credit collapse

The Looming Threat of Credit Collapse and Deflation

by

THREAT OF CREDIT COLLAPSE 

The threat of a credit collapse and subsequent deflation currently outweigh the risks associated with higher inflation. This article explores the threat of a credit collapse and its implications for economies and societies worldwide.

After more than one hundred years of practicing inflation with intent and purpose, the Federal Reserve has backed themselves into a corner. The “dual mandate” objectives claimed by Chair Powell and his predecessors are little more than a smokescreen to hide the Fed’s scrambling efforts to contain the effects of the inflation which it has created over the past century.

In his latest attempt to divert attention away from the Fed, Powell has mentioned the potential negative effects of tariffs on the Fed’s efforts: “We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension.”

There should be no doubt that tariffs will be disruptive and harmful to the economy. Tariffs are self-inflicted wounds that have serious negative economic consequences. They do not work as intended or as described by their proponents.

That being said, it is important to consider the vulnerable state of the economy and the markets that existed before tariffs became front-page headlines. The fact of the matter is, that both financially and economically, the United States and the world stood at the edge of a precipice.

If someone pushes me from behind under ordinary circumstances, I might end up on the ground, but, I likely won’t suffer much damage. Then I could gather my thoughts, appraise the situation and stand up again.

What is currently happening is more closely akin to being pushed from behind while standing on one leg at the cliff’s edge. Even if the action were not malicious, the effects of the action cannot be rescinded or modified.

SIGNS OF THE TIMES

Universal credit default happens when individuals, corporations, and countries can no longer sustain the debt they have assumed on a scale that overwhelms ordinary financial and market activity.

This happened in 2008 with education loans, mortgages, and auto loans.  The price of non-performing debt sank into a deep hole, until the government and Federal Reserve embarked on a new experiment of making more and cheaper credit available and buying up the non-performing debt.

Now, almost two decades later, commercial real estate could be the trigger that sends the credit markets into a similar tailspin.

Sometimes, when stock prices decline badly, investors flee to the perceived safety of bonds. Unfortunately, that logic doesn’t work in reverse. If the bond market collapses, stocks will not provide a safe haven from the storm for bondholders. Currently, long-term bond prices (including Treasuries) are down fifty percent from their vaunted perch only three years ago.

As far as stock prices are concerned, we are currently experiencing the fourth decline of serious significance in this century. Previously, the stock market exhibited extreme volatility in 2000-02, 2007-09, and in 2020. While those extremes have not yet manifested this time, they could happen quickly.

We are possibly in the early stages of an asset price collapse. meaning all assets denominated in dollars – stocks, bonds, commodities, and real estate – are in danger of huge price declines.

That bad news is made worse because of bank failures. The worst financial and economic events in history were accompanied by bank failures. Bank failures were a common occurrence during the early 1930s and are evidence of the ongoing risks associated with fractional-reserve banking. Today, we have a system of no-reserve banking. There are no minimum reserve requirements for banks. How safe is your money? (see Fractional-Reserve Banking – Elephant In The Room)

DEFLATION 

Deflation is the opposite of inflation; it is a contraction in the supply of money and credit.

The effects of deflation result in fewer currency units (dollars) in circulation and an increase in purchasing power of the remaining units. In other words, your dollars will buy more – not less.

As the deflation takes hold, the prices of goods and services will decline, rather than increase. In and of itself, deflation can be a good thing. However, when deflation is severe enough, the result would be a catastrophic economic depression.

The depression will last longer than can be anticipated as it will take longer for the economy to cleanse itself of the ill effects of Federal Reserve inflation and mismanagement.

This is true even though the Federal Reserve and the government will do everything possible to counter the effects of deflation and depression. Unfortunately, their efforts will be overwhelmed by the tidal wave of financial and economic destruction headed our way.

CONCLUSION

President Trump and his tariffs are deserving of the blowback received. Chair Powell and the Fed deserve to share in the limelight for the decades of horrible financial and economic policies that have brought us to such a vulnerable state of affairs. (also see No Winners When The Inflation Balloon Pops and Liquidity Problems Could Overwhelm Inflation’s Effects)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

Treasury Bond Market Outflows, ChatBot, & Credit Collapse

by

TREASURY BOND MARKET OUTFLOWS

A reader of mine who is a financial professional and educator asked about something he heard regarding flow of funds out of U.S. Treasury bonds and into other countries’ government bonds. Reference was made to Europe generally, and Germany specifically. We both wondered about the attraction of other government bonds for investors compared to U.S. Treasury bonds.

Rather than starting my own global search for facts and information, I decided to try something with AI. I assumed it would be faster. It was. It was also lengthy. Below is the complete text of my conversation with ChatBot. My prompts and ChatBot’s responses are identified in bold type. All text from ChatBox is in italics. ChatBox sources include JP Morgan, Schwab, Morgan Stanley, US Bank, Union Bank of Switzerland, Treasury.gov, and Morningstar.

