Last week the president said something out loud that presidents are not supposed to say out loud. A journalist asked him about the debt crossing $40 trillion, and this is how he answered.

You know, inflation, certain levels of inflation will also pay off that debt very rapidly. Very rapidly.

I wrote the whole thing up on Saturday, and judging by the response it got, I wasn’t the only one who thought this was a remarkable thing for a sitting president to say.

It also brought a joke to mind. Not a Soviet one this time. Soviet prices were set by decree, so where I grew up inflation showed up as empty shelves rather than price tags, and most of our jokes were about standing in line. For the classic example of what inflation can become, you have to go to Germany, to the Weimar Republic in the early 1920s.

Here’s the joke:

Now, as you may suspect, there’s a very good reason they told that one.

Take a look at the chart below. It’s the price of one ounce of gold, in German marks, from 1919 to 1923.

As you can see, an ounce of gold went from about 170 marks in January 1919 to 87 trillion marks by November 1923. That’s less than five years.

What happened was that Germany came out of the war owing reparations it had no realistic hope of paying. Different name, but debt all the same, and far more of it than the country could comfortably meet.

So the government printed.

For a while, that looked manageable. Then, in 1923, it stopped being manageable altogether. The gold price was rising anywhere from 400% to 2,000% a month, and during some stretches almost that fast in a single week. A loaf of bread in Berlin that cost around 160 marks at the end of 1922 cost 200 billion by late 1923.

No wonder the joke has the wheelbarrow getting stolen and not the money in it.

Now, I’m not saying America is Weimar. And, of course, Trump was talking about inflation rather than outright currency collapse. But it’s worth remembering what happened the last time the U.S. went through a major monetary reset.

The basket of goods that cost 41 cents in August 1971, when Nixon severed the dollar’s last link to gold, cost 92 cents by August 1981. In other words, more than half the dollar’s purchasing power disappeared inside a decade, and at no point did it look anything like Weimar.

The catch is that this kind of relatively orderly devaluation, without wheelbarrows and riots, only works as long as people are still willing to lend to you while you do it.

And that’s the hard part today. It’s what I spent most of Saturday’s piece on (including the four mechanisms already taking shape to keep Treasury demand alive), linked below along with the rest of last week’s pieces.

From the Comments

One of the things I’ve come to appreciate most about writing here is the conversation that happens in the comments. Here are nine that stood out last week, for different reasons. Each one links back to the piece it appeared on, so you can click through if you’re interested in the context.

Thanks again to everyone who left a comment last week. I read all of them, even the ones I don’t get a chance to reply to individually. Over the coming days, I’ll try to catch up on the questions and the longer threads.

Regards,

Lau Vegys

P.S. If you joined as a paid member last week, welcome aboard. A few links to help you find your way around:

• The latest (September) issue, with our newest recommendation, an American rare earth company.

• The first recommendation: a uranium play, with the full thesis, buy-up-to price, and tranche levels.

• The second recommendation: a silver pick, same treatment.

• The third recommendation: a U.S. gold developer trading at a fraction of what its ounces are worth.

• The live portfolio: the scorecard of every open position and where each one stands.

• The first Special Report: a deep dive into uranium and the opportunity behind it.

This week, the president said it out loud.

Asked by Time magazine about the debt crossing US$40 trillion, Trump answered: “You know, inflation, certain levels of inflation will also pay off that debt very rapidly. Very rapidly.”

Oh, how times change. Not so long ago, Trump was standing on the Capitol steps promising to “marshal the vast powers” of his cabinet to “defeat what was record inflation and rapidly bring down costs and prices.”

In the same interview, he also added, somewhat mysteriously, that there are “other means” of dealing with the debt, without saying what they were. We’ll come back to that, because I have a pretty good idea what he meant. But first, a little on why a sitting president would say something like this right now.

Why There’s No Other Way

The reason Trump is talking about this now has a lot to do with timing. The fiscal year ended on Wednesday, and the numbers are about what you’d expect from a year with a war in the Gulf, oil above US$100, and an interest bill that passed a trillion dollars. By the Congressional Budget Office’s count, the government ran a deficit of about US$2.1 trillion. That’s up from US$1.8 trillion the year before, and the biggest shortfall since the pandemic. Take a look at the chart below.

Now, if we’re being completely honest, we can’t pin all of this on Trump, not because I feel any need to defend him, but because doing so would imply that the next guy might fix it.

Not going to happen.

Take another look at the chart above. As you can see, since 1970 the federal government has spent more than it collected in 53 of 57 fiscal years. Bush, Obama, Trump, Biden, Trump again: each one has pushed the debt pile significantly higher than he found it. The point is, it doesn’t matter which party is in power. The budget isn’t getting balanced, and the debt keeps rising.

It’s just the nature of the beast.

The problem the powers that be face now, if they see it as a problem at all, is that the hole has gotten too big to fill the honest way. Balancing the budget would take more than US$2 trillion in cuts every single year. For context, all of Social Security costs about US$1.6 trillion, and the military close to a trillion. Eliminate either one entirely and you still wouldn’t get there.

So cutting is off the table. Default is off the table too, since it would wipe out the very people who fund political careers in this country (along with those careers themselves, of course).

That leaves inflation. Politically, it has two great virtues. It never requires a vote. And it’s kind to the people who matter. When money gets printed, asset prices rise, and the people who own the assets get richer. The pandemic years proved this about as clearly as anything could: between March 2020 and March 2024, the number of U.S. billionaires went from 614 to 737, and their combined wealth rose about 90%, to some US$5.5 trillion.

Not coincidentally, that was when the Fed was printing at a pace never seen before. For everyone else, the ones watching their savings buy less every year, not so much.

So Trump isn’t the first leader to work out that inflation is the path of least resistance. He’s just the first in a long while to say it on the record.

What he didn’t say is how it works. So let’s talk about that, because it’s worth understanding.

