by Shanmuganathan N

On Wars, Interest Rates, Oil Prices, and Gold

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On Wars, Interest Rates, Oil Prices, and Gold On Wars, Interest Rates, Oil Prices, and Gold by Shanmuganathan N March 26, 2026 Indian Liberals, Public Finance, World Economy The last few weeks have been “different” to say the least. Just to list a few obvious ones: The US and Israel made an unprovoked attack on Iran. By the admissions of Trump’s own staff, Iran did not pose any material threat to the US at this point. More importantly, this escalation occurred while negotiations between the US and Iran were ongoing. The Straits of Hormuz have been closed, choking off nearly 20% of the world’s oil supply. In addition, there has been extensive damage inflicted by Israel to the South Pars gas field – the largest gas field in the world, which is jointly operated by Iran and Qatar. Extensive damage to countries that had US military bases, such as Bahrain, Qatar, Kuwait, the UAE, and Saudi Arabia. The invincibility of the US Army’s defence systems has pretty much been laid threadbare by Iran, so much so that even the mainstream media is speculating about the end of the Petrodollar. All these events should have caused gold prices to skyrocket and perhaps even cross $6,000/oz, and yet, what we witnessed, was the exact opposite. Gold plummeted to just above $4,000/oz. Higher oil prices and the much higher-than-anticipated PPI (for Feb 2026, which came in at a monthly 0.7%) were the supposed triggers behind gold’s plunge. That, of course, is an extremely bizarre and almost child-like economic explanation for what happened. The antidotes follow. I. Wars and Higher Gold Prices The prevailing notion that wars cause gold prices to spike is indeed correct. For the wrong reasons, though. It is not for reasons that people buy gold during times of uncertainty, as is almost always parroted. Wars are almost always financed through monetary inflation, and this leads to higher gold prices to account for the increased currency in circulation. The best example of this is the two world wars; here are the facts. The accumulated US National debt between 1789 and 1945, over the 156 years, was about $259 billion. Out of this $259 billion, $243 was incurred during the 10 years of the two world wars. Or nearly 94% of the National debt was accumulated during 10 years, and the remaining $16 billion took 146 years. Wars and monetary inflation are indeed conjoined twins. This was true even under the Fed-managed “Gold Exchange Standard”. What hope is there under a completely fiat system!   The current war with Iran is indeed going to be a very expensive one for the US economy. The Pentagon has requested $200 billion in emergency funding for the Iran war, which has lasted just over six weeks (including the June 2025 conflict), while the ongoing Ukraine war, which has lasted for more than 4 years, has incurred less than $180 billion. The Iran conflict is going to lead to an explosion in the National debt, even by the loose standards that Trump has set for himself. This is not going to be without consequences, and we should not be surprised by double-digit price inflation by mid to late 2026. And hence we will witness substantially higher gold prices later this year. Perhaps even well above $6,000/oz.   II. Oil Prices and Gold: The rationale peddled is that rising oil prices divert money from gold and hence gold and oil prices are inversely correlated. I suppose many of the algo trades happen using the above logic, and hence we have indeed seen this negative correlation over the last couple of weeks. The above hypothesis, notwithstanding its seeming accuracy for the fleeting moment, would indeed be a correct one if and only if the supply of money and debt were held constant. But we do know that both are expanding, and hence the above rationale is faulty. The closest comparison to what is happening today would be the stagflationary 1970’s. The difference is that the decade ahead will be worse, both in terms of the depth of the recession and the extent of price inflation, than the 1970s. During that period, while gold moved from $35 to $850/oz, oil prices (WTI spot) also increased from $3 to nearly $40/barrel. As shown, both moved in unison due to monetary inflation manifesting as price inflation. III. Interest Rates and Gold PricesOf all the misperceptions floating around in the world of finance and economics, this one takes the cake. Here is the rationale peddled almost on a daily basis – high price inflation would imply a higher or, at the very least, static Fed funds rate. This higher interest rate is good for the US dollar and hence bad for gold. Forget Economics. Anybody with access to a phone and basic literacy skills would know that the above is patently incorrect. The above rationale has been valid for only 4 out of the last 55 years. The reason is that what matters is the real interest rate (the yield after adjusting for price inflation), and not nominal interest rate movements. Given current price inflation trends, a PPI of 0.7% in Feb 2026 (before the Iran war, which has nearly doubled crude oil prices) indicates that the US will need a double-digit interest rate just to break even with price inflation. Given the quantum of National debt, the US cannot even afford a 5% interest rate, let alone a double-digit one. Therefore, the US Fed will keep the real Fed funds rate negative for the foreseeable future, implying substantially higher gold prices in the years ahead. Looking Ahead Given below is a summary of what’s likely to happen to interest rates, gold, and oil prices over the next 2 to 3 years. This assumes a continuation of the current trend of annual deficits of $2 to $2.5 trillion and no major new wars. Of course, the bubbles have started to burst, and all indications are that the credit bubble and Housing

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Who Killed the Dollar – Xi Jinping OR Paul Samuelson?