I provide my thoughts and commentary at the end of the conversation…

Kelsey’s Gold Facts: Please explain clearly what is happening and where funds from the sale of U.S. Treasury bonds are being moved. I have heard that one destination might be German bonds (bunds). Is this correct? Or just inflamed speculation? Any other countries?

ChatBox: The current market for U.S. Treasury bonds is experiencing unusual dynamics, with yields rising during economic uncertainty, contrary to their historical role as a safe-haven asset. As confidence in U.S. Treasuries and the dollar wanes, investors are looking for alternative investments. However, there is limited direct information on whether funds from the sale of U.S. Treasury bonds are being moved specifically to German bonds or other countries’ bonds.

Funds from U.S. Treasury bonds could be moving into various asset classes as investors seek safer or more lucrative options:

  • Gold as a Safe Haven: With the instability in Treasuries, gold has seen an increase in value, becoming a more attractive store of value

  • Other Fixed-Income Assets: Investors may be turning to other fixed-income securities, potentially including bonds from stable economies.

Regarding German bonds specifically, there is no direct evidence indicating they are a primary destination for funds withdrawn from U.S. Treasuries. However, European bonds, in general, could be attractive due to their stability and relatively low risk compared to volatile assets.

Historically, countries like China have been significant buyers of U.S. Treasury securities for stability and to manage their forex reserves . However, concerns about the reliability of U.S. Treasuries and potential geopolitical tensions have led to decreased foreign demand, which could lead to a shift in investments.

While there is no clear evidence pointing to German bonds as a specific destination, funds could be moving into:

  • European Debt: Investors might consider European bonds due to their relative stability.
  • Gold and Other Commodities: These have gained attractiveness as safe-haven assets.
  • Other Safe-Haven Currencies and Assets: Such as the euro, if not heavily impacted by European economic instability.
Kelsey’s Gold Facts: What are the fundamental reasons that would make any other government bonds more attractive than U.S. Treasury bonds?
ChatBox: Several fundamental reasons could make other government bonds more attractive than U.S. Treasury bonds, particularly during periods of economic uncertainty or shifting investor sentiment. Here are some of the key factors: 
  • Central Bank Policies: Monetary policies in other countries, such as lower interest rates or quantitative easing, could lead to attractive bond yields compared to U.S. Treasuries. 
  • Higher Yields: If other government bonds offer higher yields than U.S. Treasuries, they can become more attractive to investors seeking better returns on their investments.
  • Sovereign Ratings: A government with a strong credit rating and low risk of default can attract investors. If a country’s economic outlook improves, its bonds may seem more secure than U.S. Treasuries, especially if the U.S. faces fiscal issues.
  • Stable Economic Environment: Countries with stable political and economic environments may be favored over those perceived as higher risk.
  • Currency Strength: Investors might seek exposure to a stable or strengthening currency. If the US dollar is expected to weaken, foreign bonds may become more attractive. 
  • Inflation Rates: If a country’s inflation rate is lower than that of the U.S., its bonds may offer better real returns. Investors often seek to preserve purchasing power through fixed income.  
  • Diversification: Investors might diversify their portfolios by including bonds from different countries as a hedge against economic instability in the U.S.
  • Market Sentiment: Geopolitical tensions or financial crises in the U.S. could lead investors to seek safer or more appealing bonds elsewhere.  
  • Liquidity Preferences: Some investors may prioritize market liquidity. If bonds from other countries are readily tradable and liquid, they may be more attractive than less liquid Treasury securities.
  • Political Stability: In times of U.S. political uncertainty or instability, foreign governments perceived as more stable may gain traction, leading to increased demand for their bonds.
  • Trade Agreements and Alliances: Bonds from countries involved in supportive trade arrangements may attract investors seeking economic stability.
  • Tax Treatments: Certain government bonds may offer more favorable tax treatments than U.S. Treasuries, appealing to investors sensitive to tax impacts on their returns.
  • Regulatory Landscape: A favorable regulatory environment in another country could attract investment if it enables better growth prospects and less risk.
  • Potential for Growth: Emerging markets may offer greater potential for growth, albeit with higher risks. Bonds from these markets could attract investors looking for higher returns despite the associated risks.

In summary, the attractiveness of government bonds from other countries compared to U.S. Treasury bonds can depend on a complex interplay of factors including yields, credit risk, inflation, market conditions, geopolitical stability, and the economic environment. Each investor’s risk tolerance and investment strategy will influence these preferences.

Kelsey’s Gold Facts: Your responses are theoretical and suppositional in nature. Can you site any specific instances where these factors are currently in play?
ChatBox: Currently, there are several factors influencing the attractiveness of government bonds, including fluctuations in interest rates and yield dynamics. While specific instances where funds are moving from U.S. Treasury bonds to other countries’ bonds, such as German bonds, are not well-documented, some trends and shifts in the bond market can be identified.

  • Higher Yields and Volatility: In recent months, global government bond yields have experienced notable increases. For instance, the U.S. 10-year Treasury yield rose significantly in December 2024, while Germany’s 10-year yield also climbed. This volatility makes other government bonds potentially more attractive if they offer better yields or stability.

