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“Debasement” is an ugly word. The definition is “the action or process of reducing the quality or value of something.”

Currency debasement has a long history, from the practice of reducing the precious metal content in coins to modern monetary policies that involve printing money to finance debts. Roman emperors diluted gold and silver with base metals. Modern governments have printed huge amounts of fiat currency, leading to hyperinflation.

It’s not a good sign when the financial press begins to discuss current market moves in terms of the debasement trade. It means that investors are losing confidence in fiat currency. The fact that the USD index is stable shows that all the central banks are suspected of collaborating with governments to finance unsustainable deficits.

https://www.wsj.com/economy/central-banking/gold-p...


Gold Rally Points to Eroding Faith in Central Banks Worldwide
In Japan, as in the U.S., a new leader wants the central bank to make government debt more bearable, which could feed inflation

By Greg Ip, The Wall Street Journal

…

It turns out the U.S. isn’t the only country where massive debts and populist politics threaten the value of “fiat” currencies like the dollar—i.e., those backed by nothing tangible—and the central banks that issue them….

Gold’s rally has come in several stages. The first began after Western nations froze Russia’s foreign currency reserves in the wake of its full-scale invasion of Ukraine in 2022. Central banks and foreign governments, in search of something that adversaries couldn’t seize, began piling into gold.

The second came this past April with President Trump’s trade war, which undermined faith in the U.S. as a stabilizer of the global economic system and the dollar’s pre-eminent place in that system.

The third began in late August, when the Federal Reserve signaled it would cut rates to counteract weak labor markets, despite inflation running above its 2% target….

Gold’s rally is starting to look like a speculative frenzy. Wall Street has dubbed it the “debasement trade.”…

A simple formula determines how sustainable that [government] debt is. When the average interest rate on that debt is below the nominal growth (i.e., unadjusted for inflation) of GDP, debt tends to fall as a share of GDP. When the interest rate is higher, that ratio tends to rise….

In a new report, Morgan Stanley noted that across developed markets, “In the last year, on average, nominal growth has slowed, cost of debt has risen, and deficits deteriorated—a triple whammy for debt sustainability.” It predicts that by 2030, the average cost of debt service will equal growth rates. Preventing an explosive rise in debt would require a sizable budget surplus excluding interest—i.e., steep spending cuts or tax increases. That is proving politically unpalatable….

Trump thinks there is an easier way to lower deficits: Get the Fed to lower rates and thereby make servicing the debt cheaper. When central banks shift their priority from inflation to helping the Treasury, it is called fiscal dominance, and it usually leads to inflation…. [end quote]

Fiscal dominance is really the beginning of the end for a stable currency. The government spends more than the economy can support. The bond market demands higher interest rates to compensate for the risk of inflation and potential default. So the central bank buys the debt from Treasury to suppress interest rates. That eventually leads to inflation, a collapse of confidence and even higher interest rates.

TIPS, which show the real yield of Treasuries, can be used to mitigate the risk of inflation. Currently, the 10 year TIPS yield is trending upward after a downward move that was related to the Fed’s cut in the fed funds rate.


Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis, Inflation-Indexed
https://fred.stlouisfed.org/series/DFII10

Trump undermined the trust in government statistics by firing the director of the BLS because he didn’t like the employment numbers. It’s easy to picture Trump ordering the BLS to publish falsified (understated) inflation numbers which would reduce government expenses by reducing the COLA for Social Security. (Not to mention the political impact of high inflation numbers.)

One of the fund managers quoted in the WSJ article said, “You know what? I now see gold as a safe harbor asset in a way that the dollar used to be viewed.”

That “used to be” will be the downfall of the U.S. economy if it becomes entrenched.

Debasement is a loss of quality, of integrity, of trust. It would mean the loss of U.S. world leadership and much more hardship at home.

Wendy

I have not drilled down on this AI response to agree or disagree with its points. The response is horrid. We are going somewhere towards this.

AI Overview
A U.S. debt default would significantly devalue the dollar, increase borrowing costs for consumers and businesses, trigger a domestic recession and stock market crash, and potentially undermine the dollar's status as the world's reserve currency. International investors would likely lose confidence in U.S. debt, leading to higher interest rates and a sharp decline in the dollar's value, increasing import costs and reducing American living standards.
Immediate Effects on the Dollar
Decline in Value: The dollar would likely fall sharply against other currencies, making imports more expensive and contributing to inflation.
Loss of Reserve Status: The dollar's position as the dominant global unit of account could be jeopardized, as it would signal a loss of confidence in the U.S. government's ability to manage its finances.
Wider Economic Consequences
Higher Borrowing Costs: Interest rates for mortgages, car loans, and credit cards would rise as the perceived risk of lending to the U.S. government increases.
Stock Market and Investment Losses: A default could trigger a stock market crash, leading to significant losses for retirement and investment accounts.
Recession: A debt default could kickstart a domestic recession, leading to widespread job losses and economic contraction.
Global Impact
Disruption to Global Trade: The decline in the dollar and increased volatility in exchange rates could significantly disrupt global trade.
Increased Costs for Other Nations: Countries and businesses that rely on the dollar for trade would face higher costs for imports and transactions.

“Debasement” is an ugly word. The definition is “the action or process of reducing the quality or value of something.”

Long ago, I figured out everyone that bubblevision presented was working their own agenda. Is the "debasement trade" narrative real, or a sales pitch for gold, or crypto, or tulip bulbs? Government issued currency is backed by the issuing government's ability to tax the country's residents, to make that currency good. Is that true of any of the alternatives offered?

Steve...contrary old phart

Gold is not an investment in the normal context, but rather an insurance policy against the potential destruction of a currency. It is interesting to compare it to today's darlings, the cryptocurrencies.

Gold has to be securely stored, while crypto is just a number written on a piece of paper (or tattooed on your scalp). That said, gold is reasonably compact, but can be easily found if you try to transport it across borders.

On the other hand, gold can easily be sold "anywhere", but buying a hamburger with crypto may not be easy. Gold is a physical item, while crypto is a religious belief.

Maybe I'm old fashioned, but I see nothing wrong with keeping a small portion (say, one or two percent) of one's wealth in gold. If everything else goes to hell in a handbasket, you may find that percentage increases all on its own.

Despite the occasional doubts of the sanity of the guys running the show, the results of thee US government defaulting on its debt would be so proportionately horrible as to act as a deterrent to all but the mentally deranged.

Jeff

"backed by the issuing government's ability to tax the country's residents"
______________________________________________

I would consider changing that to:
"backed by the issuing government's willingness to tax the country's residents"

Jeff

I would consider changing that to:
"backed by the issuing government's willingness to tax the country's residents"

When the choice is between TPTB taking a haircut on the US bonds they hold, or burning down the Proles with taxes, I think the (L&Ses) will be more than willing to tax the (Prole) residents.

Steve

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