All monetary policy is carried out through ties between financial institutions, the Federal Reserve (the central bank), and various commercial banks.
The Federal Reserve, as the central authority, wields significant influence over the economy. Its actions can either boost or curb economic liquidity, thereby directly impacting the lending capacity of commercial banks to the public.
Before the Great Recession in 2008, the Fed’s primary tool in creating liquidity was controlling the Fed Funds Rate and the cost of borrowing amongst banks. Lowering (or raising) Fed Funds made it harder for banks to raise money to back up additional lending, made it possible to offer cheaper rates to borrowers, and hence attracted more loans, thereby increasing liquidity throughout the economy.
The creation of QE, following the Great Recession enhanced the Fed’s ability to increase liquidity many-fold. Specifically, the Fed could buy bonds from banks, which in a flash can add massive amounts of cash to banks’ balance sheets, dramatically enhancing the amount of loans that could be made. This cash is the actual paper stored in a vault by either a commercial bank or the Central on behalf of the commercial bank. And yes, it is immediately ready to engage in highly leveraged bank lending.
“Between the introduction of QE in mid-2008 and today, this hard cash used has risen by 8-fold, which makes the difference between unlimited lending and actual potential lending almost trivial.”
Serious Consequences
The enormous consequences to the United States financial system are not a distant threat but an imminent reality. The federal government continues to borrow colossal amounts of money from central banks, and the government has taken full advantage of massive increases in government debt as one of the consequences. This situation demands our immediate attention and action.
Between the beginning of the century and 2008, total government outlays increased by about 18 trillion or $2.24 trillion a year, while the government debt grew by 3.5 trillion, accounting for about 18% of the increased expenditure.
Then, QE entered the picture.
- Between 2008 and 2021, government expenditures soared by a staggering $43 trillion, averaging about $3.6 trillion annually. This figure represents a 50% increase compared to the 2000-07 period. The government debt also saw a significant rise, climbing by $14.1 trillion, accounting for 33% of the increased expenditures.
- In the most recent five years, which included the Pandemic, expenditures rose by $33 trillion or by a rate of $6.6 trillion a year, about triple the rate at the beginning of the century.
- Government debt rose by $2.44 trillion a year and accounted for an astonishing 37% of the increase in government expenditures.
The government wasn’t the only beneficiary of QE. Hedge funds and other money-making tools for the rich also benefitted enormously, vastly increasing inequalities. While precise data is not available, it’s more than possible that over 100% of economic growth since QE came from a lofty percentage of the U.S. public who benefitted from QE, perhaps the worst example of a society ruled solely by materiality.
Before Ukraine, the response to these hard-to-believe numbers would have been a shrug of the shoulders. However, Ukraine has demonstrated potential weakness in sanctions and a dramatic relative weakness in America’s previous military dominance, and foreigners have taken note.
U.S. Treasury Debt: Explained
In 2015, foreigners owned nearly 35% of government debt, amounting to over $6 trillion. By 2024, foreigners had increased their debt purchases to a bit more than $8 trillion—at first, this was good news, but a second look revealed a completely different story. Foreign buying represented a much lower 22% of government debt. But something with much greater consequences occurred. Over 100% of the increase had come from allies led by the Eurozone, Great Britain, and Canada.
China, by contrast, the largest holder of American debt in 2008, sold a substantial amount almost surely to increase its vast holdings of gold, which is estimated to exceed 40,000 tons and continuing to grow at over 2,000 tons a year. What is true about China is true for the bulk of the Global South. Moreover, even the European Central Banks, admittedly at a much lesser rate, have also been gold buyers.
Remember that Europe’s largest economy, Germany, is in shambles, while most other EU economies are also struggling. As a former EU member, Great Britain works nearly as much as Germany.
“The central question emerges: who will buy U.S. debt if foreigners are likely to reduce their purchases and become net sellers dramatically?”
Buyers in the U.S., which range from hedge funds to mutual funds to ordinary citizens,s will only be able to make up the difference if the Fed vastly expands the money supply by buying bonds from banks. But that would result in rising inflation and higher interest rates. Further Fed bond buying would only add to the problem. As the value of foreign bonds declined, their sales would further increase, compounding an already uncontrollable vicious circle with hyperinflation in sight.
Gold Saves The Day
Then, there is gold, and the new BRICS payment system is designed to bypass SWIFT. Technology made in China has been tested and found to be much faster than SWIFT. Moreover, using gold, whose major physical market is in China, as a means of hedging against non-payment by another BRICS country gives many reasons for preferring BRICS Pay over SWIFT.
Gold has been sought after for centuries because it transcends the spiritual and material worlds. However, it is likely part of the reason that in 2023, the Bank of International Settlements (BIS) put gold on a par with the dollar as one of two tiers of one asset, meaning dollar-denominated funds it could hold on bank balance sheets at full value when calculating reserve ratios.
In other words, the view of many that gold was a significant dollar competitor received a stamp of approval by the BIS, and for good measure, it became increasingly desirable because of its tier 1 status. Even our allies, those faltering economies still buying U.S. debt, are also buying gold, making our already vicious circle lead to utter catastrophe for the U.S. It is only a matter of when or not gold becomes the primary reserve held by Central Banks as our bonds fall. Gold holdings grow by the combination of increased purchases and rising prices.
A United States economic meltdown is not an accident waiting to happen. It has already started. Cooperation is extremely urgent.
The coming consequences include a broad range of horrid catastrophes, including hyperinflation, government bankruptcy, and even nuclear war. Those are enough reasons to cooperate with the Greater South. Still, keep in mind that world history describes a multitude of avoidable manufactured disasters. Let’s pray we are not on the road to possibly the greatest ever.
The examples mentioned above are the fundamental reasons for the importance of owning precious metals, especially gold. Check out my latest book, China’s Rise and the New Age of Gold, available on Amazon, Audible & Kindle.
Until next time…