How Inflation Pays a Debt

The general idea is simple, and it hits close to home. Say your family has a fixed US$400,000 mortgage, roughly the price of an average American house. Now say inflation takes off and, over a few years, prices across the economy double, and so, more or less, do your and your partner’s salaries. Your mortgage payment hasn’t changed by a cent. But it now takes half the share of your income it used to. The debt didn’t shrink. Your dollars did, and the debt was written in dollars.

The government’s position is exactly the same, with one important caveat. Inflation only shrinks a debt if the interest rate on that debt stays below the inflation rate. Say the government borrows at 3% and prices rise at 5%. The real value of what it owes melts by 2% a year, and after a decade or so, a mountain has become a hill. If it has to pay 7% to borrow while prices rise 5%, the trick stops working.

Now, if you look at the historical record, this wouldn’t be the first time the U.S. government has pulled it off.

Let’s go back to 1946. America had just won a world war and paid for much of it on credit. Federal debt held by the public stood at 106% of GDP, slightly higher than it is today. Everyone agreed it had to come down. But nobody wanted to slash the programs millions of returning soldiers now depended on.

So they didn’t.

What they did instead was lean on the Fed. Remember, since 1942 the Fed had already been pegging Treasury yields at the Treasury’s request, long bonds at 2.5%, so the war could be financed on the cheap.

But guess what: when the war ended, the peg stayed.

And here’s the thing about a peg like that. To hold yields at 2.5%, the Fed has to buy every bond the market won’t take at that price, and it pays with money it creates on the spot.

Now, during a war, rationing and price controls can keep all that new money bottled up, and that’s exactly what happened in America between 1942 and 1945. But in 1946 the controls came off, and prices took off: up a third between the end of 1945 and the end of 1948.

Net result: by 1950 the debt was down to 73% of GDP. By 1960, 44%. And not because anyone paid it back: in dollars, the debt was about the same size in 1960 as in 1946. The dollars themselves just bought a lot less, and everyone holding them covered the difference.

Economists have a polite name for this: financial repression. The honest name is a tax on you.

And it wasn’t the only time it worked. The details change, but the trick is always the same: keep what the government pays on its debt below inflation. Take a look at the chart below. It shows the yield on the 10-year Treasury minus inflation, going back to 1945.

Here’s how to read it. Every time the line dips into the red, inflation is running ahead of what the government pays to borrow. In other words, those are the years the trick works and the debt burden quietly melts away.

We’ve already discussed the 1940s, the big red patch on the left. The same thing happened again in the 1970s. The government ran a deficit every single year, yet the debt ratio barely budged from around 25%. If you’re wondering how, consider that consumer prices more than doubled over the decade.

Now look all the way to the right, at 2021 and 2022. The U.S. government ran deficits of US$2.8 trillion and US$1.4 trillion, yet debt-to-GDP fell anyway, from 98% to 93%. How? Well, prices rose about 14% in just two years.

Lenders Who Can’t Say No

If you’ve been reading carefully, you probably already suspect there’s a catch.

Free investors, meaning anyone who can walk away, won’t lend you money at 3% when inflation is 5%. They demand 6, 7, 8%, which of course just makes the interest bill bigger. (Keep in mind, at a trillion dollars a year right now, it’s already the second-largest line in the budget.)

So here’s the thing. For inflation to work as a debt-reduction tool, you need lenders who keep buying your paper at a loss. Not because they want to, but because they have to. Let’s call them captive lenders. Think banks that hold Treasuries to satisfy regulators, money market funds that can hold little else, foreign central banks with dollars to park. America has always had some of those. The question is whether it has enough of them right now.

Let me explain.

See, in 1946, finding captive lenders was the easy part. Americans had nowhere else to put their money (owning gold had been illegal since 1933), and the rest of the world was broke.

But today it’s a lot harder. As I told you recently, the foreign governments and central banks that financed America for decades have stopped keeping pace. At the end of 2014, they held a little over US$4.1 trillion of Treasuries. A decade and change later, they hold about US$3.9 trillion. Meanwhile, the debt went from US$18 trillion to US$40 trillion. In other words, the people who used to bankroll America sat out the last US$22 trillion of it.

So if inflation is going to do the job the president says it will, the U.S. government needs lenders who can’t say no. And since Trump took office, the pieces of a system that could do exactly that have been falling into place.

I count four big ones. Let’s take them one at a time. Then I’ll give you the blueprint for how they all fit together.

1. Build a new sponge.

For fifty years, the U.S. government never had to think about who would buy its debt, because the rest of the world did it automatically. America bought the world’s stuff, above all its oil, and paid in dollars. The world ended up holding mountains of dollars it had to park somewhere, and the obvious place was U.S. Treasuries. The oil exporters were the clearest case (that’s the petrodollar system I’ve written about before), but Japan, China, Germany and everyone else with a trade surplus did the same. In effect, they were forced buyers. Think of it as a sponge that soaked up whatever the U.S. government wanted to borrow, at whatever rate it offered.

Well, the problem now is that the sponge is drying up. China has spent the past few years building a way to buy its oil without dollars, as I showed you in my series on the Hormuz crisis, and foreign holders in general have been backing away: their share of the Treasury market has slid from close to half in 2011 to about 30% today, the lowest in two decades.

Which raises the question: how do you get people to keep buying your debt when the people who used to don’t want to anymore? One answer is to build a new sponge. And the U.S. government is doing exactly that, out of stablecoins of all things.

If you’re not familiar with them, stablecoins are digital tokens designed to trade one-for-one with the dollar, and in much of the world they’ve become the easiest way for ordinary people to hold “dollars” without a U.S. bank account. Last year Congress passed a law to regulate them, the GENIUS Act. Among other things, it requires every dollar stablecoin to be backed one-for-one by a narrow set of assets, and the main one on the list is short-term Treasuries. So every time someone in Lagos or Buenos Aires buys a digital dollar, somebody in the chain buys a Treasury bill. Treasury Secretary Bessent said at the time that the law would produce a “surge in demand” for government debt, and he wasn’t exaggerating. The stablecoin market is now around US$300 billion. Tether, the biggest issuer, reported about US$141 billion of Treasury bill exposure as of March, which by its own count makes it the seventeenth-largest holder of U.S. government debt on earth, ahead of most countries.