  • European Bond Market Performance: European bond markets, including those of Germany and the U.K., have seen favorable performance relative to U.S. Treasuries in 2024. This suggests that investors may find these markets more appealing due to their historical stability and current yield dynamics.

  • Diversification and Global Outlook: As global economic conditions shift, diversification across asset classes and geographies is becoming more attractive. Regions like Europe and Asia are experiencing rallies in their equity markets, driven by sentiment changes and valuation adjustments. This trend could spill over into bond markets as well.

While there is no explicit evidence of a direct shift from U.S. Treasuries to German bonds or similar alternatives, investors are increasingly focused on diversification. This includes moving funds into other developed country bonds where yields are higher or more stable than those offered by U.S. Treasuries.

In terms of specific factors driving investment decisions, higher yields in some markets and concerns about economic stability and inflation in the U.S. are key considerations. The prospect of the U.S. Federal Reserve maintaining higher interest rates longer than anticipated limits the potential for significant drops in Treasury yields, which could further encourage investors to explore other options.

Overall, while direct evidence of mass shifts from U.S. Treasuries to specific alternative government bonds is limited, market dynamics suggest that investors are exploring safer or higher-yielding investments globally. 

Kelsey’s Gold Facts: If investors are seeking higher yields and stability, which is in line with the “prospect of U.S. Federal Reserve maintaining higher interest rates for longer than anticipated”, why would they be “further encouraged to explore other options”?
ChatBox: The statement regarding investors being encouraged to explore other options amid the prospect of the U.S. Federal Reserve maintaining higher interest rates for an extended period may initially seem contradictory. However, several factors can help clarify this dynamic:
Comparative Yield: If U.S. Treasury rates are not rising as quickly as those in other countries, the opportunity cost for holding Treasuries increases. Investors may find more attractive yields elsewhere, prompting them to shift their investments despite the Fed’s rate decisions.
  • Real Returns: If inflation is high, even higher nominal interest rates from the Fed may not be sufficient to provide positive real returns for Treasuries. If investors expect inflation to erode the value of their holdings, they may look for other instruments, including foreign bonds or commodities, that can offer better protection against inflation.
  • Currency Strength: Investors might seek exposure to a stable or strengthening currency. If the US dollar is expected to weaken, foreign bonds may become more attractive. 
  • Inflation Rates: If a country’s inflation rate is lower than that of the U.S., its bonds may offer better real returns. Investors often seek to preserve purchasing power throu
  • Comparative Yield: If U.S. Treasury rates are not rising as quickly as those in other countries, the opportunity cost for holding Treasuries increases. Investors may find more attractive yields elsewhere, prompting them to shift their investments despite the Fed’s rate decisions.
  • Diversification Strategy: In uncertain economic times, investors often seek to diversify their portfolios across different geographies and asset classes to manage risk. If they perceive other government bonds as offering more stability or favorable economic conditions, they may allocate funds there while still holding some U.S. Treasuries.
  • Shifts in Sentiment: Investor sentiment can influence the demand for U.S. Treasuries. If sentiment turns negative toward the U.S. economy or fiscal health, investors might pivot to perceived safer asset classes in other countries, despite the Fed’s rate policies. The bond market’s behavior is often sensitive to news and macroeconomic indicators.
  • Propagation of Trends: As investors begin to move toward other markets for higher yields, this behavior can create a self-fulfilling prophecy. Increased demand for foreign bonds can also lead to tightening spreads and lower yields in those markets, making them relatively more attractive over time.
  • Strategic Allocations: Some investors may take a longer-term view and anticipate changes in economic conditions, such as potential recessions or shifts in monetary policy. They may opt for bonds in countries with a more favorable long-term outlook, even if the current rates in the U.S. seem high.

In summary, while U.S. interest rates might be elevated compared to historical lows, the broader economic context, including factors like inflation, risk perceptions, and the global economic outlook, can encourage investors to seek higher yields and stability in other countries’ bonds. This inclination is further influenced by market dynamics and the desire for portfolio diversification.