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Who Killed the Dollar – Xi Jinping OR Paul Samuelson? Who Killed the Dollar – Xi Jinping OR Paul Samuelson? by Shanmuganathan N March 19, 2026 Indian Liberals, Public Finance, World Economy “Is Killing” might be more appropriate than “Killed”. But in the larger context of history, how do you refer to something that has lost more than 99% of its value? The US Dollar, as measured against real money, i.e., gold, has indeed lost more than 99% of its purchasing power since 1971. Only in the context of academic circles with non-Austrian Economists or when measured against other fiat currencies would the dollar be considered “strong”. Even against other good currencies, the US Dollar has lost substantial purchasing power since 1971, e.g., more than 80% against the Swiss Franc and more than 50% against the Japanese Yen. In any case, it is only a matter of a few more years before the impending demise of the US Dollar becomes obvious to everybody, and the phrase “Not worth a Continental” becomes almost as applicable to the US Dollar. Let me start with the answer to the title – it is Paul Samuelson, and this should be no surprise to the regular reader of my columns. While I have used names, I am really referring to the Chinese Juggernaut Economy (for Xi Jinping), and Neo-Keynesian Economics (for Paul Samuelson), and the names are really proxies for the institutions/ideas they represent. Most readers may not be aware that Neo-Keynesian economics gained traction only since the 1960’s, when the idea that “a little deficit spending” may smooth out the business cycle. Till such time, balanced budgets were the norm, and in fact, the US Government ran a surplus for a few years during the 1950’s when it paid down the National debt. For example, the US National debt witnessed a modest decline during 1952, 1956, and 1957. For the decade as a whole, between 1950 and 1960, the US National debt witnessed a 11% increase, compared with the nearly 30% increase between 1960 and 1970. Not coincidentally, Paul Samuelson served as an economic advisor to John F. Kennedy (1961-63) when this line of thought germinated in the US administration. The shift from “a little deficit spending is good” to “deficits do not matter” was foreseeable under democratic politics. The Neo-Keynesian economists gave it the necessary intellectual cover, albeit a terribly flawed one. What is the Neo-Keynesian Ideology? This is the most pervasive economic ideology that is taught in most Universities (perhaps more than 99%) across the world. Two other Economic Schools of thought – Marxism and the Chicago School / Monetarists – are either discredited entirely (Marxism), or reluctantly embraced Keynesian Economics (“We are all Keynesians now” – Milton Friedman, 1965). The latter, perhaps, resulted from two factors: a lack of grounding in sound economic principles and the fear of becoming irrelevant in a domain dominated by the state. The one little-heard-of and even less discussed school of thought in the media that has stood its ground against Keynesian economics is the Austrian School of Economics. It is best to define the framework of the Austrian School of Economics before we venture into Neo-Keynesian economics. It is just easier to understand the con when the truth is clear. We will describe both these schools of thought in terms of the four operating tenets of the State: Money, Scope of Government, Role in Economic Growth, and Role in a Recession. Defining Tenets of the Austrian School of Economics Money: Money is a commodity that is chosen by the Free Markets as the Medium of Exchange. Or, in other words, the Gold Standard. There is almost no role for a Central Bank as the quantity of money is decided by the markets. The interest rate is also set by the free markets through the supply and demand for money, as with all other goods and services. Perpetual trade deficits are non-existent as the settlement happens through the actual flow of gold from the deficit countries to the surplus countries. This creates a self-adjusting mechanism in which the outflow of gold reduces the money supply, thereby lowering costs and enhancing competitiveness. Read More …

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A Global Currency Crisis in 2026?

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A Global Currency Crisis in 2026? A Global Currency Crisis in 2026? by Shanmuganathan N December 12, 2025 Indian Liberals, Public Finance, World Economy Let me start with an “AI” summary of the article, since that’s the most likely step for readers. The US Federal Reserve, through its ultra-loose monetary policies, has inflated a series of asset bubbles – AI Bubble, Housing Bubble (HB) 2.0, and the Bond Bubble – and the bursting of these bubbles is very likely to start in 2026. The bursting of the asset bubbles would push the US Economy into an Inflationary Depression that would eventually be called “The Greater Depression”. Price inflation will be higher than the US experience during the stagflationary 1970s (near 15% at its peak), while the contraction in GDP will rival that of “The Great Depression” of 1929 to 1946. Notwithstanding the similarities to the 2008 GFC (Global Financial Crisis) in terms of the underlying causative factors and the response of the US Government/Federal Reserve to the bubbles bursting, the eventual outcomes in terms of the impact on the US Economy as well as the US Dollar would be vastly different. The US Dollar is likely to substantially weaken not only against Gold but also against other currencies. The bubbles referred to above have been in the making for quite a few years now – perhaps even more than a decade. The fact that the bubbles have grown bigger (e.g., HB2.0 as compared to HB1.0 leading up to 2008), newer bubbles (the AI / MAG7) have been inflated, and the stock markets have chugged along steadily without any meaningful correction has only lulled investors into a deep slumber. Perhaps even closer to the stage of coma, as far as the perception of risk is concerned. FDR’s quote, “the only thing to fear is fear itself,” that he made at the very depth of The Great Depression in 1933, might be more applicable to the attitude of the US investor today than at any other point in history. Yet every objective indicator points to bubble valuations across multiple sectors and to the currency on the verge of a precipitous fall, given the prevailing fiscal dominance. What this implies is that US dollar-denominated investments (stocks, bonds, and real estate) are in for a rude awakening in the years ahead, and the Economy itself is headed for a depression that will make the 2008 GFC look like a walk in the park. The Federal Reserve’s De Facto Dual Mandate – The Arsonist and the Fireman. Let us start with the Federal Reserve, the engine of Monetary Inflation, a necessary condition for the formation of asset bubbles. Jim Grant popularized the arsonist-and-fireman analogy, explaining how the Fed ignites bubbles through prolonged artificially low interest rates. When the bubbles eventually meet the pin, the Fed again rushes in with easing – much like the arsonist calling the fire department. We have seen this cycle repeatedly over the last 35 years. The easing cycle during the early 1990s, leading to the NASDAQ/dotcom bubble. Post the Nasdaq burst in March 2000, the Fed again rushed into lowering the interest rates to a then-unprecedented 1% causing the formation of the Housing Bubble 1.0. Post the collapse of the Lehman Brothers in September 2008, the Fed lowered the interest rates to 0% and maintained them around that level for nearly 15 years. Interest rates have never been this low for this long in 4000 years of monetary history. But interest rates are only part of the story in the current easing cycle. A much more potent form of monetary inflation has occurred through an increase in the Fed’s balance sheet via Quantitative Easing (QE), through which the US Fed purchased US Treasuries and Mortgage-Backed Securities. The Fed’s balance sheet, which was less than $1 trillion at the time of the 2008 GFC, would rise more than 6-fold in the subsequent 18 years to more than $6.5 trillion today. The National debt has ballooned during this period as well, i.e., the accumulated US National debt over more than 200 years leading up to 2008 was $10 trillion, while in the subsequent 18 years, the debt has nearly quadrupled to $39 trillion.  If the BBB (Big Beautiful Bill) is indicative, we will witness the National Debt cross $50 trillion before Trump’s second term ends in 2028, even without a significant economic crisis. This combination of reckless fiscal spending, aided by an ever-accommodative monetary policy, has fomented multiple bubbles that dwarf those of the past. All bubbles, eventually, find their pins, and given the enormity of the bubbles today, a tiny prick is all that would be required. The dominoes are lined up. But before proceeding on to the “bubbles”, some questions ought to be asked and answered. We can clearly see the Boom-Bust pattern repeatedly playing out over the last 35 years in the figure above. Surely there must be sound theoretical explanations and ways to prevent these wild swings in economic activity. Why is it that there is a sudden rush to invest in a technology or in a specific asset class amongst a majority of the investing class? The Misesian Theory of the Business Cycle accounts for all of the above questions and more (as explained in the book “The Theory of Money and Credit”). Rothbard’s essay “Economic Depressions: Their Cause and Cure” provides a succinct note of the relevant concepts. Given below is a two-paragraph summary of the Business Cycle Theory. For those not unduly interested in the economic theory, please feel free to skip to the next section. When a central bank artificially sets a low interest rate below the market rate (as determined by the confluence of the supply curve for savings and the demand curve for borrowing), it creates an illusion of greater savings. This ensures that marginal projects are brought online that would otherwise not be funded. However, given that the savings were an illusion, the market demand for the products created by

