Fake It Till You Make It…Or Break It

In the US, politicians are in a race against time to negotiate a solution to the debt ceiling crisis and avoid ‘financial and economic chaos’.

One of the solutions that’s been kicking around — once again — is the trillion-dollar platinum coin.

This decade-old idea is based on exploiting a loophole in the system.

You see, the US Treasury can mint platinum coins in any denomination. So the idea is that the treasury would mint a platinum coin worth US$1 trillion and then deposit it, with the Federal Reserve to pay off national debt and solve the crisis.

The coin itself wouldn’t really be made of a trillion dollars’ worth of platinum, instead it would be kind of a token, a ‘symbolic’ deposit to pay off the Fed until they found a solution.

While the idea apparently isn’t too popular with US President Joe Biden and Treasurer Janet Yellen, there’s no telling what will be done to boost confidence. Money has been created out of thin air before…

But money has to come from somewhere.

The value of the money you have comes from the confidence that the government will honour its debts. The agreement that the value of the dollar is what it says it is.

You, yourself, likely spend most of your time during the weekday working to get money in your pocket. There’s work and time behind that money to produce it.

So what happens when there’s money for nothing? When there’s no work involved in generating that dollar? What happens to the value of money?

Does a dollar created from minting a coin or typing a few keystrokes have the same value as a dollar generated from producing things?

My guess is that it doesn’t.

The system is based on confidence…and debt

It’s not just confidence that could shake the system.

The Fed kept touting inflation as ‘transitory’ and made a mistake by waiting too long to raise rates. Now it’s been tightening at a fast pace to catch up, and this is already having an effect on the financial system.

We’ve already seen US banks failing and depositors rushing in to get their cash.

On Monday, the Fed released their quarterly Senior Loan Officer Opinion Survey. In it, they asked bank lending officers about things ranging from changes in lending standards to demand for loans.

As they found, banks are tightening their lending standards for households and businesses.

And increasing their liquidity is a priority, as Quartz reports:

‘Not only are the Fed’s interest rate hikes raising the cost of capital for banks, but the recent spate of regional bank failures—Silicon Valley Bank, Signature Bank, and First Republic Bank—has also rattled public bank stocks and made lenders more skittish as they fret about potential deposit flight. This is the first Fed survey of bank lending to be released since these banks failed.

‘“Although banks of all sizes cited the same reasons for tightening, mid-sized and other banks more frequently cited the bank’s liquidity position,” the Fed wrote in its SLOOS report.’

When things get tough out there, banks can increase liquidity by reducing their lending or stop making loans all together, like we saw with the 2008 financial crisis.

Tighter lending will reverberate throughout the whole economy. It will affect companies and the employment rate. And in a system based on debt, tighter lending could mean game over.

At times like this, focus on real things

That’s why I’m so bullish about precious metals and commodities in general.

Gold has gained around 16% in the last six months against the US dollar and silver is up 20% year on year.

Platinum is also up more than 11% just this month. Not because of talk of a ‘trillion-dollar platinum coin’, but because demand for platinum continues to grow to make electrolysers in the hydrogen economy and supply is looking tight.

My colleague James Cooper has been focusing on one metal in particular, one that’s crucial to the economy but inventories are dwindling. In fact, as he says, there may only be enough supply to meet FOUR DAYS of demand. Keep an eye out for his research tomorrow.

In my mind, having exposure to commodities, and in particular gold and silver, is a no brainer.

All the tensions and talk of war is clearly inflationary.

Central banks will likely take a break on raising rates, and the US dollar will weaken. But I think inflation is going to be much harder to get rid of than people think.

And worldwide, we are seeing clear signs of de-dollarisation. This week, Zimbabwe released digital tokens backed by gold to boost confidence in their currency and give an alternative to the US dollar.

Commodities are raw materials that have use in the economy. You can’t, for instance, just ‘print’ gold out of thin air.

Commodities are real things with value and their supply is constrained to what can be produced.

All the best,

Selva Freigedo,
Editor, Fat Tail Commodities