Global Debt Key to Dollar and Gold Fortunes

Featuring Brent Johnson

Longtime Real Vision TV commentator Brent Johnson, from Santiago Capital reflects on the year’s price action in gold and outlines the interesting dynamic going on with the dollar, based on his expectations for strength in both assets. Examining the scale of dollar denominated global debt and the ability of central banks to keep plugging the hole, Brent runs through various scenarios to spell out his thesis.

Published on
9 December, 2016
Topic
Gold, US Dollar
Duration
22 minutes
Asset class
Commodities, Currencies
Rating
49

Comments

  • DY

    Dmytro Y.

    11 4 2017 06:08

    2       0

    Very good interview! Can we have more interviews with this gentleman?

  • GS

    Gordon S.

    16 12 2016 21:00

    2       0

    Amazing interview! Perfect summary of the current financial world in 20 minutes. Wow.

  • BJ

    Brent J.

    15 12 2016 00:15

    3       0

    Joeri - Happy to discuss and to learn. Part of reason we haven't had inflation is lack of demand (as you point out). I did a presentation called "Say it Aint So" a few years ago (available on RVTV) talking about Says law and how production equals demand. I also beleive Negative rates are deflationary. so we need opposite of that. Once rates start rising (even though they can't normalize) this "may" increase velocity of money if people start to borrow (demand for credit) before rates "rise again". I think we have a very small shallow window where this could happen. It will eventually lead to dollar that is way to strong and send us back to recession. but in meantime animal spirits and inflationary pressures might run. In any cases...this very difficult to do in comments section. feel free to contact me at brent@santiagocapital.com if want to discuss further. happy to do so. Thanks again!

  • BJ

    Brent J.

    15 12 2016 00:08

    1       0

    Coxey - I think in general that the banks ownership in the Fed is inconsequential regarding dividends paid as well as exposure to the CB Balance sheet. I think they would be happy to have the Fed forgive the debt if it meant Debt to GDP would drop dramatically and give them breathing room to relever the economy again.

  • ST

    Simon T.

    14 12 2016 18:49

    1       0

    Brilliant, sharp, clear

  • jm

    joeri m.

    13 12 2016 22:07

    0       0

    Brent J. - I would like to discuss this further with you. So we agree that the potential supply of money is the same with or without QE since central banks supply the market with reserves when needed and banks only look for reserves after they created the money. So if you think there will be inflation, the question becomes, who is going to take out the money, where is the demand? My view is that because private debt is so high, there is no big demand. This is the same view as Steve Keen and Richard Koo. Without demand, there will be no increase in the money supply. Without helicopter money, I see no risk of inflation. What are your thoughts?

  • AC

    Andrew C.

    13 12 2016 06:32

    1       1

    @Brent; Will or even can, the FED cancel the government debt or part thereof if the FED is part-owned by several private banks? I cannot see how these private banks would accept this debt write-off.

  • AC

    Andrew C.

    13 12 2016 06:32

    1       0

    @Brent; Will or even can, the FED cancel the government debt or part thereof if the FED is part-owned by several private banks? I cannot see how these private banks would accept this debt write-off.

  • AC

    Andrew C.

    13 12 2016 06:31

    0       0

    @Brent; Will or even can, the FED cancel the government debt or part thereof if the FED is part-owned by several private banks? I cannot see how these private banks would accept this debt write-off.

  • VS

    Victor S.

    12 12 2016 15:47

    2       0

    Good comments -but you did not mention EU break-up from the 2017 elections.. if Marine le Pen and or several others anti-EU people wins the EU is gone gold goes to the moon.

  • IH

    Iain H.

    12 12 2016 07:27

    1       1

    You make some good points Brent, your point regard the cost of debt outstanding has to have an impact on economic activity. My concern is that the Fed and the rest of the worlds central banks will make sure gold does not leap up in price for fear of a total break done in fiat currency confidence. whats your view on gold manipulation by Central Banks?

  • BJ

    Brent J.

