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The guest commentary below was written by written by Daniel Lacalle. This piece does not necessarily reflect the opinions of Hedgeye. |
Allow me to remind you of a few uncomfortable truths.
Government spending is out of control in developed nations. Furthermore, no interventionist government wants to cut spending or balance the budget. Government spending empowers politicians, and reducing it means losing the grip on the economy.
Interventionist governments aren’t concerned about debts, deficits, or inflation. Inflation is a deliberate policy, and interventionist governments seek to nationalize the economy while imposing total control over productive sectors by issuing continuously devalued currencies.
Government spending is printing money. Politicians are happy to promise more free stuff by endlessly spending because they know they won’t pay for it and that it will make citizens and businesses more dependent and submissive to political power. No government can truly reduce debt without cutting spending.
Inflation is evidence of the loss of solvency for the issuer of money. It is a de facto slow default. Inflation serves as a policy that justifies and perpetuates significant government imbalances, shifting the financial burden onto real wages and deposit savings.
The fallacy of balancing the budget through higher taxes leads to economic stagnation and more debt. High taxes are not a tool to reduce debt but to justify high indebtedness. Tax receipts are cyclical whereas government expenditures are consolidated and annualized.
No interventionist government is going to willingly act to reduce debt and spending because they can always tax more and blame others for their problems. Furthermore, central banks have stopped playing the essential role of curbing fiscal excess to become enablers of rising fiscal imbalances.
Central banks play a crucial role in the fiat world due to the intertwining of monetary and fiscal policy. The system will gradually collapse if central banks do not stop the growth of government fiscal imbalances.
However, the independence of central banks is diminishing daily, and their policies tend to conceal excessive government spending and debt. Meanwhile, governments ignore the fact that they have surpassed the three limits of government debt: economic, fiscal, and inflationary. More government debt means lower growth, more taxes generate weaker receipts, and more government spending perpetuates inflation.
Now that central banks have stopped being the essential limit to government excess, there are only two alternatives: Gold and Bitcoin.
Gold has already overtaken the euro as the second largest asset after the US dollar in global central banks. In a few months, it will be the largest asset. Global central banks have lost confidence in sovereign debt from developed countries as a reserve asset. Thus, developed nations’ long-term bond yields rise above inflation rate expectations.
Bitcoin, on the other hand, has shown investors and citizens that a decentralized currency can gradually become a low-volatility reserve asset, a generalized means of payment, and a unit of measurement. As global citizens see Bitcoin as an increasingly viable alternative to fiat money, more are using it to store value and protect themselves against inflation.
Investors do not trust developed economies to maintain their solvency. Gold and Bitcoin are now playing the role that central banks have abandoned: reminding governments that they cannot spend and print currency forever. Bitcoin may be a teenager and more volatile, but the powerful message to the world is clear: the years of uncontrolled government spending and printing are over.
Obviously, governments do not like this. And central banks that have stopped being as independent as they should be, like the ECB, are looking to eliminate the risk of independent currencies taking away the monopoly of money by issuing a legally imposed central bank digital currency (CBDC). Interestingly, the U.S. administration is doing the opposite, banning CBDCs and embracing crypto as the next monetary revolution.
The ECB is admitting the euro’s enormous loss of utilization in global transactions and panicking by issuing a surveillance tool disguised as money, the CBDC. The US administration wants to cement the dollar’s reserve status by attracting global investment in crypto.
Bitcoin and gold are now playing the essential role that independent central banks should be enforcing. Central banks are unnecessarily dovish and continue to disguise bloated government imbalances. Gold and Bitcoin are essential parts of the answer to the inflationary temptations of governments. The only things that will save us from government excesses are decentralization and independent money.
ABOUT DANIEL LACALLEThis is a Hedgeye guest contributor piece written by Daniel Lacalle and reposted from his website. Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap." Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE. View all posts by Lacalle on his website. Twitter handle: @dlacalle_IA LinkedIn: Daniel Lacalle |