Cudmore points out that a significant change this year is that the market has stopped discussing modern monetary theory, which has been widely put into practice this year. As the size of US debt continues to expand, it is expected that the United States will implement the modern monetary theory to the end, because the United States can use this to drive up inflation and dilute debt.
Cudmore said that in this case, negative real interest rates in the US would become the norm, so investors would have to look for a store of value. At present, gold and bitcoin are the two most typical means recognized by the market. As the Federal Reserve will inject a lot of liquidity into the financial system in the future, and the real interest rate will further turn negative, the bull market of gold and bitcoin is just beginning, and the price is to sacrifice the value of the dollar.
According to Cudmore, there have been some changes in the market this year. After years of heated debate, the once absurd concept of modern monetary theory (MMT) is being quietly adopted with little protest. This means a new market paradigm, ending the default state of positive real yield in the United States.
u2460 Debt default
u2461 Diluting debt through inflation
u2462 Implement enough austerity measures to slow down debt repayment.
Given that the US controls the dollar printing machine, default on debt is politically impracticable and unnecessary. The United States may occasionally implement austerity measures to pay off its debts in the coming decades, but this is also politically unsustainable in the next few years, especially when both parties in the United States show a willingness to significantly increase borrowing.
So diluting debt through inflation seems to be the only option, which is compatible with modern monetary theory, which has been assumed by many investors after the 2008 financial crisis. The difference now is that recent action has made further debate meaningless, as modern monetary theory is being further applied to practical policy. But investors have not fully realized that the market consequence is that the default state of real yield in the United States will be negative or even collapse before the financial system is completely reformed.
Cryptocurrency and precious metals are still preferred non negative income assets as the global number of negative income debt rises.
The biggest harm of negative real interest rate is that it will erode the value of fiat money, but not as fast as many people are eager to come to a conclusion. This is an effective tail risk (which has not been precisely identified but is actually there), but it is not the base case, because there are so many structural anti inflation forces, and policymakers have many means to manage the process. More likely, the devaluation of fiat money will occur gradually over the years, which means that the value reserve will remain at a premium.
So the market is looking for an asset that can be used as a store of value.
For most of its history, gold has maintained a premium far beyond any practical use. Even if doomsday forecasters have classified gold as one of the reserves, even if they have not considered the logistics and practicality of gold bars, this seemingly unreasonable idea has given gold a special status as a means of value storage.
Bitcoin has produced similar values. As a viable trading currency, it has a poor structure and no intrinsic value, which makes many people doubt its long-term prospects. However, with the help of network effects, and even with the official confirmation of institutions such as the Commodity Futures Trading Commission (CFTC), which also regards gold as a tradable commodity, cryptocurrency has reached a critical value enough to be regarded as digital gold, thus becoming a popular value store in the next few years.
Although it is not ruled out that there will be a short-term deflationary shock in the financial system that will lead to large-scale adjustment of gold, bitcoin and their substitutes. But we need to know now, and most importantly, that the ultimate policy response will be to inject enough money into the financial system until the real rate of return is negative again, which will only strengthen the long-term potential demand for those perceived as value reserves, but at the expense of the value of fiat money. Source: huitong.com editor in charge: Yang Bin_ NF4368
Although it is not ruled out that there will be a short-term deflationary shock in the financial system that will lead to large-scale adjustment of gold, bitcoin and their substitutes. But we need to know now, and most importantly, that the ultimate policy response will be to inject enough money into the financial system until the real rate of return is negative again, which will only strengthen the long-term potential demand for those perceived as value reserves, but at the expense of the value of fiat money.