Kelsey’s Gold Facts: What are current nominal yields on government bonds from other countries compared to the U.S.?
ChatBox: As of mid-April 2025, here is a comparison of nominal yields on 10-year government bonds from the U.S. and several other key countries:
Country 10-Year Government Bond Yield (Approx.)
United States 4.34%
Germany Around 3.5% – 4.0% (recently climbed by ~28 bps in late 2024)
United Kingdom Slightly below U.S. levels, yields increased by ~33 bps in late 2024, generally in the 3.8%–4.3% range
Canada Similar to Germany, with yields performing well relative to U.S. Treasuries in 2024, near 3.5% to 4.0%
Mexico Higher yields, up by ~42 bps in late 2024, reflecting emerging market risk premiums, generally above 7%
Brazil Substantially higher yields, with a jump of 175 bps in late 2024, often above 8%
China Yields declined by ~36 bps in late 2024, generally lower, around 3% or below in many tenors
Thailand Slight decline by ~4 bps in late 2024, yields generally below 3%
  • U.S. Treasury 10-year yield is about 4.34% with an inverted yield curve (long-term yields lower than short-term yield of 3.86% for 2-year bonds) indicating caution about the long-term economic outlook.
  • German and Canadian bonds have yielded in the 3.5–4.0% range recently and have performed well relative to U.S. Treasuries, making them somewhat appealing alternatives in developed markets.
  • The U.K. gilt market offers yields slightly below or close to those of U.S. Treasuries, boosted by recent increases, making it an interesting option given comparable growth prospects.
  • Emerging market bonds (Mexico, Brazil) offer significantly higher yields, reflecting higher risk and inflation premiums, but are affected by currency volatility and risk appetite.
  • China and Thailand bonds generally have lower yields but have experienced recent declines, signaling different monetary and inflation dynamics in Asia.

In summary, U.S. Treasury yields at around 4.3% remain competitive but do not necessarily dominate yield offerings globally. European government bonds like German bunds and Canadian bonds offer slightly lower but still attractive yields with strong credit quality, while emerging markets present higher yields with increased risk. This yield landscape helps explain why some investors may look beyond U.S. Treasuries for diversification and yield enhancement.

Kelsey’s Gold Facts: Can you cite any evidence which identifies clearly any country or government that issues bonds that are currently more attractive than U.S. Treasury bonds?
ChatBox: Currently, while no single government bond market clearly outperforms U.S. Treasury bonds across both yield and safety, investors are considering alternatives that offer competitive yields and perceived stability. The U.S. Treasury 10-year yield is around 4.34%, and other developed markets are offering yields that are either comparable or slightly lower but with stability benefits.
Country 10-Year Government Bond Yield (Approx.) Credit Rating
United States 4.34% AAA
Germany Around 3.5% – 4.0% AAA
United Kingdom 3.8% – 4.3% AA
Canada Near 3.5% to 4.0% AAA
China Below 3% A (S&P)
Thailand Below 3% A (S&P)

Several factors make certain government bonds attractive alternatives:

  • Germany and Canada: These countries offer yields that are competitive with U.S. Treasuries and have performed well in 2024 relative to the U.S. market. Their stability and creditworthiness make them appealing for risk-averse investors.

  • United Kingdom: The U.K.’s gilt market is interesting due to its yields being closer to those of the U.S., while facing similar growth challenges as the eurozone. This presents an opportunity for investors seeking yield without drastic currency risk compared to the euro.

  • Emerging Markets: Countries like Mexico and Brazil offer significantly higher yields, though these come with higher risks and inflation pressures. These markets may attract investors willing to take on more risk for higher potential returns.

In summary, while U.S. Treasury bonds remain strong in terms of safety and liquidity, other markets like Germany, Canada, and the U.K. offer competitive yields with stability, making them attractive for diversification and yield enhancement strategies. Emerging markets provide higher yields but with increased risk. (End Of Conversation)

SUMMARY  

ChatBot has provided lots of information and presented logical-sounding arguments in favor of other countries’ government bonds as alternatives to U.S. Treasury bonds. The logic, however, is flawed due to circular reasoning and faulty assumptions.

It tends to provide theoretical assumptions as evidence but cannot provide any material facts or information in answer to my simple prompts. My overall impression is that rather than responding with an answer to the prompt, it tries to impress with an overload of information that does not answer the question. It feels like what you might expect from most politicians at a debate.

Some specific examples of concern are 1) ChatBot’s answer to my prompt about investors seeking higher yield and stability and 2) the answer to my prompt re: other government bonds that might be more attractive. In both cases, ChatBot failed to provide any consistent corroboration of its earlier statements which had prompted my questions.

Finally, ChatBot claims “other developed markets are offering yields that are either comparable (to U.S. Treasuries) or slightly lower but with stability benefits”. I’m not sure what is meant by “stability benefits” of the other countries in the table (see above) as compared to U.S. Treasury bonds. The implication is that stability is compensation for those countries lower bond yields when compared to U.S. Treasury bonds.

Yet, U.S. Treasury bonds have the highest yield and the highest credit rating of all the government bonds listed. So, why look elsewhere?

There seems to be no available evidence to support conjecture about specific destinations, including German bonds, for the outflow of funds from the U.S. Treasury bond market.

FINAL THOUGHTS 

As investors seek shelter from the financial storm, they will  look for alternatives. It is absurd to think, however, that other governments’ bonds or currencies are potential alternatives to U.S. Treasury bonds or the dollar. If the credit market collapses, everyone will feel the pain.

If the U.S. dollar collapses, other currencies won’t survive. All fiat would go up in smoke.