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Bitcoin’s Achilles’ Heel

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Bitcoin’s Achilles’ Heel Bitcoin’s Achilles’ Heel by Shanmuganathan N December 3, 2025 Indian Economy, Public Finance, World Economy While almost all market participants have an opinion on the value of Bitcoin, or the lack thereof, the most vocal proponents for both sides of the argument have come from the same ideological community of Laissez-faire Economists/Libertarians. To that extent, I will be drawing on the work of Rothbard, Menger, and Greenspan in this article. The objective is not to convert the Comrades or the Keynesians. Perhaps ironically, and to paraphrase Greenspan, “They (comrades/keynesians) seem to sense – perhaps more clearly and subtly than many consistent defenders of laissez-faire – that Bitcoin does not have the required monetary characteristics. And a restraining force on the reckless spending habits of government, it cannot be”. Trump, with his “Big, Beautiful Bill,” would not be embracing Bitcoin if it would. Let me start with the conclusions, and the rest of the article is a praxeological explanation of why it is indeed the case. Bitcoin’s Achilles’ Heel, as I have captioned it, is not the lack of widespread adoption as a monetary medium, as one might expect.  It is the lack of any non-monetary utility whatsoever that disqualifies its usage as a monetary medium. Even if Bitcoin is adopted by a few countries as a medium of exchange, either through legal tender laws or by the willing use of market participants, it would ultimately fail the test of “desirability.” The Origins of Money The society transitioned from a direct exchange (barter) to an indirect one (using a medium of exchange), as it was more efficient from a transactional standpoint. It permitted greater, easier, and granular exchanges as compared to the prevailing barter system. Consequently, the division of labour could be greater when the medium of exchange was more “marketable” as compared to direct exchanges. The entire process did not originate through an overnight discovery, but a gradual transition of members accepting and using the medium of exchange for conducting their transactions. This medium of exchange had to be a highly valued good under the barter system before it became accepted for its monetary value in indirect exchanges. Or, in other words, the monetary property of a commodity was a consequence of widespread non-monetary utility within a community. It couldn’t have been otherwise. Many textbooks would define money as a “medium of exchange” and a “store of value” (i.e., retains purchasing power). However, as readers would realize, a good medium of exchange would also be a store of value. Greenspan summarizes it best in terms of the advantages of moving from a barter system to using money as a mechanism for conducting transactions. Reproducing his quote from Gold and Economic Freedom, “The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.” While all commodities possess varying degrees of acceptability as a monetary medium, it was the non-monetary utility that determined their widespread market acceptance for monetary purposes. Literally hundreds of commodities have been experimented with as a medium of exchange in the free markets, and only three have met the market test across countries and for extended periods of time. This is depicted in the table below. So, why did society start using wheat as a medium of exchange and subsequently transition to iron/copper, and eventually gold/silver? Once again, we turn to Greenspan for a pithy summarization “…the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe, where they were considered a luxury. The term “luxury good” implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.” So not only should the object used as a medium of exchange have widespread non-monetary utility, but it should be a very highly desired commodity as well. The transitions over thousands of years reflect this, as increasing productivity, induced by the specialization of labour, turned what were once luxury items (e.g., wheat, iron, and copper) into basic, everyday goods. Why only Gold / Silver? While societies have experimented with hundreds of commodities, we eventually settled on gold/silver, as they best met the requirements desired of money. The authors mentioned in the beginning (Rothbard, Menger, and Greenspan) have extensively documented the rationale, and a summary table is included below. While desirability (i.e., a luxury good on account of its non-monetary utility) has been expanded earlier, a brief overview of the other four properties is provided below: Durable: An ability to retain its essential property over prolonged periods of time. Gold and Silver, even under the most corrosive conditions (e.g., the ocean floor), retain their essential properties over thousands of years. While proponents have argued that bitcoin is durable (as it is nothing more than an algorithmic token), durability refers to not merely the extended physical/virtual existence but the continued desirability of the object over that time period. Even assuming some non-monetary utility (i.e., desirability) is found for bitcoin in the years ahead, how can we remotely suppose that a better algorithm will not come along that will serve the same purpose better than bitcoin? Divisible: An ability to subdivide into tiny units, with the divided unit retaining its fractional value of the whole. While gold can be divided into units of 0.001 gram with the unit retaining its value by

