State of the Union (Unfiltered)

I thought I’d take another stab at committing some of my deliberations to paper—mostly because it helps me organize them.

I believe governments around the world have a spending and debt addiction. Sure, it varies by country, but the trend is widespread and even historically frugal nations (like my own) have their economic wagons so hitched to countries that long ago tossed fiscal caution to the wind there is no escape. In fact, there’s now a perverse incentive to follow suit.

A System Unmoored

Since Bretton Woods, the world has operated on a dollar standard. First, it was backed by gold (until ’71), then by oil (until ’08), and since the late ’80s, increasingly by what I’d call “financial engineering.” That’s my polite way of describing the ever-more-complex methods used to obscure where the mounting debt is hiding. Initially, this meant stretching fractional reserve banking ratios, which triggered the Global Financial Crisis. Now, the debt is ballooning at the sovereign level, straining bond markets—as we saw during the Liz Truss episode in the UK and the Japanese carry trade unwind last August.

The system was untethered in 1971, and since then, it’s been drifting—slowly but surely—off course, without the means or the will to return to a stable equilibrium.

This is all perfectly captured in the meme below.

The Illusion of MMT

Because real productivity is the bedrock of any sustainable system, I reject Modern Monetary Theory (MMT) and similar ideas that suggest we can just print our way out of trouble forever—especially when the printed funds are funneled into unproductive expenditures (read: bloated government bureaucracy or the military-industrial complex). That said, MMT is intellectually interesting and harder to disprove than I'd like to admit. My skepticism probably also reflects my Calvinistic upbringing and lack of formal economics training—but it's worth saying.

Not Apocalypse—But Close Enough

Despite these concerns, I’ve come to believe we’re not racing toward some fiscal or financial apocalypse. The stakes are simply too high. The global economy is so financialized that a true “reset” of the USD system would equal societal collapse. We have too many levers—too many tools of financial wizardry—to let that happen.

But wizardry only works for so long. It disproportionately benefits the powers at be and offers diminishing returns in terms of productive outcomes. Japan experienced this firsthand in the ‘90s with a prolonged deflationary spiral. China seems to be in the thick of something similar now. But if the U.S. were to face such a bust, it would spell disaster for every global bank, insurer, pension fund—you name it. That’s why, again, they won’t let that happen.

So when someone insists that gold or Bitcoin is going to multiply tenfold because all global USD-denominated value will rush into it—take a breath. That would require total financial armageddon, and it’s just not on the cards.

The End of the Tether

That said, I believe the U.S.—to which the rest of the system is tethered—is nearing the end of its rope. I’m encouraged that some current U.S. policymakers at least talk as if they understand this. That doesn’t mean they’ll succeed, and I’ll be the first to call foul if they simply serve us the same “print-the-difference” sandwich with a new political label.

But I’d still rather place cautious hope in leaders who recognize the core issue than in those who are fully committed to the fiscal fantasy of MMT (ahem—looking at you, EU and U.S. Democrats).

Transparency vs. Obfuscation

Quick sidenote: I find it fascinating that Trump’s strategy seems to be doing everything out in the open—almost as a preemptive move against media distortion or institutional sabotage. Executive orders are signed publicly, policies are explained in long-form podcasts, and cabinet picks are telegraphed far in advance. It’s a sharp contrast to what we see in the EU, where unelected leaders like Ursula seem to operate behind closed doors, or in the U.S. past where omnibus bills were rammed through unread.

But I digress.

The Plan (As I See It)

Let’s focus on what I think the Trump camp’s economic plan is, what its chances of success are, and what it means for investors like us.

The Objective:

• Balance the budget in nominal terms (i.e. reduce inflation and the deficit below 3%)

The Tools:

• Increase oil production by 3 million barrels/day to lower prices and boost U.S. competitiveness
• Cut spending through DOGE (Departments of Government Efficiency—if I’m interpreting that right)
• Raise government revenue via tariffs—especially if the goal is to cut taxes for average Americans
• Lower both the trade-weighted USD and interest rates
• Refinance the debt at longer maturities—perhaps with some coercion of “allies” into accepting zero-coupon century bonds

Yes, there are contradictions here. Yes, it’s a risky plan. But it’s not insane. As S. Miran put it, “There is a path... but it is narrow, and will require careful planning and precise execution.”

