There is an old joke among investors that, in our time, is tragically accurate. Countries start by borrowing from each other. When that trust is gone, they borrow from the banks. And when that source is exhausted, they end up stealing from the people.
This theft can appear in various forms: from taxes and special contributions, to uncontrolled inflation that drowns the real income of citizens.
We have now reached this era when the over-indebted states of the West have resorted to far-fetched solutions, in an attempt to “control” and “reduce” public debt – for vote-getting reasons. The easiest way to achieve this is experienced daily:
Uncontrolled inflation. Without shrinking the real level of public debt, it keeps the ratio to GDP on a stable or even declining trajectory. Inflation is a silent killer of citizens’ wealth.
The US Debt “Black Hole”
The debt dance is led by the United States, where debt has already exceeded GDP. Contrary to the assurances of the Federal Reserve and Jerome Powell to fight inflation and return to 2%, in reality inflation has never been defeated since 2020… saving the US even from bankruptcy, thanks to the preeminence of the dollar as the main reserve currency.
This has happened despite his post-2022 (and admittedly deflationary) interest rate hikes, which were essentially designed to kill consumer demand (via higher debt costs) and create a convenient little deflationary recession (which Powell later denied) in the middle class. Inflation is great for debtors, and no one is more indebted than the US.
But the fancy lads on Wall Street have a more eloquent term, and it’s called “negative real interest rates.” And in the case of the US, this essentially (and officially) amounts to a scenario in which the official CPI inflation rate is higher than the yield on the most sacred bond: the 10-year US Treasury note.
The US’s options
At this point, the US’s only options were and are: 1) default on its debt and default. 2) “Do it like Yellen”: further debt inflation. 3) cut military spending by 40%-50% (political suicide). 4) reduce the debt ratio through inflation.
Governments chose the latter.
Capital Controls Are Coming
Financial repression works, but as the same IMF warned sovereigns in another 2023 report, debt-soaked nations would fare much better if they quickly added capital controls to their toxic mix.
That is, before financial repression can really do its dirty work, it is important to simultaneously control citizens’ ability to flow their money in or out of the system before they feel the full pain of negative real interest rates.
The Golden Solution
Some indestructible assets have the last and patient word in an increasingly crazy/centralized world.
If you’re wondering how to prepare for looming capital controls, the answer lies in what sophisticated investors have known for centuries: physical gold in private vaults, outside your country.