Of course, it doesn’t stop at crypto. Banks, money-market funds, insurers and pension funds can all be nudged into Treasuries through regulation, and they are. What every one of these buyers has in common is that none of them is really free to walk away. They hold Treasuries because the rules say so. And when you trace it all the way back, the new buyer is you and me.

2. Run a pawn shop.

The second piece deals with the old buyers, the foreign governments that already hold trillions of this paper. If the U.S. government can’t make them buy more, it can at least try to stop them from selling.

For that, the Fed has a tool almost nobody has heard of, called the FIMA repo facility. In plain English, it’s a pawn shop for governments. A foreign central bank that needs dollars hands the Fed some of its Treasuries as collateral, the Fed hands back freshly created dollars, and later the country buys its bonds back. The Fed’s own description says the facility exists to give foreign governments “an alternative temporary source of U.S. dollars other than sales of securities in the open market.” In other words, it was built so that a government that needs cash doesn’t have to dump Treasuries to get it.

Why does that matter right now? Because of Japan. Japan is the biggest foreign holder of U.S. debt, about US$1.14 trillion of it, and it has spent this year fighting a collapsing yen. Defending a currency takes dollars, lots of them, and Japan’s two interventions this year cost US$73 billion and US$75 billion. The obvious place to get that money would be to sell some Treasuries. Which is exactly what the U.S. government cannot allow. Which is why it has been steering Japan toward the pawn shop instead. (You may remember that right after this summer’s joint intervention, Japan’s Ministry of Finance announced it plans to use the facility, and Bessent publicly asked the Fed to raise its US$60 billion per-country cap.)

3. Move the debt to where the Fed sets the price.

The third piece is about which kind of debt the government issues. As you may recall, the Fed can’t dictate what investors demand to lend for 30 years; that rate is set in the market. But it has a great deal of say over what they get for lending for three months. So if you’re the Treasury and you want to keep your borrowing costs down, you issue more short-term bills and fewer long bonds.

That’s what’s been happening. In 2014, bills made up 13% of marketable debt. Where are they now? About 22%. Interestingly, that’s above the 20% ceiling the Treasury’s own advisers consider “prudent.”

Now, conveniently, the stablecoin rules I just mentioned also create demand for exactly this paper. That’s because under the GENIUS Act, Treasuries used as reserves generally have to mature within 93 days. So the newest captive buyer is being steered straight into the one corner of the market where the Fed sets the price.

4. Print, but don’t call it that.

And finally, there’s one buyer that can never run out of dollars: the Fed. If the economy weakens, if the bond market seizes up, if long rates get uncomfortable, the Fed can simply create reserves and buy government debt itself. Call it QE. Call it liquidity support. The mechanics are the same: the buyer with the deepest pockets in the room owns the printing press.

And you don’t have to wait for a crisis to see it. The Fed spent the first half of this year buying short-term bills by the tens of billions and calling it reserve management.

That’s printing in everything but name.

The Treasury, meanwhile, has started buying its own bonds. In August it doubled its long-end buyback operations, from US$2 billion apiece to US$4 billion, through early November. A week later came reports that Bessent could tap the government’s cash balance, close to a trillion dollars, to fund more of them.

None of that is QE on paper. All of it is the government holding its own bond market up.

Now, here’s the blueprint I promised, with all four pieces in one picture.

If you study it for a moment, you’ll notice the four pieces have one thing in common. Not one of them depends on the interest rate to work. Or on inflation staying low.

I’d bet this is exactly what Trump had in mind when he talked about “other means.”

Enjoy the rest of your weekend,

Lau Vegys

P.S. As I mentioned, owning gold was illegal for Americans from 1933 until the end of 1974, so when the dollars in the bank started buying less in the late 1940s, there was nowhere to go. That isn’t your situation. You can still swap government currency for the one thing the government can’t print: precious metals. Physical metal comes first. After that, for potentially greater profits, mining stocks, which give you leverage to the metal price. That’s why a good part of the SNAFU Investing portfolio is in gold and silver names. And last week, the latest monthly issue went out with a brand-new recommendation. If you’re a paid subscriber, it’s all waiting for you in the portfolio. If you’re not, now might be a good time to see what you’ve been missing.

Lee Kuan Yew, the man who built modern Singapore and spent fifty years watching China from next door, put it like this:

The size of China’s displacement of the world balance is such that the world must find a new balance. It is not possible to pretend that this is just another big player. This is the biggest player in the history of the world.

He was spot on. China is not just another big player. (If you read my two-part series on how China saved the world from US$200 oil, I suspect you’ll agree.) It’s the biggest one yet, and the challenge it poses to the U.S.-led order is just as big.

Case in point: rare earths.

China processes around 90% of the world’s supply of rare earth elements (REEs). It also produces nearly all of the more valuable heavy rare earths, which we’ll get to below. And if you look at the chart below, you’ll see where the raw material comes from in the first place: China mines close to 70% of it.

Most people have never heard of these obscure elements, but modern life doesn’t work without them. They go into the crucial components of advanced electronics: iPhones, electric cars, flat-screen TVs, computers, and the sophisticated end of military equipment, like guidance systems, drones, anti-missile systems, radars, and fighter jets. The screen you’re reading this on relies on them.

There is no substitute for rare earths in advanced electronics. The U.S. military and the U.S. consumer are wholly dependent on them, and the country that supplies nearly all of them has a virtual monopoly on the trade.

Former Chinese leader Deng Xiaoping is said to have remarked, back in 1992, that “the Middle East has oil, China has rare earths.” He wasn’t wrong.

So how did China end up sitting on the rocky equivalent of the Persian Gulf?

Well, rare earths are a bit of a misnomer. They’re not rare at all. They turn up in ordinary ore all over the world, in the sands you mine for titanium, in the rock you mine for phosphate, in the United States, Australia, Brazil, Vietnam, Greenland. Digging them up is the easy part.

