If you follow macroeconomic trends, and I hope you do, you've no doubt heard countless times the term "debasement trade." This idea, which is essentially new branding for a concept Austrian economists have been highlighting since debasement began in earnest in 1971, encompasses analysis of both fiscal and monetary policy as well as the astronomical surge in precious metal prices.

Keynes gets a bad rap in sound money circles, and deservedly so. But there's another side of Keynes' strategy that has been completely written out of monetary policy. Yes, he advocated for spending into the economy in times of economic recession; that is nothing new to us who observe in our time ever-expanding budgets and a ballooning deficit. But when times were good, when those spending campaigns yielded the intended results, policymakers were supposed to tighten the belt and correct back to balance. It's the latter element that has been ignored.

Congress is ultimately to blame for this constant downsizing of the denominator. No amount of monetary policy (simply put, the Fed controlling interest rates) can sufficiently counteract bad fiscal policy (Congress's spending and tax policy). Put another way, if Congress can't stop spending, it doesn't matter what the Fed does; we will always get an increased money supply. Not only are they not cutting spending, they are not even attempting to cut the rate of spending increase.

This is like needing to go in reverse but accelerating instead. We could even tolerate putting cruise control on and holding steady if we can't start lightly tapping the brake to begin a slowdown. But they have the pedal to the metal and still want more. We must conclude that we will never go in reverse, and we will never maintain our speed. So long as the dollar system prevails, we will not stop accelerating. Of course, there is no such thing as infinite acceleration, so there will be a point where the engine simply stops, but that is another discussion entirely.

For now, so far as we can plan for and adapt to, we need to assume the money supply will continue to increase, that the denominator of measurable goods and assets will continue to shrink relative to the numerator of dollars chasing those goods—be they consumer goods or assets. Things will just keep going up. They kind of have to.

The debasement trade refers to the skyrocketing gold price, and its digital cousin Bitcoin, as investors and central banks alike flock to stability in the wake of a devaluing unit of account. How high gold will go is anyone's guess, as is whether Bitcoin will continue to act as digital gold. But if it offers a chance to preserve value, it's hard to justify not increasing your exposure to such assets. I believe the dollar will continue as the world reserve currency (again, a much longer discussion we've had on our platform before) despite its devaluation. These sound money assets, after all, are appreciating in dollar terms. And reading into Trump's economic policy, as precarious and inconsistent as it can be at times, suggests to me that the primary goal is to ensure the central banks of the world still require an amount of dollars that makes them too difficult to replace. This assumption naturally informs my financial strategy.

Shattered Fundamentals

Here is where we have to practice discernment and try to forget the truisms that guided the last 90 years of investment strategy. What got us to this point will not get us through the next 90 years, given the foundational destruction of economic models happening right now.

Let's remember that the Fed is now in a rate-cutting cycle in the midst of record stock market highs. That is the precise opposite move per the central banking handbook. At a time when prices of both equities and real property (homes) are off the charts, they are putting more money into the economy. This is that acceleration we discussed above.

As we scratch our heads, we must turn to the labor market for a clue as to why they are doing this. What would cause them to forsake one of their two mandates (price stability) in favor of the other (employment)?

Anthony Pompliano offers insight here:

"The labor market is going to have continued weakness, which means the Fed is going to keep bringing the cost of capital lower and lower.

As the Fed cuts rates lower, we should expect asset prices to go higher. Investors and corporations salivate over cheaper capital. They can push further out on the risk curve, they can invest more in R&D, and they can pour more capital into various assets.

In a very simple way, the lower the labor market goes, the higher asset prices are going to go. That is nearly the complete opposite of what has happened in history. Usually a weaker labor market means a recessionary period, which pushes asset prices lower.

But the inputs to a weaker labor market are not structural issues, but rather signs that companies are becoming more productive and efficient, while the US government is becoming less bureaucratic and bloated. Those are both big wins for the private sector.

Weak labor market, all-time high asset prices right now. Welcome to the future."

Go ahead and throw that old playbook right out the window. Jobs are going away, many never to return. The Fed has indicated they will continue to chase that rabbit down the hole, but AI is too powerful a disruption to imagine there is much hope in them staving off its advance with endless monetary policy manipulation. We've covered in the past how the Fed has lost some control over interest rates, and I believe that lack of influence will only increase over time.

Don't miss this: the economy is growing while hiring is slowing. Companies are valuing their growth by revenue per employee, and they are seeing record-breaking revenue even as they reduce their workforce. Another old truism gone—that an expanded workforce yields increased productivity.

What's a Fed to Do?

Next month I plan to do a deep dive into the liquidity of the banking system and why the entire plumbing structure is about ready to break. But as that analysis would make this much too long, we'll point out that the mechanisms which provide liquidity to the market are essentially tapped. The SOFR rate is alarmingly high relative to the EFFR (we'll get into this next month; don't worry if that doesn't make sense), and the magnitude of the economy is so much larger in absolute dollar terms that plays which have worked as recently as the 2019 repo spike are no longer practical.

There really is only one way out for the Fed, and that is permanent QE (quantitative easing). If you recall a recent episode on interest rates with Joe Withrow, we discussed how the Fed had been trimming its balance sheet (QT—quantitative tightening) by letting bonds mature without reinvesting them. This was a step toward sanity, but Treasury Secretary Janet Yellen, in an effort to sell more T-bills at a lower price, drained all the liquidity that had piled up in the system (in the reverse repo system). We now find that pool mostly liquidated, and that pool was essentially the backstop that kept money flowing through banks.

For the Fed to attempt to shrink the balance sheet now, they risk breaking the system entirely. But not shrinking the balance sheet will mean they not only remain as bloated as they are but will require continued bloating. To bring it back to the beginning, this is why they will continue to print and asset prices (alongside CPI) will continue to rise. It truly is a rock and a hard place of their own making.

Take it back to Yellen in 2020, to Bernanke in 2008, or to Jekyll Island in 1913; whoever we feel most deserves the blame certainly won't bear the consequences. The tide is rising whether it's fiscally sound or not (it isn't), and it won't wait for you.

Debasement trade is more than a buzzword. It's the new playbook of the new centrally planned economy. Your job is to wisely steward your capital so you can bear the weight they are trying to put on your children for them. Your future generations will thank you.

Check out our recommended strategy to ensure your boat rises with the tide here.