Will It Work? And If Not…

So, we have a plan. It’s imperfect. But if it fails, the fallback will be what it always is: print the difference. The real question becomes, how much will they need to print—and will it benefit our portfolios?

As stated I think the imminence of a global trade war disaster is currently overstated largely due to the clown like manner in which the Trump administration has chosen to tee-up the debate (based on trade deficits rather than actual tariff differentials). Lets assume that it was indeed a highly intellectual 4D chess move to anchor the tariff discussion starting point at the high end of what is humanly imaginable…Lets just wait to see what happens.

I was encouraged to see S. Bessent leading talks with Japan. If a series of smaller countries fall into line, it’ll rack up quick wins for Trump.  Given the proximity and the NATO love fest i just witnessed I am gonna go out on a limb and discount all the posturing by NATO members, Canada and Mexico and suggest that they will all come to the negotiating table and we will in fact 1) improve trade relations amongst that group, solve the GIUK gap (Google it!) defence topic collectively in one fell swoop…That will be a real landslide win for DJT and finally up the pressure on Russia and China to come to the negotiating table.  If i’m right about China’s deflationary outlook they WILL play ball and they WILL accept a sizable tariff to correct for past practices and incentivise normalization of trade flows in return for continued support by and access to the USD system (read the Japanese lending/funding market)….it may even include a HK like deal regarding Taiwan (i.e. you can have it but give us 5 years to build our own chip/fab making capability).

Now those are a lot of pieces that need to fall into place and I'm sure there’s some blow up risk on some of these topics but if DJT manages to push only half of these things half way home he will have achieved more than many before him.  If he manages to do more and also de-escalates the UKR and Iran situation while he is at it I think we may well deserve the legacy status he so clearly desires.

The Fiscal Elephant in the Room

But here’s the rub—even if you believe all of the above fairytales and assume he is wildly successful, it will NOT materially change the outcome fiscally. i.e. The savings from DOGE plus the additional revenue from tariffs will not offset the intended tax cuts and the loss of revenue from slower growth & less government spending….and that’s before this morning’s announcements regarding a 1 trillion dollar military spending budget (up from 800bn!)...

In short i agree with the plan but I believe it fails to address the elephant in the room which is the size of government and its budget vs. the productive/real economy…..and thus until i see evidence to the contrary i think they will have to continue to “print the difference”.

Green Dreams vs. Military Madness

There where EU and Dems seem intent on wasting tax dollars on Green new deals (subsidies) and counterproductive DEI fluff it was in many ways more benign than the Republicans desire to spend it all on the military industrial complex.  Of course the EU just follows suit as if they totally forgot about their climate ideals which until recently where the absolute top of the policy agenda (bonus points for anybody that can help me understand how military spending is good for the environment and/or sustainable)....Again as much as i am a climate sceptic I do not like that direction of travel or the current level of fearmongering that is fueling the need for increased military spending either.

The Case for Decentralization

As someone with no say in U.S. policy, I do want to take a moment to express my strong opinion that I think the EU and NATO as institutions are what is commonly known as a “prisoners dilemma” to the individual participants. Each member would be better off regaining cultural and economic sovereignty, decentralizing power, and breaking free of U.S. dominance and centralized bureaucracy.

Deleting or reducing centralized bureaucracies will help shrink government. Every dollar cut frees up capital and labor for the productive economy. Less government means fewer regulations and less interference—a win-win-win.

How democracy has been turned into a kabuki theatre to convince the masses that voting for more government somehow serves their purpose is beyond me as everybody with a brain should to be able to follow the above elementary grade logic less government = good.  At the very least they need to learn to live within their means and be accountable for what they do.