Holding German Bunds or other fiat currency-denominated investments won’t provide a better or safer alternative. Like it or not, bruised and battered, the U.S. dollar is still the currency of last resort. (also see Treasury Bonds – Last Week’s Big Winner; This Week’s Big Loser)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

No Winners When The Inflation Balloon Pops

by

As the economy slowly grinds to a standstill, the expectations of worsening inflation continue to rise. “Stagflation”, you say? Possibly; but, there is another risk that is greater than stagflation. And, the prospects are much gloomier than those envisioned by a scenario which features an ordinary recession accompanied by marginally higher prices.

THE EFFECTS OF INFLATION 

Inflation is the debasement of money by government. As governments (via their central banks) create money by expanding the supply of money and credit, it cheapens the value of all the money in circulation and causes a loss of purchasing power in the currency (dollar, euro, etc.). The loss of purchasing power results in higher prices for goods and services.

All governments purposely inflate and destroy their own currencies. Over time, the inflation takes its toll and its effects are cumulative, volatile, and unpredictable. The Fed and other central banks think they can control (“manage”) the effects of the inflation which they create, but they end up spending most of their time reacting to and trying to contain those effects.

Today, the U.S. dollar is worth less than 1 penny compared to the dollar of a century ago. Theoretically, the dollar’s decline in purchasing power can continue indefinitely. Hence, some predict the inevitability of hyperinflation and complete repudiation of the dollar. (see Two Reasons Hyperinflation Is Unlikely)

RISK OF DEFLATION AND DEPRESSION 

There are dangers to the world economy which transcend those of hyperinflation and dollar destruction. Those dangers include wholesale deflation and a full-scale depression. The onset of deflation and depression could be triggered by a credit collapse. Or, we might continue to sink slowly and less obviously into a pit of financial quagmire. At some point, recognition of the awful reality would be obvious, but, too late for a reasoned response.

A certain amount of inflation is necessary to keep things from cascading downward. Over time, the effects of inflation are less obvious, so, additional money creation is required periodically in order to maintain the status quo. Beyond that, there is less of the stimulation that was intended. It is very similar to the vicious cycle of a drug addict.

The dependency on the drug (money) is heightened over time. The drug’s effects wear off more quickly and the dosage needs to be greater just to maintain stability, let alone get the desired effect as originally intended. The symptoms of withdrawal are often so bad as to prompt further addiction, rather than endure what is necessary stop the habit.

THE END OF INFLATION 

Historically speaking, periods of entrenched inflation always end in economic collapse. There are examples of ridiculously high inflation rates which ended up at dramatically lower levels after a collapse. And, the economic collapse can happen either with, or without, experiencing runaway inflation.

Weakening economic conditions and a stubbornly strong U.S. dollar are not indicative of worsening inflation. Credit market problems and liquidity issues shift the emphasis from the supply side (too much money) to the demand side (not enough money).

As the demand for cash increases, people begin to sell things – anything and everything. It will require a deflationary collapse to heal completely and to recover from the ill effects of Fed inflation over the past century.

Deflation means that the dollar would buy more, not less; however, there would be fewer dollars available. The demand for money would supplant the fears and concerns associated with the effects of inflation. (see The End Of Inflation?)

RISKS FOR INVESTORS 

It doesn’t matter much what you own at this point. If there is $ sign which indicates its value, that value will be significantly less (by 50% or more) in the event of a credit collapse and the onset of deflation. The biggest losses will come early; and they will be difficult to reverse.

In the past, quick response by the Fed has allowed for varying degrees of restoration and recovery. The long-term addiction described earlier has made it less likely that any Fed response to the next financial and economic catastrophe will offset the tidal wave of credit collapse and bankruptcies that ensue.

The popping of investors’ inflation-supported balloons (stocks, bonds, commodities, real estate, cryptocurrencies, etc) will be devastating.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

Backtalk From The Bond Market

by

BACKTALK FROM THE BOND MARKET

Investors keep looking to the Fed for supposed “forward guidance”. They are looking in the wrong place. Since mid-December, bond prices have declined another 5% and are currently at new 52-week lows. Here is an updated chart of U.S. Treasury Bond ETF (TLT)…

U.S. Treasury bond prices have now declined 16% since the Fed announced a reversal in its interest rate policy and the first rate cut last September. The latest weakness comes in the face of a second rate cut, so it begs a repeat of the question I posed last October…
“Why are bond rates rising at the very time the Fed is trying to move interest rates lower?” (Fed Cuts Rates But Bond Rates Are RISING)
Subsequently, the Fed announced a second rate cut, but the announcement lacked the conviction that inflation is under control and that multiple rate cuts could be expected for 2025.
I don’t so much think the Fed has suddenly had a change of heart. The situation is precarious and the cumulative effects of more than full century of money creation (inflation), mis-management, and manipulation have evolved into a game of playing catch with a ticking time bomb.
Former Fed presidents Greenspan, Bernanke, and Yellen all know this and have kicked the can down the road. Jerome Powell was likely aware of the ongoing threat of a catastrophe from which there is no return. The opportunity to be “numero uno” for a season, however, must have displaced any fear of presiding over a credit collapse and economic depression.
THE FED’S DILEMMA

The Federal Reserve doesn’t know what to do; but it probably doesn’t make much difference anymore.

