All Roads Point to Greater Monetary InflationThis morning a question about gold... and our preparation for a busy
Executive Summary
Good morning: A reader sent over a sharp question last night that I think frames today’s discussion topic perfectly. They pointed me to two pieces. The first was a 2024 piece by Michael Howell at CrossBorder Capital. The second was Paul Wong’s recent Sprott report on the “debasement trade.” Both analysts argue that gold and crypto serve as monetary inflation hedges. Not CPI hedges, mind you. Monetary inflation hedges… which are an important distinction. These are assets that rise with global liquidity expansion, tracking the growth in money supply rather than the price of eggs at the grocery store. The reader’s question: if a rising liquidity tide lifts all boats, doesn’t a receding tide sink them all? If gold, Bitcoin, collectibles, and equities all correlate to liquidity expansion, are precious metals really a safe harbor? Or are they just another piece of the “everything bubble” waiting to pop? It’s the right question to ask. I don’t think either Howell or Wong fully addressed it in their pieces. At least not directly. Let me offer some additional insight here... Michael Howell’s data shows gold and crypto track global liquidity with a measurable lag. Using Granger causality testing, he found that Bitcoin responds to liquidity shifts within about five weeks. Gold takes longer, around 36 weeks. So yes, when liquidity contracts sharply, correlations spike toward ONE, and everything sells together. The margin calls don’t discriminate. We saw this play out in March 2020 when gold dropped 30% alongside equities. We saw it again in August 2024 during the yen carry trade unwind. And we saw it this spring during the tariff panic. In those moments, “hard assets” feel anything but safe. But here’s what Howell, Wong, and I have all concluded, each in our own way… The tide can’t recede for long. The system won’t allow it. Howell frames this around refinancing risk. He notes that roughly $60-70 trillion of the world’s $340 trillion debt stock needs to be rolled over every single year. That’s not a policy choice. It’s a requirement. When liquidity tightens enough to threaten that refinancing cycle, you don’t get a slow deflation. You get a crisis. You get 2008, the 2011 ECB event… the 2015 China refinancing crisis… Volmageddon (2018), COVID, the GILT Crisis (2022), the SVB banking crisis (2023), and on and on… Crises get met with emergency liquidity facilities, balance sheet expansion, forward guidance tweaks, and whatever else it takes to keep the wheels turning. Wong comes to the same conclusion from a different angle. He refers to the reality of “fiscal dominance.” That’s the regime where government borrowing needs take priority over monetary policy goals. Deficits now drive monetary policy, not the other way around. Central banks have effectively become financing arms of their treasuries, whether they admit it or not. The Fed can talk tough about inflation targets, but when push comes to shove, they’ll accommodate the deficit. If you really want to understand how all of this comes into orbit, read my piece from August - How I Learned to Start Worrying And Hate The Bond Market Bomb. It explains how central banks aren’t independent anymore, not only from their own governments… but also from other central banks in other nations. They have to maintain that fiscal dominance. The alternative is a sovereign debt crisis in the reserve currency. So, both authors point to the same exit… inflate it away. Now, let me note something on Wong’s piece. The framing of gold corrections as “overbought pullbacks” or “normal market cycles” is technically accurate but undersells how violent they feel in real-time. A 20% to 30% drawdown in your “safe haven” asset while everything else is also falling doesn’t feel like a normal cycle. It feels like the thesis is broken. But here’s the data point that matters: Wong notes that central banks have been steady net buyers of gold since 2013. On a cumulative basis, they’ve purchased 264 million ounces compared to just 15 million ounces accumulated by gold ETFs over the same period. Only one quarter in that entire span saw net central bank selling. That was Q3 2020, and it was a barely recognizeable 340,000 ounces. This buying regime creates, as Wong calls it, a “central bank gold put.” It’s not a guarantee against drawdowns, but it’s a structural floor. When gold sells off, there’s a large, price-insensitive buyer waiting on the other side. That limits sustained downside and accelerates the recovery. So how do you think about precious metals in the context of the “everything bubble”? I’d reframe the question entirely. You’re not hiding from volatility. You’re not avoiding drawdowns. If you’re in hard assets expecting them to go up in a straight line while everything else crashes, you’ve misunderstood the trade. What you’re actually doing is betting on how this resolves. And there are really only three ways out of a debt spiral of this magnitude… One: Fiscal consolidation. That means austerity, spending cuts, and tax increases. It’s politically impossible in the current environment. There’s no constituency for it. It likely won’t happen as it failed miserably in 2011 in Europe. Two: Outright default. That’s unthinkable for the reserve currency issuer. The entire global financial system is built on the assumption that Treasuries are risk-free (though they’re not). You can’t default your way out without blowing up the whole architecture. Three: Inflate it away. Monetize the debt. Keep real rates negative. Let nominal GDP growth outpace the debt burden over time. This is the path of least resistance. It’s what we did after World War II. It’s what every overleveraged sovereign eventually does. We’re at that point right now. (Note: There is a fourth… but I don’t want to ruin your breakfast.) Both Howell and Wong agree: door number three is where this is heading. A professor at Purdue told me the endgame was to inflate it away back in 2012. Almost by accident. We were discussing Keynesian frameworks, and he made an offhand comment about how all roads eventually lead to monetization. He didn’t frame it as a critique. He framed it as an observation about how the system actually works, rather than how textbooks describe it. That conversation cracked something open for me. Eventually, you get what Wong is describing… Pure fiscal dominance, persistent debasement, and a structural bid for anything that can’t be printed. So to answer the reader’s question directly… Yes, precious metals will fall during acute liquidity stress. Yes, correlations will spike. Yes, it will feel like the thesis is broken. But if the policy response is structurally predetermined, and it is, the post-crisis trajectory remains higher. You’re not buying gold to avoid the storm. You’re buying it because you know what comes after. All roads lead to door number three. But… before I get to the morning report, there’s a deeper question buried in all of this. If Bitcoin and gold are simply tracking liquidity, what does that say about their role in the system? Are they really alternatives to fiat? Or are they something else entirely? I’ll have more on that at 11 a.m. today at Me and the Money Printer. The title alone might ruffle some feathers. Let’s get to our market commentary… Continue reading this post for free in the Substack app
|
All Roads Point to Greater Monetary Inflation
By -
December 15, 2025
0
Post a Comment
0Comments