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Gold’s Price Rise – Three Perspectives

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Gold’s Price Rise – Three Perspectives Gold’s Price Rise – Three Perspectives by Shanmuganathan N November 14, 2025 Indian Liberals, Public Finance, World Economy Gold’s rise over the last couple of years has been meteoric to say the least. While the media has largely overlooked the move, there have been occasional discussions on why the uncertainty surrounding Trump’s tariffs and geopolitics has led to a rise in gold prices. These narratives overlook the massive tectonic shift underneath from an economic perspective. Unless one views the events with knowledge of Austrian Economics, forecasters will likely miss the action that lies ahead. If one were to go by the US Government numbers (propaganda would be a better word – but that’s a discussion for another day), gold’s rise makes no sense – the US GDP growth is hitting nearly 4%, price inflation is on the decline, and US unemployment is near all-time lows. If this were truly the case, gold prices should not have doubled to over $4,000/oz in the last two years. However, let us return to the numbers later. Let me begin with an overview of the three prevailing perspectives on gold: Keynes’s Barbaric Relic, the Neo-Keynesians, and the Austrian Economists. I. KEYNES’S “BARBARIC RELIC” John Maynard Keynes, wrote “The General Theory of Employment, Interest and Money”, in 1936 and referred to gold as a Barbaric Relic in his thesis. In one form or another, Keynesian economics has been widely adopted and built upon over the subsequent decades, far exceeding the wildest dreams Keynes might have had. So much so that it would be (almost) appropriate to say, “We are all Keynesians now” – a quote attributed to Milton Friedman. Keynes suggested, in his work, among other things, the use of fiscal and monetary policy to manage business cycles extensively. From a Monetary policy perspective, the idea was to lower the interest rate during a recession to stimulate business activity and to increase the interest rate when price inflation is too high. How many times would we have heard this simplistic, and in fact naïve explanation, over the last few decades by Central Bankers, Economists, and commentators? From a fiscal perspective, Keynes’s suggestion was to run deficits during a recession and to use the surplus during the good times to pay down the deficits. Needless to add, once an intellectual justification (albeit a flawed one) was provided in favour of deficits, Governments never have the incentives to balance the budgets. For the record, the US Federal Government has not had a single year of budget surplus since 1971 (not an “accounting surplus”, but viewed as a decrease in the National debt).   But what has gold got to do with the above fiscal and monetary stimulus? As Greenspan wrote in Gold and Economic Freedom, “Deficit spending is simply a scheme for the hidden confiscation of wealth. Gold stands in the way of this insidious process”. Suffice it to state at this juncture that Gold limits the deficits as well as the manipulation of interest rates. The total accumulated National Debt of the US government between 1789 and 1971 was less than $400 billion. In contrast, the US has run a higher deficit every quarter for the entirety of this decade so far, with the pace of addition only increasing over time. Gold is an insurmountable barrier to even a very rudimentary implementation of Keynesian ideas of fiscal and monetary stimulus. Classifying it as a barbaric relic was a very self-serving argument for Keynes. However, in some sense, I find a commonality between Keynesians who call gold a barbaric relic and some Austrian economists who refer to Bitcoin as fool’s gold. In much the same way, the former believes gold’s price will crash in the years ahead, I think Bitcoin and other unbacked crypto prices will crash. Perhaps alongside the AI bubble bursting. With one difference in the above commonality, the key distinction between gold and bitcoin is that the latter has no non-monetary utility (i.e., Desirability in the D3C2 table below), a very fundamental requirement of qualifying as money. Barbaric Relic Summary: It would be tempting to term this as “Buffett Blindspot,” especially given the number of his followers who have used his observations on gold to classify it as a useless asset. Buffett’s views are, however, far more nuanced than that. While one doesn’t have to be Buffett to recognize that Gold has far outpaced the DJIA since Aug 1971 (a 115-fold return for gold as compared to a 55-fold return in the DJIA), I suspect nothing short of hyperinflation in the US dollar will eradicate the blind spot of this crowd II. THE NEO-KEYNESIAN ECONOMISTS A nagging piece of evidence against the Barbaric Relic Theory has been the rise in gold prices over the decades. While it could be ignored/dismissed as the proponents of Keynesian Economics do, most Neo-Keynesians find it convenient to attribute non-monetary reasons to explain away surging gold prices.  The reasons for the justification date back to 1968, when the U.S. Senate Committee on Banking and Currency held hearings on legislation to eliminate the gold cover, i.e., the legal requirement that a fractional 25% of the issued Federal Reserve Notes (i.e., the paper U.S. dollar) be backed by gold. Parallel to the Senate hearings, the House also conducted similar hearings, with the Chairman Wright Patman declaring that “the US Dollar is stronger than Gold”. The Treasury members, Federal Reserve officials, and noted Economists (including Milton Friedman) argued in favour of the bill, terming it a pro-dollar move. In reality, it was the final straw in abandoning the Gold Exchange Standard, and Nixon’s closing of the Gold Window in 1971 was a foregone conclusion after the 1968 vote in favour of removing the Gold Cover. The 1971 removal of the Gold-Dollar exchange rate was a historic move whose significance will be recognized in the years ahead. However, at the time, many officials/economists argued that it was the Bretton Woods agreement and the US Dollar that

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Gold @ $4,000/Oz – A Small Step for Gold; A Giant Blow to the Fiat Monetary System