A dilemma is “a situation in which a difficult choice has to be made between two or more alternatives, especially equally undesirable ones.” (New Oxford American Dictionary)

We are hooked on low interest rates and the drug of cheap and easy credit. Maintaining low interest rates furthers that dependency and heightens the risk of overdose. The result would be a swift and renewed weakening of the U.S. dollar accompanied by the increasing effects of inflation.

On the other hand, raising interest rates more could trigger another credit implosion which could lead to deflation and a full-scale depression.

Doing nothing is an option. The problem is that the Fed is holding that “ticking time bomb” and doesn’t know how long it will be until its world blows apart.

WHAT TO EXPECT NEXT

Don’t trouble yourself worrying about who the next Fed chair will be. It doesn’t matter. It is too late in the game for a change to have any meaningful impact. This includes speculation that Judy Shelton might get nominated again. Yes, she is an excellent choice; and, for all of the right reasons.

Unfortunately, that would expose the game of chess being played by the Federal Reserve and its owners. (see Federal Reserve – Conspiracy Or Not? and Federal Reserve vs. Judy Shelton)

The worst possibilities come after something big happens. The Federal Reserve and the U.S. government will work together to stave off any possibility of loss of control. That means that everyone – investors,  traders, citizens, communities – will be subject to a host of new economic and monetary regulations, restrictions, executive orders, etc.

It will be like nothing we have seen in the past and beyond anything we can currently comprehend. (also see Bond Investors To The Fed – “Not This Time”)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED

 

Global Credit Collapse Is Deflationary

by

NOTE TO READERS:  “Global Credit Collapse Is Deflationary” was originally published as an exclusive for TalkMarkets on October 29, 2024. I have not changed anything in the article, nor is there any reason to modify or alter what is written below because of U.S. election results.

Read more

Viewing Gold In Its Proper Context

by

Viewing gold in its proper context seems to be difficult for most gold bugs. The excitement associated with anticipation of gold at $3000, $10,000, or higher tends to overide real fundamentals and common sense.

Not a few of the predictions for a new, higher gold price are just wild guesses. Some of the reasons given to support those guesses include a Fed pivot and reduction in interest rates, geopolitical concerns, a recession and weak economic activity, and a collapse in the U.S. dollar. There are others, but for now, lets look at these.

GOLD AND INTEREST RATES 

Financial writers in the media continue to refer to “gold’s correlation with interest rates”. The theory is that higher interest rates are negative for gold (the gold price) because gold doesn’t pay interest. Hence, investors tend to shun gold when interest rates are rising and look elsewhere for a higher return.

Time and again, the following statement or something similar finds its way into gold commentary:

“…prospects of higher US interest rates have the ability to limit upside gains. It must be kept in mind that Gold is a zero-yielding asset that tends to lose its allure in a high-interest rate environment”  

A variation of that statement:

“Because gold doesn’t bear interest, it struggles to compete when interest rates rise.” 

The statements imply a correlation between gold and interest rates. The implied correlation suggests that higher interest rates result in lower gold prices, however…

Between 1970 and 1980, the price of gold increased from $35.00 per ounce to $850.00 per ounce. Rather than declining, though, interest rates were rapidly rising.

Gold galloped ahead in the face of ever higher interest rates and increasing lack of demand for higher-yielding investments including U.S. Treasury Bonds. The 10-year U.S. Treasury bond yield exceeded 15%!!! This contrasts markedly from what happened thirty years later.

During the ten-year period 2001-2011, the price of gold increased from $275.00 per ounce to a high of almost $1900.00 per ounce. Yet, interest rates, which had been declining since the 1980s, continued  their descent (helped along by the Fed, of course).

Two ten-year periods of outsized gains in the price of gold while interest rates were doing something exactly opposite during each period. There is no correlation between gold and interest rates.

GOLD AND GEOPOLITICAL CONCERNS 

Any apparent effects from geopolitical issues are temporary at best, and there is no reason to expect them to have any measurable or lasting impact on the gold price unless the U.S. dollar is affected negatively.

(See my article The Gold Price And Geopolitical Concerns for examples; i.e., Russia vs. Ukraine, Israel vs. Hamas, The War with Iraq, etc.).

GOLD AND RECESSION FEARS

A recession is a period of weak economic activity. Even a severe recession will not have an appreciable effect on the gold price.

If the recession deepens and economic activity declines severely,  the result could be a full-scale depression.

In most cases, events of this nature are accompanied by deflation. Deflation is the opposite of inflation and results in a stronger currency (USD) which gains in purchasing power.

The gain in purchasing power means you can buy more with your dollars – not less. The downside is that there are fewer dollars to go around. There would be a huge price collapses in prices for all assets, investments, goods and services. The gold price would be similarly affected.

GOLD AND DOLLAR COLLAPSE 

There are expectations by some for a complete collapse in the U.S. dollar resulting in hyperinflation; similar to Germany in the 1920s, Zimbabwe, or Venezuela.