The hard part is what comes after. Separating rare earths from ore is toxic, expensive, and dangerous to the workers, and it’s the processing, not the mining, that decides who controls the trade. China has fewer environmental regulations and frankly disregards environmental and labor safety concerns in a way other countries cannot. That lets it produce rare earths at a much lower cost than anyone else. And that, in turn, is what let it undercut everyone else out of the business, one plant at a time.

The other part is, of course, subsidies. The Chinese government pours money into the industry. Nobody knows exactly how much, since it’s notoriously opaque, but it’s clear the Chinese Communist Party considers rare earths a national priority and will spend whatever it takes.

What the Trade War Became

Once you know all that, it’s kind of crazy that the world’s largest economy and its most powerful military are utterly dependent on these materials. But that’s exactly the situation the United States is in.

To give you an idea, an F-35 fighter contains about 920 pounds of rare earth materials. A Virginia-class submarine, about 9,200 pounds. An Arleigh Burke destroyer, around 5,200. They’re in the guidance fins on a Javelin missile, the sonar on a submarine and the motors that steer a drone. And for most of the past decade, about 70% of the rare earths America imported came from China.

Which is exactly why rare earths are what the trade war has become about. It might have started with tariffs on steel and washing machines, but it ended up being fought over the minerals inside a fighter jet. Below is a timeline of how that happened.

Now, if you look closer at the chart, two things jump out.

First, each side plays the cards it actually holds. America’s are tariffs, chip bans and an executive order. China’s, every one since the end of 2023, are minerals: export bans, traceability rules, and licenses on the rare earths that matter most. The U.S. has never answered a mineral move with a mineral move, for the simple reason that it has no minerals to answer with.

Second, look at the tempo. In the first five years, two moves and a truce. In the two years since, seven moves and two truces, including two moves in the same week. In other words, the trade war has been intensifying, not winding down (and the side setting the pace is the one holding the minerals).

All of which brings us to Xi Jinping’s state visit to Washington last week. He stayed for three days, a good part of them talking with Trump, formally and otherwise. The two were picking up where their governments left off last November, when they agreed to put the latest round of tariffs and export controls on ice for a year and talk instead.

And the result of all that talking? A two-month extension of the November truce, through January 10, and a promise to meet twice more before then, in Shenzhen and Miami.

Light on substance would be the kindest way to put it.

It was not light on spectacle, though, and I think that speaks volumes in itself.

For starters, Trump didn’t wait for Xi at the White House. He went to Joint Base Andrews and greeted him personally on the tarmac, something U.S. presidents almost never do for foreign leaders. In fact, with the exception of popes, no president had met a foreign leader on the tarmac since JFK did it in 1962.

Then came the military band, the B-1 flyover, the 21-gun salute, fighter jets lined up on the tarmac, the formal White House ceremony and the state dinner.

That is not your usual treatment.

It’s clear the U.S. government is treating China as the other heavyweight in the room. And when historians go looking for the exact moment the multipolar world stopped being a theory, this visit may well be it.

What to Expect From Shenzhen and Miami

Watching all that, though, what struck me was what wasn’t being discussed. Not a word about rare earths, the one thing American industry arguably needed most out of the visit. Not from Trump, not from Xi. It was almost as if the subject were too hot to touch.

And yet the problem hasn’t gone away. Wire reports continue to describe Chinese deliveries as “falling short” of what was promised under the last truce. The numbers bear that out: Chinese shipments of rare earth magnets to the U.S. totaled 512 tons in August, down 20% from July and 13% from a year earlier.

More importantly, the restrictions themselves are still in place. Dysprosium, terbium and five other rare earths still need a license from the Chinese government before they can leave the country. Each application is considered case by case.

And if the buyer has anything to do with a foreign military, there isn’t even a case to consider. China’s rules bar licenses for defense end-users outright. That includes Pentagon suppliers, which means they can’t legally buy these materials from China at any price.

This is a problem because what turns an ordinary rare earth magnet into one that keeps working at the temperatures inside a jet engine, a missile or a submarine’s sonar (the very military hardware I mentioned earlier) is exactly that: a small dose of dysprosium and terbium.

How likely is all that to get reversed at the two remaining meetings this year?

Not bloody likely, as my good English friend Ian likes to say.

Just look at the timeline again. The licenses on dysprosium and terbium date back to April 2025, and they haven’t gone anywhere. That’s because they’re exactly what any negotiator wants: real leverage. China isn’t about to give that up, no matter how warmly Xi and Trump shake hands.

I say that because I’ve watched what China has actually traded away in every truce since. And if you’re wondering what that was, the answer is: not much.

In November of last year, for instance, China suspended the October package, the last Chinese move on the timeline above and one it had never actually enforced, for a year. In return, it got the fentanyl tariff halved and the U.S. affiliates rule suspended. The April licenses weren’t touched.

Last week, China extended that same arrangement by another two months. And again, the April licenses weren’t touched.

I’m sure you see the pattern. Each time, the thing China puts on the table is the threat it hasn’t used. The thing it keeps is the one that’s been working since April.

So that’s pretty much what I expect from Shenzhen and Miami. We may well see a longer suspension of the October measures, maybe out to 2028, plus a few more licenses for civilian customers, an aircraft order, maybe also a promise to buy more American soybeans. The headline will say “breakthrough.” And dysprosium and terbium will still need a Chinese permit to leave the country, because that permit is the whole reason the U.S. government keeps coming to the table.

Which is exactly how a smart rising power would play Thucydides’ Trap.

Regards,

Lau Vegys

P.S. This is exactly why the latest SNAFU Investing monthly issue, which went out a few days ago, features an American company on the right side of those licenses: one that can make what China is withholding, that has the government’s money behind it rather than in front of it, and that doesn’t need the next summit to go badly in order to work. The full write-up is available to paid members, with the thesis, the risks, the buy-up-to price and the tranche levels. As I write this, the stock is still trading below our buy-up-to, so if you’ve been on the fence, this is a good moment to come inside.

Quick update on our first recommendation. Some new shares are landing in your brokerage account, and I want you to know what they are.