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Gold @ $4,000/Oz – A Small Step for Gold; A Giant Blow to the Fiat Monetary System Gold @ $4,000/Oz – A Small Step for Gold; A Giant Blow to the Fiat Monetary System by Shanmuganathan N October 13, 2025 Indian Liberals, World Economy There has been a relentless rise in gold prices over the last three years. From a bottom of around $1640 in October 2022 to $4000/oz today, Gold has delivered a 35% CAGR over the last three years. Most analysts remain oblivious of the underlying causes and attribute the move in gold prices to economic uncertainty, geopolitics, Fed rate cuts, higher price inflation, Trump’s tariffs, and other secondary factors. However, the Numero Uno factor is the return of Gold to the centre of the world’s monetary system, and these are very early days as part of that transition.  I would not be entirely surprised by an addition of “0” to the current gold price over the next 5 years. The Case for $24,000/oz in the book “RIP USD: 1971-202X …and the Way Forward” The book laid out the base case for gold prices hitting $24,000/oz by the end of the decade based on a return to “some form” of the Gold Standard by the US Fed. The $24,000/oz number was based on a 100% backing for the M0 component of the then (Q1 2024) Money Supply and is shown below. The graph (reproduced from the book) indicates that at twelve times the then price of $2000/oz, the Fed could have backed the base money (or “M0” component of the Money Supply) with its existing gold reserves. What has happened since the book was published in June 2024? The one change is the election of Trump as President of the US, effective January 2025. Unquestionably, Trump inherited a horrendous fiscal situation. However, despite his pre-election promises to balance the budget and pay down the debt, he has only exacerbated the problem. Consequently, it is time to upgrade the targets, and as explained below, $40,000/oz does indeed seem to be a reasonable projection. Funding the National Debt The growth in the National Debt for FY2025, ending September 30, has been $2.1 trillion and this is in line with the trend of the previous 5 years. However, the “Big Beautiful Bill” of Trump is expected to add at least $3 trillion per year to the National debt – a near 50% increase from the recent trends of $2 trillion annualized additions to the debt. FY2025 might well be the last year in which the annual additions to the national debt had a “2” handle. Additionally, approximately $7 trillion of the existing debt is maturing over each of the next three years. The implication is that nearly $30 trillion of US debt will need to be sold over the next three years. What will that do to the Monetary Base? The graph above indicates the external leverage that the US Government was able to get through the US Federal Reserve, financing a portion of the National debt. At its peak, between 1990 and 2007, for every $1 of the Monetary Base, the US Government was able to sell (or more correctly, borrow) up to 12 times in international markets. When the Fed monetizes the deficit, it does so by buying Treasury securities (typically long-dated) by creating new currency, which increases the Monetary base. When there is a massive expansion of the deficits, a significantly large portion of the US National Debt must be financed by the US Federal Reserve, which increases the monetary base. This causes the ratio to decline, as we witnessed during the 2008 GFC as well as during the COVID-19 pandemic. From these lows, the ratio has increased to 6+ as indeed it has today. So, merely retesting the two immediate prior lows (at around 4) of the National debt-to-M0 ratio could send Gold’s target to $40,000 in the QE tsunami that is just ahead. A strong case can be made for why this 4 is a high number, given the bankrupt nature of US finances today, and that we should expect to see much lower levels in the years ahead. Even if the ratio doesn’t drop much below 4, the National debt itself is expected to witness a steep increase in the years ahead, leading to a significantly higher monetary base. But we will leave that argument for another day. $40,000/oz is good for now. Wall Street Portfolio Allocation: A Paradigm Shift from 60/40 to 60/20/20 For decades, Wall Street’s traditional portfolio allocation rule has been 60/40, meaning 60% in stocks and 40% in bonds. Gold has been completely ignored, despite outperforming the DJIA for the past 25 years. The DJIA-Gold ratio has declined from 40+ at the start of the century to less than 12 today. In other words, excluding dividends, the DJIA, when priced in terms of gold rather than the US Dollar, has lost about 70% of its value in the last 25 years. The nominal gains are merely an illusion of monetary inflation! Morgan Stanley recently changed its allocation from 60/40 to 60/20/20, i.e., 60% stocks, 20% in bonds, and 20% in gold. Almost equally interesting is the fact that they have recommended allocating the bond portfolio to shorter-duration income securities, indicating that they expect an increase in long-term interest rates. Finally, Wall Street is waking up from its apathy towards gold and recognizing the reality ahead. Now that Wall Street has recognized gold, does it signal the end of the bull market? Not in the least. Bonds are the quintessential antithesis of gold, and Wall Street recommending equal weightage to both signifies a very queer position indeed. Bonds today, especially long-dated bonds, are still the largest bubble in history, many times the combined size of the current HB2.0 and AI bubbles. The worst part is that any attempt to reinflate the other bubbles after they burst in the form of QE will deflate the bond bubble even more. Or in other

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Interest Rate Cuts – A Sinker to a Plunging Dollar