That is possible, but it is unlikely.  A credit collapse and deflation are more likely since the Federal Reserve fuels inflation with cheap credit. A credit collapse would trigger huge price declines in all assets, including gold. The most likely result would be a full-scale depression that could last for years.

Even if the U.S. dollar were to collapse, the price of gold in dollars would be meaningless.

VIEWING GOLD IN ITS PROPER CONTEXT 

Gold is real money and a long-term store of value. It is also original money. Gold was money before the U.S. dollar and all paper currencies; and, all paper currencies are substitutes for gold, i.e., real money.

The higher price of gold over time reflects the ongoing loss of purchasing power in the U.S. dollar. In other words, the price of gold tells us nothing about gold.

The gold price tells us only what has happened to the U.S. dollar. The same thing is true if gold is priced in any other fiat currency.

Over the past century, the dollar has lost ninety-nine percent of its purchasing power. This means that it costs one hundred times more for the things you buy today than it would absent the effects of inflation.

The original fixed price of gold was $20.67 oz. Convertibility allowed exchange of $20.00 in paper money for one ounce of gold and vice versa.

At $2000 oz., gold today is one hundred times higher and reflects the actual ninety-nine percent loss of USD purchasing power.

The gold price only moves higher to reflect the dollar’s loss of purchasing power after the fact;  never before.

Expectations for a much higher gold price based on anything other than the loss of U.S. dollar purchasing power will not be realized.

A much higher gold price can only present itself after further, significant loss of U.S. dollar purchasing power.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

Gold And US Treasuries – Punctures In The Everything-Bubble

by

GOLD AND US TREASURIES 

The price of gold early Friday morning this past week touched $1720. At that level it was down $350 per ounce from its high point of $2070 last August.

The size of the decline is not unusual at face value. But, in light of the expectations for hugely higher inflation rates and much higher gold prices that have dominated the headlines over the past year, the drop might signal a cause for concern among gold bulls.

Meanwhile, eyes are fixed on interest rates for US Treasury bonds. During the same six-month period (August 2020 – February 2021) during which the price of gold fell by seventeen percent, the price of the 20-year US Treasury bond fell by twenty percent. That IS a huge deal, as it corresponds to sharply higher interest rates from less than 1% last August to as high as 2.26% just the other day.

The rush to proclaim correlation between interest rates and gold has resumed. Also, warnings and predictions of much higher inflation from around the globe are increasing.

As we have said on several occasions, there is no correlation between gold and interest rates (see Gold And Interest Rates – There Is No Correlation).

This can be seen on the charts below. The first chart (source) is a history of gold prices over the past fifty-six years and the second chart (source) is a history of interest rates over the same time period…

GOLD PRICES 1965-2021

 

10 YEAR US TREASURY RATE 1965-2021

During the 1970s, the price of gold rose from $40 per ounce to an intraday peak of $850. All throughout that time, the interest rate on the 10-year US Treasury bond rose higher and higher; from approximately 4% to 12.5%.

However, during the years 2000-2011, while the price of gold rose from $250 to $1900, interest rates on the 10-year US Treasury bond dropped from 6% to 2%.

The two decade-long periods provide contradictory results for the argument that lower interest rates are correlated to higher gold prices.

And for those who argue that the higher rates we are currently seeing are an indication of significantly higher inflation, then why is the gold price declining?

The higher interest rates are possibly a market reaction to the brutal effects of infinite credit creation and interest rate manipulation by the Federal Reserve.

The entire world economy is funded with cheap credit and most economic activity is dependent on it.  The prices for all financial assets misrepresent and grossly exaggerate any underlying fundamental value.

Higher rates might trigger a credit collapse so severe that any asset could decline in price by fifty percent or more.

As for gold, it would also decline – to a level commensurate with whatever strength the US dollar attains.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT  and  ALL HAIL THE FED!

Everything Is Going Lower, Including Bonds

by

EVERYTHING IS GOING LOWER

Nothing epitomizes cheap money more than the lofty level of bond prices and their corresponding low yields. The old adage of “never chase yield” seems to have been pushed aside in favor of “buy more when the interest rate approaches zero”.

Yield-hungry investors think they are being conservative, though. Some of that reasoning is due to the obvious volatility of the stock market; especially during the first twenty years of this century.

BONDS BIGGER RISK THAN STOCKS

Even before the latest stock market dump, bonds could be considered a bigger risk than stocks. The risk is greater now than it was in 2007-08; and probably more so than at any other time in history.

Read more

Need A Second Opinion?

by

DO YOU NEED A SECOND OPINION?

Let’s face it. No one plans financially for disaster. We assume that if we are conscientious, persistent, and long-term oriented, that our plans –  generally speaking – will find fruition.

We carry insurance to protect ourselves against financial loss from events such as death,  major illness, disability, property damage, long-term care, etc.

But what about systemic risk?