    12 12 2016 03:42

    5       0

    Robert - Thanks for your comment. GDP is a very flawed number to begin with but I think it does approximate the value of $ based transactions in the US economy each year. And the point I'm trying to make is that if the flow of money is not high enough to satisfy all the $ based interest payments, the entire system goes into default. @ 2.5% GDP growth, the $ value of new (growth) transactions would be about $400B. So that means all the new growth is going to pay interest and not going to actual new productive programs.
    But there are other ways for dollars to flow in the world. When we import goods our dollars flow overseas. So that is a source of funds to pay the interest. Also, when transactions take place in eurodollar market (Saudi Arabia sells oil to Brazil priced in dollars) that is a source of funds for dollar interest payments. The point I am trying to make though is that there is a very high demand for dollars in the world JUST TO PAY THE INTEREST on dollar based debt coming from National Debt, Money Supply and Int'l dollar based loans. Those interest payments alone put a pretty strong bid under the dollar. Hope that helps answer your question and apologies if my explanation is still not clear.

  • BJ

    Brent J.

    12 12 2016 03:33

    3       0

    Thomas - I agree with you on Japan. This was actually discussed at the Milken Conference this year. Also, regarding my math, you are correct. I was being overly generalist and conservative in some of my numbers in order to keep the math simple for an interview without charts/graphs/etc.
    National Debt - Fed owned treasuries is closer to $16-$17T not the 10T I mentioned. So those interest payments are in the $300-$400B range. For $ loaned into existence I again tried to simply it. I took total US Banking assets (see link below) and then subtracted Monetary Base. This could be off a bit but I think it comes pretty close and still makes my point valid.
    https://fred.stlouisfed.org/series/TLAACBW027SBOG
    I also gave the benefit of the doubt saying these loans as well as international $ denominated loans were done at the risk free rate of 2.3%. which is obviously not the case. So while my numbers were off, I think they were off to the downside (and so the problem is actually worse. In actuality I think that global $ based interest payment are at least $1T annually and probably higher than that.
    All this said I am always happy to learn so I'm open to the conversation if you (or anyone) wants to discuss further or point out where I've made a mistake (as I'm certainly not immune to making them).
    Thanks again for the comment.

  • TR

    Thomas R.

    11 12 2016 22:24

    2       0

    Brent - thanks for chiming in with some responses below – especially your comment that “The future move will be when the Fed just forgives the debt entirely and tells the Treasury they don't need to make further interest or principal repayments” I personally feel the Bank of Japan will lead the way in that course of action. They are certainly set up to do so.
    Liked your overall assessments but was really challenged by some of the numbers you threw out as being inaccurate. At approximately 13:55 of your presentation you suggested the Fed owns half the 19T in US Debt. You said 9T or 10T. As of Dec 7th, the Fed’s balance sheet is 4.49T of which 2.46T is US Treasuries and 1.74T is Mortgage Backed Securities. The balance off 0.29T is made up of various other assets. So the 2.46T of Treasury obligations is just over 12% of the US Debt not half.
    At approximately 13:40 you state that “...All the dollars in the world is $16T.” M2 is pressing $13T, so my question is are you referring to M3? – because the actual circulation of just currency is about 1.5T. When you go onto say that $12T is loaned into existence, with the monetary base at $4T, and using your figure of $16T – I’m guessing the statement that $12T is loaned into existence is simply a function of total M3 less the Monetary base. You numbers get really sketchy from there. Having said all that – your assessments and summations are all still very valid.
    I thought both your points on the Saudi’s and then Central Bank divergence were excellent.

  • RM

    Roberto M.

    11 12 2016 18:48

    0       0

    He was right on Trump! Touched on a lot of things and good overview of some of the themes but am having an issue with the argument:

    He says:
    1) 600bn of demand for interest payments on all the dollar debt due to global dollar debt - OK FINE
    2) GDP growth on 17 trillion economy is 2-2.5% which is 400bn of money circulating; that's the gross GDP; quickly getting to GDP is just enough to cover interest payments in the world (HUH? DON'T KNOW ABOUT GDP GROWTH BEING THE "DOLLARS CIRCULATING")

    If someone can explain this to me appreciate it!

  • AP

    Alfonso P.

    11 12 2016 14:30

    1       0

    excellent presentation, on the US debt would be interesting to have a follow up with slides, remember Grant's Crazy on debt

  • CB

    Cliff B.

    11 12 2016 11:39

    0       0

    Good update

  • AC

    Andrew C.

    11 12 2016 06:15

    0       0

    @Brent

  • BJ

    Brent J.

