Paying for Overconsumption: The World Is About to Tell America What it Really Thinks

I’m calling my shot. The US Treasury market will crash tomorrow.

America has overleveraged its technological development, using tech to pursue profit rather than productivity, and there is no place that is more prevalent than the US bond market.

Here’s why and how it will happen:

* High frequency trading has enabled the basis trade
* This allowed hedge funds to shuffle treasuries back and forth, taking advantage of small changes in interest rates to earn a profit -> basically playing hot potato with the bonds
* The US has always been considered the benchmark for the “risk-free” rate, and therefore Treasuries should be the safest way to save your money
* This meant that the US Gov could issue debt at lower rates, rather than generating the necessary revenue through taxing its population as heavily as they otherwise would have
* With the Moody’s downgrade, the most basic algorithms will finally sell off US debt - no longer getting the risk/return profile they are programmed to seek
* That will cause a massive wave of liquidity in the bond market that causes a massive imbalance at current rates
* Now that the US has alienated almost every ally and major trade partner, it is no longer in their national interests to accumulate more US debt and there is no demand for new large issuances.
* All this supply needs to find demand. Algorithms can process in nanoseconds, but even they have a limit. America’s ability to stuff its dollars under the technological mattress will be over.
* But the monetary system won’t collapse:
* Americas debt will be repriced, the “risk-free” rate in valuation algorithms will rise and the stock market will fall. The people hurt most will be the ones that are highly leveraged themselves
* That’s why tech billionaires are so scared. They are the most highly leveraged people on the planet and their net worth is directly tied to the value of their companies, which is itself based on a highly leveraged stock market. If they are margin called they will lose it all and be forced to sell shares cheaply – **causing a wealth redistribution**
* The return will ultimately settle on the return where investors and algos are willing to bet on America again. That return and perception of risk/reward will degrade over time as more shocks in the economy are felt

Putting it another way:

* America has financed their society by cheap debt that they earned by being the only major productive exporting nation after WWII
* Over time the productive output of America has not been strong enough to support these low rates
* These rates were first financed by investors of all classes buying into the idea of American Exceptionalism and that the US government would offer them a return on their purchasing power once their loan matured. These repayments have ultimately been financed by debt issuances – the ballooning US debt
* Americans have since used technology to create liquidity in the bond market in the form of algorithmic trading, suppressing rates and creating artificial demand without providing any form of real productive output
* Social media is the perfect encapsulation of this trend, but its unproductive fintech that will be the straw that breaks the elephant’s back
* But once again, the system won’t collapse. Capital will flow to countries and companies where it sees the best risk return profiles, and at some level capital will bet on America again – that bet will just have a higher required return

Debt is not evil. Capitalism as a system isn’t evil. It is arguably necessary to create a sustainable world because it encapsulates that there is a cost for using a resource today that will need to be paid back in the future (climate change) and **equitable taxation** is how nations sustainably pay for the cost of resources that their citizens use. National debt held by other countries means that America has been relying on other countries to support its standard of living. America has paid this debt in non-financial value, that America would create a better world for those nations and protect their interests, for a very long time.

Capitalism works, America has used tech to avoid the guardrails that capitalism enforces, but it has finally caught up to them.

**So what is going to happen in other markets and where should you invest?**

Commodity prices will initially explode and become extremely volatile as leverage from futures contracts unwind. Velocity from HFT will exacerbate this before finally settling at a prices much higher than they currently reflect. Much higher resource prices means that capital will flow to the countries and companies that have and extract these resources to take advantage of the true unlevered price of commodities. Technology will be repriced, with capital that stays invested in technology settling in companies that are focused on the efficient utilization of those resources – i.e. renewables and recyclables

For disclosure, I do own some gold and mining funds