How will you survive a complete credit collapse and loss of 50-90 percent of the value of all assets denominated in U.S. dollars? What about a full-scale depression?

When most advisors talk about investing in such a way as to minimize risk and avoid market blowouts, there is an implicit assumption that whatever the situation, it will be temporary; that the financial markets will continue to function.

Maybe that isn’t the case. Wide-scale bankruptcies, bank failures, and interruptions in communication channels could effectively stop markets from functioning at all.

Suppose you have an investment that generates huge profits for you during a stock market collapse; say a short position on some individual stocks or an ETF with a similar strategy.

Because of the leverage involved, if a market decline is steep enough and swift enough, there may not be any traders or other investors with money to whom you can sell your profitable ETFs or from whom you can buy back your existing short positions.

What if the U.S. dollar renews its long-term decline in accelerated fashion? Is runaway inflation a possibility and how would you be affected?

Do you understand the concept of fractional-reserve banking and the danger it presents?

Maybe you don’t own stocks. You might own bonds which provide you with interest income. Or real estate; or gold. Extreme negative market conditions will affect all of these things in ways you probably cannot imagine.

If you are worried or concerned about any of  these things, or just feel the need to be better informed, you could benefit from a personal consultation.

Or, perhaps you are a corporate officer who has employees that would gain from a better understanding of these issues.

Whatever your particular situation, take action today. Send me an email with your concerns and questions. I will get back to you quickly.

Let’s talk…  kwilliams@kelseywilliamsgold.com

Bio: KelseyWilliams

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

 

Inflation Is Not Our Biggest Threat

by

You wouldn’t know that by listening to current commentary on the economy.

There is a bigger threat, though. But first, there is some clarification about inflation that is necessary.

Most people infer rising prices when they hear the term inflation. That is not correct. The rising prices are the ‘effects’ of inflation. The inflation, itself, has already been created.

It is not created, or caused, by companies raising prices. And it is not created by ‘escalating wage demand’.

When someone says “inflation is back”, they are referring to rising prices. Yet they are wrong on two counts.

First, as we have previously said, the rising prices, generally, are the effects of inflation.

Second, the inflation isn’t back; because it never went away.

From my book INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT:

“Inflation is the debasement of money by the government. 

There is only one cause of inflation: government. The term government also includes central banks; especially the U.S. Federal Reserve Bank.” 

The Federal Reserve caused the Depression of the 1930s and worsened its effects. Their actions also led directly to the catastrophic events we experienced in 2007-08 and have made us more vulnerable than ever before to calamitous events which will set us back decades in our economic and financial progress.

The new Chairman of the Federal Reserve, Jerome Powell, is personable, likable, candid, and direct. But he cannot and will not preside over any changes that will have lasting positive impact.

The Federal Reserve does not act preemptively. They are restricted by necessity to a policy of containment and reaction regarding the negative, implosive effects of their own making.

And their actions, especially including the inflation that they create, are damaging and destructive. Their purpose is not aligned with ours and never will be.

Yet they are not independent. In fact, they have a very cozy relationship with the United States Treasury. That relationship is the reason they are allowed to continue to fail in their attempt to manage the economic cycle.

There are two specific terms which describe our own actions and relationship with the Federal Reserve – obsession and dependency.

We are bombarded daily with commentary and analysis regarding the Fed and their actions. Almost daily we are treated to rehashing of the same topics – interest rates, inflation – over and over. And we seemingly can’t read or hear enough, i.e. obsession.

But are we reading or hearing anything which will help us gain a better understanding about the Federal Reserve? And what, if anything, can we realistically expect them to do?

We are also hooked on the liberally provided drug of cheap credit. Our entire economy functions on credit. We are dependent on it. And without huge amounts of cheap credit, our financial and economic activity would come to a screeching halt.

A credit implosion and a corresponding collapse of stock, bond and real estate markets would lead directly to deflation. The incredible slowdown in economic activity leads to severe effects which we refer to as a depression.

Deflation is the exact opposite of inflation. It is the Fed’s biggest fear. And it is a bigger threat at this time than progressively more severe effects of inflation.

The U.S. Treasury is dependent on the Federal Reserve to issue an ongoing supply of Treasury Bonds in order to fund its (the U.S. government’s) operations. During a deflation, the U.S. dollar undergoes an increase in its purchasing power, but there are fewer dollars in circulation.

The environment during deflation and depression makes it difficult for continued issuance of U.S. Treasury debt, especially in such large amounts as currently. Hence, the resulting lack of available funds for the government can lead to a loss of control.

The U.S. government is just as dependent on debt as our society at large.

The following excerpt is from my new book ALL HAIL THE FED!:

“When something finally does happen, the effects will be horribly worse. And avoidance of short-term pain will not be an option. The overwhelming cataclysm will leave us no choice.

As severe as the effects will be because of previous avoidance and suppression, they will also last longer because of  government action. The cry for leaders to “do something” will be loud and strong. And those in authority will oblige. 

But don’t look to the Federal Reserve for a resolution. They are the cause of the problem.”

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!