    11 12 2016 00:34

    1       0

    Mark - Thanks for your nice compliment. transcripts are available by clicking the button on the home screen at the very beginning of the interview

  • BJ

    Brent J.

    11 12 2016 00:30

    5       0

    Florian - The US Treasury is responsible for paying the interest on the national debt. This should come from tax receipts. But tax receipts are not big enough so we also borrow new money (from new treasury bonds) to make up the shortfall. The trick comes in when the Fed buys the bonds. Once the Fed buys the bonds, then Treasury pays interest to the Fed. But the fed just rebates this interest back to the treasury, so that essentially negates the debt service of the bonds owned by the Fed. The future move will be when the Fed just forgives the debt entirely and tells the Treasury they don't need to make further interest or principal repayment...

  • BJ

    Brent J.

    11 12 2016 00:23

    11       0

    JOERI - thanks for your comment. You are correct that reserves cannot be lent out. But that is also somewhat of a play on words. Bc while reserves cannot be lent out, they can be used as collateral to loan 10X their balance into existence. So reserves themselves are not inflationary, as I point out, that is why inflation hasn't taken off. But if/when the banks start making new loans using the reserves as collateral, and the velocity of money picks up, you will see inflation. The reserves are the not the fire, but they are the kindling that allows the fire to grow. Happy to discuss further if you like.

  • jm

    joeri m.

    11 12 2016 00:10

    1       2

    It is impossible for the banks to lend out their reserves, so worrying about them being potentially inflationary in the future is incorrect (lending them out multiple times as you say). It is a bit troubling to me that you know that much about the monetary system, gold,... but can't get the simple details about money and central banking right. I am not trying to be irrespecutful, I respect you but it is troubling that you still think the banks can lend out their reserves. Cullen Roche talked about this being impossible on RealVision already. RealVision should invite prof Richard Werner of prof Perry Mehring to talk about how money, interbank reserves and central banks work. They are both real experts on the subject. I also know Steve Keen and Michael Hudson know that banks can't lend out reserves, they both did an interview on RealVision but I don't know if they talked about this specifically.

  • CH

    Calvin H.

    10 12 2016 23:31

    3       0

    My kinda a guy, but a few more details please. ie. what is 'pain', is it just stock market plunges? What is it going to take, so we can watch out for them.

  • ca

    cyavash a.

    10 12 2016 21:52

    0       0

    just google fed credibility...it's always been under attack and hasn't seemed to matter yet. Perhaps there's a critical mass that needs to be reached, idk.

  • MM

    Mark M.

    10 12 2016 18:43

    2       3

    Best interview yet, is a transcript available?

  • SK

    Stefan K.

    10 12 2016 18:14

    7       0

    The real interest rate's relationship with gold is the most important. When real rates (inflation adjusted interest rate) are trending negative, gold rises. This was the case from January 2016 until July 2016. Since then, real rates have been trending upwards: The UST10 year is up 100bps, gold got hammered. So, will real rates continue to go up, or down? My bet is on down, which is called financial repression (watch the Russell Napier video).

  • g

    george .

    10 12 2016 17:57

    5       0

    i am in the strong dollar and strong gold, only silver not gold, camp also. i want to hold both at least for the time being. you said the correct word, QUALITY. BONDS have declined, stocks are in euphoric unproven stage.

  • RR

    Ronin R.

    10 12 2016 15:08

    2       9

    Lots of "I think" and "maybe" nothing actionable from this video. Would like to hear from traders actually making directional bets on gold that can give precise directional views.

  • JM

    James M.

    10 12 2016 04:59

    29       1

    Good interview but seems old - its frustrating that RV have removed the "filmed date" as this was an important piece of info.

  • JW

    Jason W.

    10 12 2016 01:25

    1       1

    AIIB, CNY would replace USD.

  • KA

    Kevin A.

    10 12 2016 00:29

    1       0

    Anyone else think that Jan 2015 to Jan 2017 gold chart looks a lot like the 2008 to 2017 USD/JPY chart?

  • FB

    Florian B.

    9 12 2016 22:59

    0       0

    When he says x amount interest to pay on national debt, what exactly does he mean? who pays who?

  • LA

    Linda A.

