THE GREAT DEBASEMENT / MACLEOD FINANCE

The great debasement

It was happening anyway, but the attack on Iran has brought forward the collapse of the fiat currency system. The key to watch is bond yields of highly indebted G6 nations.

Alasdair Macleod

Introduction

You can see that despite the propaganda and groupthink at the heart of his cabal, President Trump is now panicking. 

The closure of Hormuz prompts him to put boots on the ground and a plea to America’s allies to add their navies to a protection force in the Straits of Hormuz. 

For whatever reason, Iran’s threats to close Hormuz were not taken seriously by the Trump administration, and now that the rising price of oil threatens western capital markets it is badly rattled.

There’s no doubt that the war is not going to Trump’s plan, if there ever was a credible one. 

But it is not the focus of this article to examine why, other than to observe that far from collapsing Iran is no pushover. 

Therefore, our assumption must be that it is going to get messier, and that the absence of insurance cover for shipping means that Hormuz will be a no-go area for the foreseeable future. 

That being the case, oil prices will continue to rise as the situation escalates, and essential ship bunkers for global logistics will remain locked in the Gulf.

Even food production depends on oil

Additionally, one-third of the world’s nitrogen, the essential feedstock for fertiliser and a further million tonnes of fertiliser will be denied to the northern hemisphere at the start of its growing season. 

Phosphate production will be restricted as 50% of the world’s sulphur is no longer available. 

It’s not just oil prices which matter, but the supply and future prices of all downstream products from the refining process.

There can be no doubt as to what all G7 governments will do over the course of 2026.to counter the consequences of loss of food production. 

They are bound to introduce widespread price controls and subsidies not just for food, but all other items deemed essential to their electorates, which by sustaining demand will simply make the shortages worse.

It will require a covid-like expansion of central bank balance sheets to fund these efforts. 

Currency and commercial bank reserves will be expanded through quantitative easing and government debt increases, covid being the precedent. 

It will be the Great Debasement, and some government bond yields are beginning to reflect this prospect.

Get out of credit and into real money, which is physical gold. 

That’s the way to play the Great Debasement.

Last week, yields on Germany’s bunds, France’s OATS, UK gilts, and Japan’s JGBs challenged new high ground, in the case of France and Germany achieving it. 

The other G7s: the US, Italy, and Canada saw significant increases in their bond yields as well and further rises in the coming weeks are certain to undermine all financial asset values, particularly equities.

The economic and financial consequences of Covid were a bad enough shock to bond markets, but that was just a hors d’oeuvre for what’s to follow. 

The rise in 10-year US treasury note yields from below 1% in 2020 to nearly 5% broke some regional banks. 

A rise from 5% to who-knows-where will have major consequences, particularly for leveraged private equity and the banks which funded it. 

And there is no doubt that the equity bubble sits on the edge of a precipice because valuations relative to bonds are more stretched than ever:

The US government’s response will be certain. 

It will do everything in its power to stop a financial market crisis and economic slump by ramping up monetary inflation. 

The alternative is unthinkable, and politicians have an electoral duty to prevent it. 

The other G7 governments will follow suit. 

Consequently, they will all trash the value of their fiat currencies.

The war against Iran has brought forward the end of the fiat currency system. 

We can now pencil in a process which will likely complete in as little as a year or two. 

Those who criticised the folly of past governments who collapsed the value of their currencies will learn that it is unavoidable. 

It is a process driven by political imperatives, not economic reason.