Read more

Today’s Monday note is not going to be terribly long, because I just came off about a week of working on the latest monthly issue of SNAFU Investing, which went out yesterday.

It’s amazing what several days of poring over news, research reports and financial statements can do to your recovery needs.

Anyway, one of the things I spent a good amount of time on in the issue was something Xi Jinping said during his state visit to Washington last week, standing on the South Lawn of the White House with Trump beside him:

China and the United States must hold the line of no conflict and no confrontation between us. The Thucydides Trap can be overcome.

Like I said in the issue, a lot of the coverage took that as a message of peace from Xi.

And sure, it can be read that way. But it can also be read as a challenge. Because to accept the framework at all, you have to accept that there is a rising power and an established one, and you have to be pretty clear about which is which. And I don’t imagine Xi was thinking of himself as the established power being overtaken, standing there on the South Lawn.

You can read about all that in the issue (linked below), but one thing I didn’t mention is that Thucydides, the Greek historian the trap is named after, who wrote the history of the war between Athens, the rising power of the day, and Sparta, the established one, wasn’t some scholar sitting in a library.

He was an Athenian general. In 424 BC, they sent him to hold a city called Amphipolis, one Athens couldn’t afford to lose, and he turned up too late. So they exiled him for twenty years, which he used to travel, including through enemy territory, writing down what both sides had to say about the war.

Now, interestingly, the man who first diagnosed the trap never got to write the ending. His account breaks off mid-sentence, seven years before the war actually finished. Another Greek historian, Xenophon, picked up the story where Thucydides stops and carried it forward.

In case you’re foggy on how the war ended, Sparta, the established power (think the U.S. today), won. Athens, the rising power (think China today), lost.

Yes, the established power beat the rising one. Remember, the Thucydides Trap tells us nothing about which side, rising or established, might win. It just tells us that war between the two is pretty much inevitable.

But here’s the thing. Sparta only pulled it off by taking Persian money (Persia being the other great power in the neighborhood, and the ancestor of today’s Iran) and Persian timber to build a fleet of two hundred ships. Which is another way of saying it invited the outside power into a Greek quarrel so it could win the quarrel.

This, of course, didn’t end well. Sparta won the war, but it had bled down a citizen army it could never really replace, and Persia eventually switched sides and began financing Sparta’s enemies instead. Then, in 371 BC, thirty-three years after the war ended, an army from the Greek city-state of Thebes smashed the Spartans at Leuctra. Sparta never really recovered.

My point is that when all was said and done, both sides lost. And historically, you see the same dynamic come around again and again whenever these situations arise. Sometimes the established power wins, sometimes the rising one does, but the war tends to be so taxing that even the winner rarely comes out whole.

Make of that what you will.

And on a final note…

Xi’s reference to the Thucydides Trap brought to mind an old Soviet joke I wanted to share with you today. I think you’ll agree it’s a fitting one given the outcome of last week’s meeting.

As the story goes, Leonid Brezhnev, the Soviet leader at the time, told a version of it to Henry Kissinger in May 1973, at the Politburo villa at Zavidovo outside Moscow, while the two of them were working out the details of Brezhnev’s state visit to Washington (the one that produced an agreement aimed at preventing nuclear war).

The irony is that this particular joke ended up being prophetic. The warmer U.S.-Soviet relationship of the early 1970s unraveled over the rest of the decade. The decisive break came with the Soviet invasion of Afghanistan in December 1979. Carter imposed sanctions and a grain embargo, restricted technology exports, pulled the arms control treaty he had signed with Brezhnev six months earlier out of the Senate, and backed the 1980 Olympic boycott.

The struggle for peace, as promised.

From the Comments

One of the things I’ve come to appreciate most about writing here is the conversation that happens in the comments. Here are five that stood out last week, for different reasons. Each one links back to the piece it appeared on, so you can click through if you’re interested in the context.

Thanks again to everyone who left a comment last week. I read all of them, even the ones I don’t get a chance to reply to individually. Over the coming days, I’ll try to catch up on the questions and the longer threads.

Regards,

Lau Vegys

A word before we start. This is the second of the SNAFU Investing monthly issues, which come at the end of each month. This one carries a new recommendation, below the paywall.

“China and the United States must hold the line of no conflict and no confrontation between us. The Thucydides Trap can be overcome.”

Xi Jinping said that earlier this week, on the South Lawn of the White House, at the welcome ceremony for his state visit, with Trump beside him and a military band behind them. Most of the coverage gave the line a sentence and moved on to the trade numbers. I think it was the most important thing anyone said all week. I’ll explain why in a moment.

But first, some background, in case you’ve been living under a rock for the past eight years. The United States and China have been locked in an on-again, off-again trade war since 2018: tariffs, counter-tariffs, export bans, a truce, the collapse of the truce, another truce. The latest of those came last November, when the two sides agreed to put their newest round of tariffs and export controls on ice for a year and talk instead.

This week’s state visit was the latest round of that talking. Xi came to Washington, stayed three days, and the two sides agreed to extend the November truce by another two months, to January 10, and to meet twice more before then, in Shenzhen and in Miami.

If you followed the coverage, especially in the more president-friendly outlets, you probably came away with the impression that a deal is just around the corner, and that once it’s signed, everything goes back to business as usual.

I don’t think so. The trade war between the U.S. and China was always a sideshow of a much bigger issue: who will be the world’s dominant power?

It will either be China, or it will be the United States. It can’t be both.

China’s economy is already larger than America’s on a purchasing-power basis. Its navy has more ships. And it controls about 90% of the world’s rare earths, which, as it happens, is what this issue is about.

Meanwhile, the U.S. finds itself in the same position previous established powers did when a rising one came up behind them: more than US$40 trillion in debt, running wartime deficits in peacetime, paying more in interest than it spends on its military, and stretched across commitments on three continents it can no longer comfortably afford.

This dynamic has a name, and it’s the one Xi reached for on the South Lawn: Thucydides’ Trap, after the ancient Greek historian who wrote the history of the Peloponnesian War between Athens and Sparta. Sparta was the established power. Athens was the one rising fast. And the trap, as Thucydides described it, was that the rise of one and the fear it produced in the other made war inevitable.