    9 12 2016 22:38

    1       1

    Love your thoughts Brent on gold, dollar, China, debt-. This is everything I need to hear to appease my pain with gold & not trading this mkt. U are right about the global debt - holy cow. What I don't get is that everyone was fretting about increasing rates a 1/4 % in Dec 15' & now stock mkts. are at all time highs. Yellen did what she said she would do -run it hot. She is running it sizzling hot.

  • MS

    Michael S.

    9 12 2016 19:54

    20       0

    Why does this take 40+ days to air and why is manipulation never factored in even though HSBC HAS BEEN FINED FOR BOTH Gold & silver fraud.

  • TB

    Taylor B.

    9 12 2016 18:37

    7       1

    I understand the consternation about the pre-election film date but the fact Brent indicates the views presented here are election outcome-agnostic (and we still have less than a week before the next FOMC meeting) makes the release today more understandable. That said, any other older, unreleased pieces need to be released ASAP so we can move on in real time.

  • db

    don b.

    9 12 2016 18:04

    9       1

    He is assuming that gold follows a real price signal which is false. Everybody is talking about the banks manipulating gold and silver but in truth banks are the cockroaches at a murder scene. The real doer is of course the US Treasury ESF. Quit looking for reasons why gold is down it's down for the same reason that Trump just picked a Goldman President for his Chief Economic Adviser. How about an audit of the US Treasury ESF, oh yeah they are above the law.

  • IJ

    Ian J.

    9 12 2016 17:28

    1       1

    Muldoon = Central Banks
    Dollar = Clever girl
    https://www.youtube.com/watch?v=YKRnEOUxZm0

  • WM

    Will M.

    9 12 2016 16:10

    17       3

    Excellent commentary by Brent. It does feel like gold is at a critical point here. Unless it rallies to new highs above $1360 sooner rather than later, it feels it will test $1040. Problem for gold holders is the psychological impact of breaking below the last big low is profound. The rise of the stock market, dollar movement and weakening of gold in recent weeks is making Martin Armstrong's perspectives very credible.

    One small last point is that this video is somewhat tardy coming onto the site.

  • SB

    Sam B.

    9 12 2016 16:06

    15       0

    I think he hits the nail on the head saying that CNY devaluation is the most likely catalyst for QE4. The Chinese absolutely need to devalue against the USD to avoid a deflationary collapse of their own credit bubble. By devaluing CNY substantially enough, that allows the Chinese firms that have borrowed in USD, and are hence short them to the tune of almost $2 trillion, to bid for dollars. Since the supply of dollars from global banks is actually contracting, Chinese firms freely bidding for dollars catalyzes a gigantic short squeeze in the FX markets, massively bids up the price of USD (through LIBOR and currency swap spreads), thus making it much harder for anyone else in need of dollars to find them. That is why a Chinese devaluation causes massive deflation. Even though this cause/effect is talked about a lot, I don't think the mechanics of "CNY deval = deflation" are well explained. Anyway, in that scenario the Fed will obviously need to react to that, but I believe the next iteration of balance sheet expansion will be more through dollar swaps rather than the UST/MBS purchases of the prior 3 QEs. However it shakes out, 100% agree with Brent that long USD/long gold makes a ton of sense.

  • JF

    John F.

    9 12 2016 15:29

    3       4

    Perhaps the Fed is going to use pulsing action of tightening followed by loosening. Short-term rates are a brake upon lending to calibrate the rate of release of funds. Historically, the rise of the USD coincides with a bear market and the fall of the USD coincides with a post-crash bull market. Fortunes are made from boom & bust and the Fed has never gone against that philosophy. Gold will finish falling at the bottom of the crash. Gold will rise during the boom. Inflation liquidates debt. Your mortgage becomes a smaller portion of your take home pay. Also, the financial (banks & insurance co.'s) need a normal interest rate (one above QE) to remain solvent in the long run. The consumer who drives the economy, needs an economic stimulus. The transitions coming in 2017 will be painful to bonds, but fresh air to banks and the consumer. There will be a revaluation-realignment of international currencies at some point in time to deal with the debt issue world-wide. The formula will be based upon debt levels and gold reserve levels.

  • RI

    R I.

    9 12 2016 14:56

    57       0

    Insightful think piece. However, I find it incredible that this was filmed before the election (minimum 1 month ago), only to be released now.