Macro-fundamentals - Long Term
Right now, we are witnessing a coordinated global effort to debase fiat currencies. Almost every global economic power is using its central bank as a tool to debase its currency.
Here is a quick anecdote:
Let’s say a government called “ABC” issues bonds (debt) to finance its deficit spending, at a 1% interest rate. Creditors buy the bonds expecting to be paid back accordingly.
But one day, it becomes very difficult for ABC’s Treasury department to pay the debt back. They have been spending like drunken sailors - and the deficit balloons.
This is occurring right now, as governments around the world are reacting to the global pandemic.
In our thought experiment, Government politicians aren’t willing to face a default, so they devise a plan to pay back their creditors:
First, they drive inflation - whether 2.5 - 3% - the key, is a number larger than the (1%) government’s borrowing rates. To achieve this, ABC’s central bank increases its money supply, with the aim of hitting target interest and inflation rates.
If successful, ABC government can repay their creditors with money they printed, while bearing the burden of a depreciating currency, as no true value was created with this increased money supply.
This is also known as an inflation tax.
Government bond investors end up being the “bag holders,” as the government has benefitted from a negative “real yield” on its debt.
It’s a sleight of hand that even the best magicians would admire.
As we know, real yields in the United States and most of the developed world already dipped below zero in 2020: