“Bonds are certificates of guaranteed confiscation.” ~ Franz Pick

In an inflation-driven world, new money is always the best money.

That’s why when a bond matured you were getting a good thing.

You got paid out with new money at its current valuation.

But it’s not looking that way any more…

Government spending is out of control. It’s about the same, if not more than it was during World War II. US Government spending is at 44% as a percentage of GDP.

Yet, the government keeps issuing bonds less people want.

More, in fact, then the amount spent when Bernanke came up with the Quantitative Easing(QE) solution.

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QE meant that the Federal Reserve would print money to buy up debt from the market, particularly the housing market. Once the housing market debt was paid off, then the Fed would just remove it from the balance sheet, all things being equal.

Since 2020, massively more bonds are being issued for a different reason. The US Treasury is forced to issue more bonds to pay for more debt.

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The chart above shows interest payment on sovereign debt increases over the last four years. The amount the US government is paying in interest payment has more than doubled from $500 Billion to over $1.1 Trillion. Those are some big numbers…

I could say more about them to scare you, but that’s not my intention. What I want to show you is that more money must be printed. And that means more, bonds must be issued.

The whole process devalues the US dollar…

And since there is so much spending, and even more money caught up in financialized products, yields are on their way into dangerous places!

Here’s a chart of the 10-year and 3-month T-bills.

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Historically, just before a recession, the 3-month T-bill yield rises above the 10-year Treasury Yield. Then to “fix it,” the Federal reserve raises interest rates, which raises the value of the dollar, and lowers yields curves bringing down the 3-month T-bill.

This time is different.

The Federal Reserve has raised interest rates, and yet, yields remain high, slowly rising.

There are two ways this could go…

1. If the Federal Reserve raises rates again, we may see more over-indebted banks crash, bank runs, and more “unrealized” real estate losses. Then yields may drop, but someone will still need to clean up the financial loss (possibly with more money printing).

2. If the Federal Reserve lowers interest rates, yields will most likely shoot higher as the dollar’s value moves lower. And most likely, QE + more money printing to “stimulate” growth.

Either way, 2021-22 was an inflection point for the US Dollar.

Central banks should be able to control yield curve on their debt. When they can’t, the currency loses value.

That really fired up in the early 2000s, when the US sped up the money printer moving from a 0% inflation target to a 2% inflation target. Then the return on bonds has been slowed down.

“Fixing” the asset bubbles in stocks, bonds, and real estate using QE after the GFC didn’t pan out. Maybe for a moment, but since 2014, bond returns have been on the decline.

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While the return on bonds declined, the return on gold continued to rise, decoupling from bonds around the same inflection point I mentioned earlier, at the end of 2021.

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Here’s where our favourite safe haven is most likely going now that gold is no longer following yields curves.

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Bonds may have been a good financial trade years earlier, but because the dollar is becoming less marketable gold is still our favourite safe haven asset. Even more so, with too much sovereign debt, budget deficits, and decreasing foreign bond buyers/holders…

And possibly proof that with a long enough timeline, gold beats fiat every time.

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