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Interest Rate Cuts – A Sinker to a Plunging Dollar Interest Rate Cuts – A Sinker to a Plunging Dollar Chandrasekaran Balakrishnan September 26, 2025 Indian Economy, Public Policy, World Economy The US Dollar has been in a rapid decline since 2022, and the series of hikes initiated by Powell has merely stemmed the rate of decline rather than reversing the trend. This pattern has accelerated since Trump assumed office at the start of the year. It is in this context that we should view the 25bps cut effected by Powell with a promise of two more similar cuts to be made in the remainder of this year. Gold prices have more than doubled since January 2022 (from $1,800/oz to $3,700/oz) while DXY has declined by nearly 15% (112 to 97) in the same period. This indicates that the US Dollar is not only losing purchasing power against the market standard of gold, but also against the currencies of its trading partners. In this environment, what a rate cut(s) would do is to accelerate the decline of the Dollar – most certainly against gold but even vis-à-vis other currencies. What the cut signifies to the markets is the greater preference of the US Fed for its employment mandate over price stability (which was, incidentally, the only mandate of the US Fed when it was formed in 1913). As an aside, I should point out that in the book “RIP USD: 1971-202X …and the Way Forward”, it was explained why gold prices will touch $24,000/oz by the end of this decade. So, though the rate cuts pave the way for higher gold prices, these are merely proximate reasons within the larger context of the world reverting to some form of a gold monetary system over the next few years. Do Rate Cuts Always Lead to a Lower Dollar? On the contrary, the converse is true more often than not. Apart from the 4-year period between 2007 and 2011, interest rate movements and gold price changes are positively correlated; that is, when interest rates rise, gold prices tend to increase and vice versa. The reasons are manifold. At the outset, explaining gold prices with a single factor such as interest rates is academically a flawed proposition. We will have to consider at least 3 factors – interest rates, price inflation and Cantillon effects to explain the movements in gold prices. Without delving into a detailed discussion of the factors mentioned above, the prevailing high price inflation rates today lead to a situation where a reduction in interest rates results in increasing gold prices. So, while we are in an environment where gold prices are structurally positioned to go multiples higher from the current levels, the Fed action of cutting interest rates would be the equivalent of throwing gasoline on an inferno. What should the Fed do? Whether Bernanke acknowledges it or not, the US is in a stagflationary economic situation. The growth and employment numbers are below par, while the price inflation numbers are admittedly much higher than their targets. This is despite accepting the government numbers at face value, and we have repeatedly seen the systemic reporting bias in painting a rosier picture than is actually the case. What did the Fed do when it was previously in such a situation, i.e., a stagflation? We will have to go back to the 1970s, and as one can observe in the table above, the Fed hiked rates substantially to 20%. That begs the question – What is different in the environment back then that warranted hiking rates, while under a similar environment today, the Fed is embarking on a path of lower rates? Between the two issues – the stability of the dollar (price inflation or stable prices) and employment, the former must take precedence. There is no historical record of any country achieving prosperity by devaluing its currency. This was precisely the hard choice in the 1970s as well, and the US Fed under Paul Volcker raised interest rates high enough to quell the monetary as well as price inflationary forces and bring stability to the US Dollar. For context, the US annual price inflation has been above 2% since 2020. So why is the exact opposite monetary path being attempted today? The elephant in the room is obviously the $37 trillion National debt that is bankrupting the US Federal Government. Despite previous claims that the US Fed managed the impossible (i.e., raised interest rates without affecting employment), recent trends have exposed the flawed data basis on which the Fed had made the claims. It is only a matter of time before the GDP is also revised downwards in line with the employment data. The Economic Forecast – What does all this indicate? The only question now is “how long and how deep will the stagflation be?” Given the massive imbalances in the US Economy (multi-trillion-dollar budget deficits, trillion-dollar trade deficits, and debt-to-GDP above 125%), we should not be surprised by an economic playbook that is much worse than the 1970s. That is the best-case scenario, and in my opinion, it is not a very high-probability event. The most probable forecast would have to be a high-inflationary depression, with a possibility of hyperinflation depending on how the Fed / Trump choose to respond to the emerging situation. If they continue to prioritize temporary economic stimulus over price stability, then hyperinflation would become a probable scenario. For 2026, we should not be surprised to see gold prices in the $5,000 – $6,000 range. This is assuming none of the asset bubbles burst (the AI bubble, Housing Bubble 2.0, and the US Bond Bubble). It is pretty unlikely that the Fed can postpone the bursting of these asset bubbles, and in that case, we should witness even higher gold prices depending on the size of the QE in store. About the Author: Shanmuganathan N (aka Shan) is an Austrian/Libertarian Economist based in Chennai, India. He is the author of the recently published

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Is the Fed Setting Up Trump to be the Scapegoat?

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Is the Fed Setting Up Trump to be the Scapegoat? Is the Fed Setting Up Trump to be the Scapegoat? by Shanmuganathan N September 4, 2025 Indian Liberals, Public Policy, World Economy In Greek mythology, Scylla and Charybdis are two mythical sea monsters guarding a narrow strait. Navigating the sail successfully would require not getting too close to one monster while trying to avoid the other. The job of the Federal Reserve has often been compared to (mistakenly, though) the above, wherein they have to navigate the economy on its dual mandate of maximum employment and price stability. The Phillips Curve is the most standard model that depicts this supposed inverse relationship between unemployment and price inflation. Neo-Keynesian economics has broadened the interpretation of the Phillips curve from unemployment to include economic growth. So, the narrative is that if the economy is operating below potential in terms of GDP growth rate or employment, then the Federal Reserve would reduce the Fed Funds rate to stimulate the economy. If price inflation exceeds the 2% mandate, the Federal Reserve would raise the Fed Funds rate to dampen the price inflationary forces. But what happens if the growth is below par or unemployment numbers are high, AND concurrently, price inflation numbers are high? Technically, the economic scenario is called “Stagflation”. Just a year back, when Powell was quizzed about the possibilities, he quipped, “I don’t see the stag or the -flation, actually.” A short twelve months later, that is precisely the situation in front of Powell. How do the Keynesians explain “Stagflation”? They don’t; they hope that it doesn’t occur during their tenures. Paul Volcker was the last Fed Chairman who had to handle a similar situation, and even he would not want to step into the shoes of Powell today. The condition is much worse on a logarithmic scale. The solution though remains the same: dramatically hike interest rates. However, it cannot be implemented today, as it would collapse the system due to the substantial debt. But let us step back a bit and examine the entire hypothesis of this employment-price inflation tradeoff. At the outset, followers of Austrian Economics would know that this Phillips Curve and what it represents is almost as mythical as the sea monsters. It is the combination of Cantillon effects and the misrepresentation of price inflation that creates this illusion of trade-offs between employment and price stability. Examining the US price Index from the year 1800 to 1913 reveals a period of continuously falling prices. The price index was down by more than 40% by 1913, as compared to the starting year 1800. By some estimates, this fall in prices was even higher as the product basket was continuously becoming better and not even strictly comparable. Most major innovations we can think of – telephones, automobiles, airplanes, computers, mass production, modern medicine, military hardware, etc – happened during this period. The transition of the US from an erstwhile colony of the British Empire to the dominant superpower also occurred in this period. If falling prices had caused the Great Depression of 1929 to 1946, as is popularly believed, or as the Phillips curve implies, the entire 19th century (1801-1900) should have been an extended depression. Instead, what we actually witnessed was a boom of unparalleled proportions in modern history, except for what has happened in China starting in 1990 to date. How does one reconcile the Phillips Curve, and indeed, Keynesian Economics, with the above? One simply cannot. So, what does all this have to do with today? A note on the current stage, i.e., “The Oncoming Inflationary Bust,” would be in order before proceeding. The US Government has incurred unprecedented debt and liabilities since the 2008 GFC. The National debt is at $37 trillion and growing at $3+ trillion per year, while the unfunded liabilities are an additional $200+ trillion. If the Federal government were to pay its entire income towards servicing this debt (ignoring the interest part), it would take nearly 50 years to extinguish this debt. A sovereign credit rating of anything other than JUNK would be outright disregard for the fundamentals. The only way this debt is going to be resolved would be through a hyperinflationary meltdown of the economy. Barring a Milei-style presidency, that is the most probable outcome.  However, the mainstream media narrative even today is that Trump wants to lower interest rates to achieve even higher growth rates, from already what is the “best performing economy ever”. On the other hand, Powell intends to hold the rates steady to protect the purchasing power of the US Dollar. The economic truth is that both narratives are flawed. Even a 0% rate today cannot prevent a bust of the financial systems that is floating on a sea of asset bubbles – an AI bubble that dwarfs the NASDAQ 2000 bubble; a housing bubble that is far bigger than the 2008 housing bubble; and a US bond bubble that is bigger than these two bubbles combined. The bust at this point is inevitable and imminent – the timeframes would be a few months and not a few years. The current rate of 4.25% to 4.5% is way too low to contain price inflation meaningfully. The National debt is increasing at an even higher pace than before, and monetary inflation is a natural outcome, indicating that the rates are very accommodative. Why Rate Cuts are Imminent Whether Trump is aware of the above is debatable, but unquestionably, Powell understands the deep crisis the US Economy and the US Dollar face in the months ahead. The Fed even telegraphed the oncoming crisis in one of its own publications. For more than 50 months in a row, the core inflation rate – the Fed’s preferred measure – has been above the target 2%. The June 2025 number was 2.82% and under normal conditions, the US Fed would have aggressively hiked the rates. The only reason why they do not do so is “Fiscal Dominance”. What