Now, I’m not saying war between the U.S. and China is inevitable. But if history is any guide, the odds are not comforting.

A guy called Graham Allison, a professor at Harvard, has studied sixteen cases of Thucydides’ Trap over the past five hundred years. In twelve of them, 75% of the time, the result was war. Not a trade dispute. War.

The clearest modern example is the one everyone learns in school: World War I. Britain was in decline. Germany was rising fast. War became inevitable. But it’s not the only one from living memory. Japan was the rising power in the Pacific in the 1930s, the United States the established one, and we all know how that ended. Go back further and you get England and the Dutch in the 1600s, Britain and France in the 1700s, and the same story each time.

Now, it’s true that China might be fine with being number two globally as long as it’s number one in its own neighborhood. It might even be fine with the dollar staying the world’s reserve currency, given what that job costs the country that holds it (economists call it the Triffin dilemma: to supply the world with dollars, America has to run the trade deficits that hollow out its industrial base), as long as the yuan is what its neighbors and its oil suppliers settle in.

My fear is that the U.S. couldn’t swallow even that. Losing Asia and watching the yuan gradually take over its own backyard would be challenge enough, and a power that feels itself being cornered tends to do what any cornered animal does. It lashes out.

I may well be wrong. But I remember enough physics to know that objects in motion tend to stay in motion, and U.S.-China relations have been moving in one direction (not a good one) for eight years. Nothing about this week reversed that, by the way.

That’s why I think that even if some sort of deal gets worked out, in Shenzhen or in Miami or wherever the next handshake happens, it will do nothing to resolve the larger problem.

Trump understands that. So does Xi. Which is why, standing on the South Lawn, he reached for Thucydides.

Now, before I get to this month’s pick, which I think is the best way to profit from all of this right now, and which has the kind of multi-bagger potential I look for, let me lay out the case for it. It starts with those rare earths I mentioned, and why China’s grip on them is a much bigger problem for America than most people realize.

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After Muse, Meta’s new AI assistant, shot to the top of Apple’s U.S. App Store, the company’s shares jumped more than 11% in a single day, adding roughly $200 billion to its market value.

The excitement spread across the rest of the AI trade. Chip stocks rallied, AMD crossed the trillion-dollar mark, and the Nasdaq climbed 2.3% to a record high.

American investors, for now at least, cannot seem to get enough of it.

The American public, though, appears considerably less enthusiastic.

According to a Reuters/Ipsos poll published this week, 73% of Americans worry that AI companies are not doing enough to prevent the technology from causing serious harm. Fifty-five percent want its development slowed down. Only 11% think AI is having a positive effect on society.

And perhaps that is not surprising.

Because on top of everything else happening in the economy and the apparent threat AI poses to their jobs, Americans are now also being told that the technology may end the world.

Worse, none of this is coming from a man wearing a cardboard sign on a street corner. It is coming from the people building the technology.

Anthropic’s head of alignment science, Evan Hubinger, puts the chance that AI kills every human within the next decade at more than 10%. And he is hardly alone. Sam Altman, Dario Amodei and Google DeepMind CEO Demis Hassabis have all signed a public statement declaring that the risk of extinction from AI should be treated as a global threat alongside pandemics and nuclear war.

They Warn Us. Then They Keep Building

As an investor, and simply as a curious person, I spend a lot of time thinking about how incentives drive people’s actions. And that is what makes all of this so fascinating to me.

All these AI bigwigs openly acknowledge they are building a dangerous technology with, in their telling, the potential to destroy the world as we know it. They issue warnings. They call for slowdowns. They frighten the public with increasingly apocalyptic predictions.

And then they go right back to building it.

The latest round of panic began earlier this month, when a 27-year-old researcher named Jacob Coxon resigned from Anthropic and posted a thread on X.

“They are racing straight to self-improving superintelligence and gambling with our lives,” he wrote about Anthropic and his previous employer, OpenAI.

He went further. The people building AI, Coxon said, earnestly believe it could kill us all before the end of the decade. Yet they are building it anyway.

If you want to read it for yourself, here is Coxon’s full thread on X. (Just click the preview below.)

According to the counter displayed by X, the thread was viewed more than 170 million times. Within days, Coxon was everywhere. Newspapers, television, podcasts, you name it. Politicians were quoting him. Other AI researchers were attaching their own probabilities to human extinction. A relatively unknown mathematician had become the public face of the AI apocalypse almost overnight.

Now, Coxon is not some random fellow who downloaded ChatGPT and frightened himself. He worked in pre-training research for roughly three years across OpenAI and Anthropic. By any reasonable standard, his concerns deserve to be taken seriously.

So that is exactly what I have done over the past couple of weeks. I took the warning seriously and went down the rabbit hole.

But somewhere along the way, I realized something. Whether AI could eventually become powerful enough to destroy humanity is actually the less interesting question. Given enough time, I suspect the answer is yes, but putting a date on it is pure guesswork.

No, the more interesting question, at least for now, is this: who benefits from making you believe it could?

Fear Is Good for Business

Because, again, think about who is trying to frighten you. For the most part, it is the very companies building the technology.

But why would a company tell you that its own product might end the world?

Well, it is difficult to justify a chatbot at a valuation approaching $1 trillion. A chatbot is useful. It can write emails, summarize documents, produce code and occasionally invent a court case that never happened.

But the most powerful and dangerous technology in human history?

Now that sounds like a trillion-dollar company. And that is, of course, exactly what you want investors to believe before you ask them to buy your shares.

Which, by the way, is what the company Coxon just quit is preparing to do. Anthropic has already filed confidentially to go public, in what could become one of the largest technology IPOs ever.

Worth mentioning here, too. Coxon had been at Anthropic for only about four months, although he reportedly left two months before his equity would have vested. Make of both facts what you will.

OpenAI, the company behind ChatGPT, has also confidentially filed for a public listing of its own.

Now, both companies understandably need enormous amounts of fresh capital. AI models are staggeringly expensive to train and run. The data centers, chips and electricity behind them require a constant flow of new money.