I love the chart below indicating the “effect” of government involvement on prices vs. the effect of free market competition.

Versus the following meme about throwing more money at the problem as opposed to letting the money flow freely and letting the market solve the problems

The irony of the richest men (plural) in the world now being in de facto cahoots with the leader of the free world truly has an Ayn Rand ring to it that even a literary barbarian like myself can’t overlook….

So lets try to make an interim summary of my diatribe and try to hypothesise whether there is a way out of this misery:

• The largest economies in the world will not succeed in curtailing their deficits and/or reducing their collective debts and as the US requires more of the global pie to pay for its profligacy this will increasingly be at the expense of others
• Given we have already tested the lower bound on rates once and global debt to GDP levels are way beyond metrics deemed sustainable historically we have limited time to figure out an alternative
• We need to “re-tether” the system so that we can at least stop drifting further away from a functional society and for that we have to curtail government's ability to issue ever increasing amounts of debt.

Gold, Bonds, and a Way Forward?

At this point I would ask the reader to look at what Judy Shelton (Trump’s pick to replace J. Powell) and Scott Bessent have said out loud on this topic in recent months.  Both are ardent gold bugs and financial realists so they understand that there is not enough gold in the world (at today’s prices) to go straight back to some type of (even fractional) gold reserve without huge chaos.  So they have come up with a novel “gold backed sovereign bond” that could in my humble opinion very easily be turned into a global standard for all sovereigns thereby killing multiple birds with one stone:

1. Reduce the pressure on the U.S. to export dollars (trade deficits)
2. Create a Sovereign bond standard not tied to the USD but to gold oz.
3. End the US’s abusive monopoly of global SWIFT payment system, and 
4. Curtail the endless mercantilist fiat devaluation race to the bottom

What is this new gold backed bond i hear you think.  Well it is a long dated bond, longer than most countries can issue at the moment with a coupon that is below current market rates because it comes with an implicit inflation protection by making the principle convertible to a certain amount of gold (in oz. / set at issue).  The collateralization of such bond issuance is of course where the rubber meets the road but even if they were only collateralized with a fraction of the nominal amount of gold (between Grok and ChatGPT the consensus is somewhere between 10-30%) you could sort of make the numbers work if we 3-5x the gold price from what it is today.  Wild, right?

I have spent a fair bit of time digging into this gold backed bond idea and i actually think it has legs…It would solve tons of problems and in a lot of cases (Italy & France for example) would allow countries that rely too heavily on "beggar thy neighbour" tactics, to put their sizeable gold reserves to good use to instill the fiscal responsibility they seem otherwise incapable of finding.  We could reduce the role of the ECB to the custody of the gold and issuance of gold backed bonds and give back some sovereignty to national banks whilst keeping the Euro in the same manner that the US issue both federal and municipal bonds at separate markets/rates. 

One of the notable exceptions for whom it would not work so well is the UK that famously sold all its gold at the pico bottom around the millennium (commonly referred to as “the Brown Bottom” after the infamous finance minister that made that decision). I often wonder whether this has any bearing on their warmongering in Europe as they are truly the weakest link (macro economically & balance sheet wise) but then I remind myself that they at least are selfsovereign and pray that they find the courage to back their own MGBGA plan some day (i have some ideas for those interested).

Final Thoughts

I wanted to end my rant there and just remind everybody that although I believe that everybody should own some gold..... That  it is likely gonna be an extremely hard trade to hold onto as the chart below (Gold price in Weimar Marks during the Weimar period) so beautifully depicts….

I want to re-itterate that the gold-backed bond idea has legs. It solves problems, offers accountability, and could redefine global finance. But even if it doesn’t materialize, gold remains one of the only hedges against the inevitable printing press.

Oh—and as for Bitcoin, strategic reserves and sovereign wealth funds in the US? My read is they’re preparing to use a variety of real assets as collateral to deal with the U.S.’s unfunded liabilities (social security, pensions, Medicare). But that’s a story for another day.