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Powell Should Gladly Accept Trump’s Firing

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Powell Should Gladly Accept Trump’s Firing Powell Should Gladly Accept Trump’s Firing by Shanmuganathan N July 30, 2025 Indian Economy, World Economy If Powell had any sense for what lies ahead, he would accept Trump’s firing gladly.  Accompanied by the academic protests lamenting the lack of the Fed’s independence, etc, for the record books. If Trump had any sense for what lies ahead, he would allow Powell to remain in the chair and blame him subsequently when the US Housing Bubble 2.0 comes crashing down. Trump can at least have the satisfaction of saying “I told you so”. Why is Trump desperate to get the Fed funds rate down to 1% from the current 4.25 to 4.50% range? Two massive icebergs are on an imminent and direct collision course with the US Economy at this juncture, and these are: Bursting of the US Housing Bubble 2.0 Interest Expense as a % of Federal Income Headed into Uncharted Waters As Trump sees it, the only way to avoid the above issues is to lower the interest rates substantially. Readers should be aware that the current rate, aside from the ZIRP era following the GFC in 2008, is low from a historical perspective. But even these are not sufficient to maintain the bubbles. Trump Challenge 1 – The Housing Bubble 2.0 The peak of the median housing prices in the current cycle occurred in Q4 2022 at $442,600. As of Q1 2025, the median sale price was $416,900. While a 5% drop is not a significant correction, two factors do not bode well for a meaningful recovery: that this drop has occurred over 30 months, and the persistent high mortgage rates are keeping affordability at an all-time low for US consumers.    The previous 30-month period’s drop in housing prices occurred from Q4 2017 to Q2 2020 (a period during which the Fed funds rate increased from 1% to 2.5%), after which the COVID-19 stimulus and a return to ZIRP reversed the declining trend in housing prices. Trump wants to orchestrate a similar move now – reduce interest rates and inject massive fiscal stimulus through the Big Beautiful Bill. The only other period in which we have witnessed an extended drop in housing prices this century was during the 2008 housing bubble. Between Q1 2007 and Q1 2009, housing prices declined by more than 20%. Only a combination of ZIRP and QE – both unprecedented monetary measures – halted this decline. So as far as Trump’s eye can see, the solution to the problem of a housing crisis is a combination of ultra-low interest rates and expansion of the Fed balance sheet. The fact that, on the two occasions this was done – done after 2008 GFC and during Covid-19 – there were no deleterious consequences to talk about – would probably make Trump conclude that this extraordinary monetary stimulus can be done today as well. But why can’t the housing process recover without the above measures? The housing price increases have far outpaced the growth in median incomes. The Atlanta Fed’s Home Ownership Affordability Index (HOAI) – a composite index that takes into account housing prices, principal and interest payments, as well as taxes and insurance – is at an all-time low. This index is even below the levels that led to the bursting of the housing bubble in 2008. A level of 100 indicates that housing prices are affordable to buyers, given the current mortgage rates. The current score as of Apr 2025 is 65 – well below what makes the median house affordable to the median buyer. There are only two acceptable ways to increase affordability – either increase median wages or reduce interest rates. As Trump sees, all roads seem to lead to lower interest rates. There is, of course, a third way (an unacceptable one, though) to increase affordability – a dramatic decline in housing prices. Given that a housing bust will be accompanied by a decrease in employment, wages, and taxes, housing price declines must rival the effects of the above to lead to an increase in the Affordability Index. A drop of at least 30% would be required to bring the index into the affordable category. A 20% decline caused the 2008 crisis, and that too, from much lower levels of housing prices. Once again, it is easy to see why Trump is arguing vehemently in favour of substantially lower rates to stimulate the housing market. Trump Challenge 2 – Interest Expense as a % of Federal Income If the housing bubble bursting is an imminent danger in the months ahead, the Interest expense of the federal government is a current millstone around Trump’s neck. From less than 20% during Q1 2022, the interest expense as a % of Federal revenues has increased to 35% during Q1 2025. Readers might recall that the Fed hiked rates from nearly 0% during March 2022 to nearly 5.5% by July 2023. The US National debt has also increased from $30 trillion in Q1 2022 to more than $37 trillion today. A legitimate question would be whether this is not the first time we have crossed 30%, as there were two earlier periods: the 1980s decade, when this averaged more than 40%, and the years immediately prior to the 2008 GFC. 1980s was a period in which the debt-to-GDP was less than 40% – less than one-third the current debt-to-GDP ratio of 125%. The interest expense was high primarily because the Fed funds rate was in the double digits. As these rates declined, despite the debt growing faster than the GDP throughout the 1980s, the government was quite able to manage the interest obligations without threatening to take over the Fed’s primary role. Today, we are in a situation that the Fed would prefer to call “Fiscal Dominance,” i.e., the rates must necessarily be held low due to excessive government debt. Regarding the years preceding the GFC in 2008, the debt-to-GDP ratio was still less than 60%, allowing