And nothing attracts money quite like the claim that the technology you are building will control the future of the human species.

That same claim has now carried the heads of the leading AI companies all the way to the United Nations Security Council.

As I write this, Sam Altman of OpenAI and Dario Amodei of Anthropic are among those due to brief the body responsible for international peace and security. The subjects on the table include malicious use, self-improving machines and the possibility that advanced AI could slip beyond human control.

When was the last time you saw the maker of a useful accounting program invited to brief the Security Council?

But tell the world your product might become more dangerous than a nuclear weapon, and you may find yourself discussing the future of civilization with foreign ministers.

At that point, you are not merely a software executive anymore.

You are a geopolitical actor.

You sit across from governments and discuss which countries can be trusted with the technology, how quickly it should be developed and what rules the rest of the world should follow. (More on why they might want those rules in a moment.)

The AI companies are selling the product, warning you about the product and helping governments write the rules governing the product. If the technology succeeds, they make fortunes. If the public becomes terrified, they gain political influence and a hand in deciding who else is allowed to build it.

Anthropic offers an almost perfect example.

Its CEO, Dario Amodei, recently called on the industry to slow the pace at which it releases new capabilities, warning that increasingly capable systems could outrun the safeguards meant to contain them.

Can you guess what happened ten days later?

Anthropic released Claude Opus 5.5, a cheaper new model intended to help it compete with OpenAI ahead of its expected public listing.

To be fair, Anthropic would say there is no contradiction. The new model was extensively tested, it contains better safeguards, and the company is asking everyone to slow down together rather than volunteering to lose the race by itself.

Very understandable.

Also very convenient.

Regulate Me, Please

Now, one thing the AI bigwigs have been doing as they rub shoulders with world leaders is asking for more regulation.

Strange, isn’t it?

It makes sense for governments to demand tight controls. Politicians get to show they care about the public while gaining something governments have always wanted: control over an important new technology.

Yet the companies themselves seem to be falling over one another to hand them that control.

On the surface, that makes far less sense.

Why would someone ask the government to regulate the industry they are trying to dominate? Why would anyone building a new technology say, please write rules that could slow me down?

Maybe they care deeply about humanity.

I mean, maybe. Stranger things have happened.

Or perhaps the more likely answer is that regulation gives them what investors call a moat.

A moat is simply a barrier that protects a business from competition. And regulation can be one of the best moats of all.

Suppose every company developing an advanced AI model must put it through months of testing, hire government-approved evaluators, employ an army of compliance staff and obtain a license before releasing it.

OpenAI, Anthropic, Microsoft and Google can afford that. A university laboratory probably cannot afford it. An open-source developer working from his garage certainly cannot.

The rules may apply equally to everybody on paper. In practice, they can turn the existing giants into the only companies legally and financially capable of building the technology.

History is littered with examples of exactly that. For instance, before the United States deregulated airlines in 1978, federal regulators controlled fares, routes and entry into the market. For decades, that system protected established carriers from new competitors.

Before I wrap this up, there is one more thing worth mentioning. It probably deserves a proper investigation of its own, but this essay is already running long, so I’ll keep it brief.

There is a communications researcher named Nirit Weiss-Blatt who writes the AI Panic newsletter. She has spent years tracing the network of AI-safety institutes, university programs and political organizations that has grown up around the idea that AI could wipe out humanity.

Using public grant records and the AI-safety movement’s own funding data, she has traced much of the money behind this ecosystem back to a relatively small circle of wealthy donors associated with Effective Altruism, including Facebook co-founder Dustin Moskovitz, Skype co-founder Jaan Tallinn and Ethereum co-founder Vitalik Buterin.

Now, there is nothing inherently wrong with wealthy people funding research into a danger they genuinely believe is real. But it does mean the AI-doom movement is not quite the spontaneous grassroots uprising it can sometimes appear to be.

Far from it.

Behind it is a well-funded, highly organized ecosystem, complete with donors, institutions, fellowships, researchers, media campaigns and political organizations.

Or, as Trump’s former AI czar David Sacks has called it, the “Doomer Industrial Complex.”

Now, none of this proves the danger of AI wiping out humanity is fake. After all, the scientists who built the atomic bomb were perfectly sincere when they warned what it could do.

(Then again, those scientists did not own shares in the bomb.)

But whatever you make of the apocalyptic case, AI does not need to destroy humanity to cause enormous disruption. My point is that the more immediate dangers, for lack of a better term, are already here.

You do not need an evil superintelligence to take your job. You do not need killer robots to raise your electricity bill. And you do not need a machine to become conscious before the government uses it to watch you.

That is partly why I am suspicious of the apocalyptic framing. The more time we spend debating whether AI might exterminate humanity someday, the less time we spend examining what the companies and the state are doing with it right now.

That said, I will probably come back to the apocalyptic case in the coming weeks, if only as a thought experiment. Because it is fascinating.

How does a harmless chatbot become something capable of pushing humanity aside?

But for now, I just wish we had more people willing to ask the oldest, most reliable question in politics and investing before handing anyone more money, more power or a legally protected monopoly.

Who benefits?

Regards,

Lau Vegys

As you may know, the Strait of Hormuz is still effectively shut. It has been since the end of February, which makes it close to seven months now. Transits are running at a trickle against a pre-crisis baseline of around 85 a day, and Iran’s parliament speaker said again last week that it stays closed until Washington lifts the blockade, drops the oil sanctions and releases the frozen assets. Brent is sitting a little over $100.

The shooting hasn’t stopped either. Earlier this month, U.S. Central Command hit IRGC targets in southern Iran, at Kenerak, Bandar Abbas and Qeshm Island, saying it was retaliation for Iranian attempts to lay sea mines in the strait. Eleven people were killed, five of them guests at a wedding. A week after that, U.S. forces struck Iranian oil tankers after an attempted missile attack on an American warship. Iran has been hitting back at U.S. bases in Bahrain, Jordan and Iraq.

