reserve requirements when creating more and more debt ad infinitum as they have been doing the last 50 years.

Conclusion
Since the Repo Crisis struck, we’ve been maintaining that debt levels were now critical and that the key priority of our time is to stop further growth of the debt.

Also we have been predicting the return of the Gold Standard for many years now, combined with the stark warning that it would lead to a crushing deleveraging of the Debt Bubble, resulting in the Greatest Depression.

The death of the Treasuries’ reserve status, and the now very soon to be implemented New Gold Standard indeed will stop debt growth. But also money growth, and money in the economy MUST grow at least six, and really eight percent per year, otherwise the deflationary forces in the economy take over. When they implement the new system, some air will be left in it, they won’t want the Deflation to start immediately after. Perhaps there will be one last bout of money printing to create this extra liquidity after the coming deflationary shock.

Because money couldn’t grow under Gold there was eternal deflation during the 19th century, ultimately culminating in the Great Depression. But in 1929, as said, the debt/income ratio was about 1:1. Now it is 4:1. So it is absolutely guaranteed the Greatest Depression will be worse many times over. It will be genocidal. It will be the first Hyper Deflation in history.

And it will start only maybe eighteen months from now.

Related:
Absolutely Shocking Predictions By ChatGPT About The Coming Financial Collapse
The Petrodollar’s Swan Song And The Rise Of The New Gold Standard
The Fed Is Pulling The Plug On The Debt Bubble. ‘Cyber Attacks’, Followed By The Greatest Depression Are Coming
The Return Of The Financial Crisis September 2019

Anthony Migchels is an interest free currency activist and founder of the Gelre, the first regional currency of the Netherlands. His articles can be found at http://realcurrencies.wordpress.com. Contact him at [email protected]

Source: https://realcurrencies.wordpress.com/2024/10/31/fiat-and-the-treasuries-are-dead-long-live-the-new-gold-standard/