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Moody’s Meaningless Downgrade of USA

Leave a Comment / Democracy and Institutions, Public Policy, World Economy /

Moody’s Meaningless Downgrade of USA Moody’s Meaningless Downgrade of USA by Shanmuganathan N June 5, 2025 Democracy and Institutions, Public Policy, World Economy Moody’s downgraded the US Government’s credit rating on May 16th from AAA to AA1, citing the uncontrolled increase in government debt over the years. Moody’s also forecasted the debt-to-GDP to rise to 134% (98% in 2024) and the annual deficits to widen to 9% (from 6.4% in 2024) by 2035 as the rationale for the downgrades. The specific numbers are not very important at this stage, and in any case, Moody’s estimates are massive underestimates even from a 2030 perspective, let alone 2035. But more importantly, the agencies are missing the “Forest For The Trees” in their analysis. If one understands the actual state of US Government finances, anything more than a JUNK rating would be an overvaluation. The only significance of the recent downgrade is that this is the first time in more than 100 years that all the major rating agencies have downgraded the top-tier credit status the US Government had hitherto enjoyed. Before the numbers, readers must understand the unique position of the US Government. It is the ONLY government in the world where the external debt can be denominated in the currency it can create out of thin air. No other government has this privilege. That said, this was essentially an “earned” privilege due to the record budget and trade surplus that the US was running under the Gold Standard for more than a century and a half before the formal Bretton Woods agreement in 1944. The US Dollar also maintained its purchasing power over the period: viewed in terms of gold prices, the US Dollar had declined in value from 1/20th an ounce of gold during 1800 to 1/35th an ounce of gold by 1971. That is about a 75% decline in purchasing power over 180 years – almost a steady-state condition in the context of what has happened after 1971. Now for some numbers used by Moody’s: The number almost always used in the context of debt is the National Debt and that is nearing $37 trillion. The US GDP in 2024 was about $29 trillion and so the debt-to-GDP is already at 127%. It is unclear why Moody’s is reporting a lower debt-to-GDP at 98%, but this is probably because of excluding specific categories of debt. It could also be the case that they are using nominal GDP and not real GDP. But as I said in the beginning the specific numbers are not relevant in the context of the US. Let us assume the debt-to-GDP is 200%. Will the US Government default under those conditions? Not in the traditional sense of the word “default” i.e. non-repayment of the US Dollars owed. The US government can always print; even if the debt-to-GDP is 1000%, it does not need to default. Greenspan summarized this best when he said “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default” So, the debt-to-GDP condition reaching 134% or even 200% does not imply a default as it would for almost any other country. Now comes the critical question – if the probability of default by the US Government is ZERO under any debt condition, and it indeed appears to be the case, as Greenspan stated, then what are these rating agencies even measuring? – It is the default mechanism available to governments in general and, more specifically, to the government that owns the world’s reserve currency, “Default Through Monetary Inflation (DMI).” DMI is a mechanism in which lenders lose not the absolute amount of the currency they lent but the vastly decreased purchasing power of the currency they receive from the borrower. For example, if the borrower had been promised $100 at the end of 5 years during a time of stable prices (i.e., price inflation is zero or close to it) and if the government ran an annualized price inflation of 20% over the subsequent 5 years, then the lender would have lost almost 60% in terms of today’s purchasing power of the currency. The readers need to understand that the mechanism of DMI is an option specifically available only to governments and not to private borrowers. In practical terms, receiving the promised quantum currency that has lost 60% of its purchasing power is the equivalent of taking a 60% hair-cut on the debt with the currency retaining its purchasing power. The latter is indeed an honest default and a preferable option. Therefore, the PRIMARY RISK rating agencies have to measure the US Government against is DMI, not the normal default mechanism that they do for other countries/companies. From the perspective of DMI, the probability of losing substantive purchasing power of US Dollars over the next few years is 100%—maybe even near 100% of the purchasing power, i.e., hyperinflation, and that is increasingly looking like a probable scenario. The Numbers – Deep Dive Though Moody’s focussed on debt-to-GDP as well as deficit %, the latter is not a very meaningful indicator and can display wide fluctuations on an annual basis. The debt-to-GDP on the other hand, is a summary of the historical deficits to date and hence reflects the pattern of US Government spending over decades. Think of debt-to-GDP as the Balance Sheet and the deficit % as the Profit and Loss statement – it will be clear why we should focus on the former from a rating perspective. As one can observe, debt-to-GDP has been on an upward trajectory since 2000, and it has gone up from 55% to over 120% today. This has happened in the context of what is seen as spectacular prosperity – booming stock markets (Dow has gone from 11,000 to 42,000 in the last 25 years) and relatively stable prices (CRB Index has gone from 150 to 360 for a CAGR of 3.5%). This 120+% continues to increase as the annual

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