As central banks like the US Federal Reserve and the ECB go berserk and embark on endless minting, Raoul Paul argues that there is a risk of the global economy sinking into a deflation, and not inflation as widely expected, because the United States Dollar (USD)—a reserve currency, is in short supply.
With the USD outperforming fiat currencies and commodities—the WTI Oil futures prices just sunk to negative prices, gold will stand as a main beneficiary as a safe haven asset.
since, Bitcoin share the same properties as the yellow metal, he is confident that this digital gold will also rally because of debt deflation fears.
Deflation is the opposite of inflation.
The subject of deflation, at the time when the FED and several other central bank are overworking their printers churning trillions of dollars to stimulate the economy and prevent businesses from crumbling down because of coronavirus, can’t understandably make sense.
However, when the USD’s role is brought into the picture as a leading reserve currency which is held by foreign central banks, the magnitude of the problem can be gauged.
USD is a Wrecking Ball
Emerging economies and most countries hold the USD for FX purposes and to intervene whenever there are internal crises.
Moreover, in most cases debt are usually denominated in the greenback. The strengthening of the USD is wreaking havoc to other economies.
As it soars, their debts are magnified and despite overheating money presses, money supply isn’t just enough because of unexpectedly high demand from to service pending debts.
In a thread, the CEO explains:
“We live in a relative world where the dollar standard is the very cause of many of the issues we now face. There are simply not enough dollars available in the world to service all the debts and thus a debt deflation remains the BIG RISK.”
The Dollar Wrecking Ball:
I hear the narratives that the Fed is printing money…Brrr… and that is going to cause a dollar collapse. I worry that this narrative is very wrong. My strongly held view is that the dollar is the pinnacle of all the macro issues we face. 1/
— Raoul Pal (@RaoulGMI) April 25, 2020
This poses a big problem for borrowers who are now forced to “play musical chairs to get access to the dollar to service debts.”
The result of overcrowded weak borrowers won’t be inflation but a deflation crisis similar to the Great Depression of the 1930s and that which Bank of Japan (BoJ) is battling with.
“You see, the biggest problem the world faces is the dollar. We are in a viscous doom loop where slowing growth causes the dollar to rise, which causes slower growth, which causes the dollar to rise, as all borrowers play musical chairs to get access to the dollar to service debts.”
“The global system is just not set up to deal with this. It is an UGLY situation with almost zero options without a change in the entire system. No printing of money will solve this. It is structural.”
Gold and Bitcoin may Rally
Gold is considered a leading safe haven status but pound to pound, Bitcoin’s properties eclipses the clunky yellow metal.
For what is ahead, the risk of a global deflation means commodity prices thanks to government interventions will likely drop as the economy bounces back.
Here, in the short-to-medium term, gold and Bitcoin will likely benefit from cash injection and may rally. Specifically, Bitcoin which is not only a SoV but a medium of exchange may trump gold.