So nothing has been resolved. And the whole reason the U.S. is still fighting Iran now comes down to the Strait of Hormuz. Which, of course, wasn’t even a problem before the war started.

Now, as I wrote to you a couple of months ago, a big part of the reason crude is sitting where it is, and not somewhere north of $200, is China. I wrote two pieces on why they did it and, just as importantly, how (the short version being that they quietly stopped buying so much of it). Both ended up being the most-read things I’ve published. If you missed them, you can catch up here and here.

Anyway, ever since then I’ve been watching China’s crude imports like a hawk. And the July and August numbers just came in.

As you can see from the chart above, August came in at 8.93 million barrels a day. That’s up from 8.45 in July, and a good deal better than the June low of 7.1. So yes, they’re buying again.

But that’s still 23% below where imports were a year ago.

Bottom line, nearly seven months after Hormuz shut, the world’s biggest oil buyer is still taking in a quarter less crude than it normally would.

And here’s the part I find most interesting.

Low imports could also conceivably mean China’s economy is struggling and doesn’t need as much oil. That is not what’s happening.

Chinese refineries processed 13.91 million barrels a day in August. That’s the most since March, by the way. Imports plus domestic production came to 13.27 million barrels a day. Which means the difference, about 640,000 barrels a day, came out of storage.

Put differently: China is using the oil. It just isn’t buying as much of it as it normally would. And if you read those two pieces above, you already know why.

Which makes you wonder how much longer they’re prepared to keep doing that, and what happens to the price if they stop while this war is still going.

That question isn’t academic, and it brings us directly to what happened last week.

On Wednesday the Fed raised rates a quarter point, its first hike since 2023. It did it because of energy prices.

But there’s one problem.

The Fed can set the price of money. It can’t produce a barrel of oil or reopen a strait.

So what you’re really looking at is the world’s largest central bank reaching for the wrong medicine, hiking into an oil shock with a $40 trillion debt load on its back.

I got into all of that in an alert I sent subscribers on Saturday. What the hike means for our gold and silver positions, and why I think this is the Fed proving a point rather than the start of another Volcker. It’s linked below, along with the other piece from last week.

From the Comments

One of the things I’ve come to appreciate most about writing here is the conversation that happens in the comments. Here are four that stood out last week, for different reasons. Each one links back to the piece it appeared on, so you can click through if you’re interested in the context.

Thanks again to everyone who left a comment last week. I read all of them, even the ones I don’t get a chance to reply to individually. Over the coming days, I’ll try to catch up on the questions and the longer threads.

Regards,

Lau Vegys

P.S. If you're a paid subscriber, keep an eye out for the September issue before the month is out. It will feature a new pick, complete with the full thesis, the buy-up-to price and the tranche levels. And if you're not, this might be the issue to come in on.

As I wrote earlier this week, the Fed went ahead and raised rates by a quarter point, its first hike since 2023.

On paper, that should be bad news for gold. Higher rates make cash and bonds more competitive with a metal that pays no interest. They also tend to support the dollar.

And since gold and silver are major themes in our portfolio, I wanted to send you an update on what this hike means for us.

I’ll get to some of our individual positions below. But first, let’s look at what happened after the decision, because the market’s reaction was telling.

As you may know, gold initially sold off, especially after Fed chairman Kevin Warsh made it clear that another hike could follow.

But then the buyers stepped in.

By Friday, gold had recovered and finished the week up 0.5%. Silver did even better, ending 3.1% higher.

I, for one, find that interesting.

The Fed raised the price of short-term money, which pushed up the yields available on shorter-term Treasuries. In plain English, investors could suddenly earn more by lending money to the government for a couple of years.

Long-term yields, of course, barely moved. The Fed does not control those directly. So the gap between short-term and long-term rates narrowed. That is what people mean when they say the yield curve “flattened.”

That combination is not supposed to be friendly to precious metals.

Yet gold and silver absorbed the hit and finished the week higher anyway.

On top of everything else we have seen this year, that is another confirmation that there is real buying underneath this market. More importantly, it tells me the forces driving this bull market are bigger than one quarter-point rate hike.

Again, that does not mean we will not see volatility and weakness in the weeks ahead. We almost certainly will. That is precisely why I sat down to write this alert.

But because we build our positions in tranches, that weakness is more of an opportunity than a problem. It gives us the chance to add at better prices. (If you need a refresher on how the tranche system works, I laid it all out here.)

Before we get to the individual names, though, we need to understand what the Fed is really up against, and what it can realistically do from here.

The Fed Cannot Print Oil

The official explanation for the hike is simple enough.

Gasoline was up 27% from a year earlier, while producer prices for diesel jumped 24% in August alone. Brent crude pushed back above $100 as the fight over the Strait of Hormuz dragged on.

The Fed saw inflation moving in the wrong direction and decided it had to look tough.

There is just one problem.

The Fed can set the price of money. It cannot produce a barrel of oil. It cannot keep the Strait of Hormuz open, end the war or manufacture the metals the world is running short of.

And this is hardly the first time inflation has outrun the Fed’s promises.

If you take a look at the chart below, you can see just how consistently it has done so. The chart uses CPI rather than PCE, the Fed’s preferred inflation gauge. But whichever official measure you prefer, the basic picture is the same.

Inflation has now been above 2% for six straight years.

Six years.

Remember, the Fed already raised rates by 525 basis points from 2022 to 2023. It still failed to bring inflation back to target.

Now it is raising rates again in response to an oil shock it cannot control. All that can really do is make money more expensive and the economy weaker.

So why do it?

Credibility, at least in part.

After six years of above-target inflation, the Fed cannot simply sit on its hands while prices begin climbing again. A quarter-point hike allows it to show that it is serious, even if it is prescribing the wrong medicine for the disease.

That is how I see this move. It looks less like the beginning of another Volcker-style hiking cycle and more like the Fed trying to prove that it still means business.

It may even hike once more. But one or two hikes are very different from a sustained campaign to force inflation back to 2%.

And there is another, much bigger reason I doubt the Fed can keep raising rates from here.

Read more

“LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT,” he wrote on Truth Social.

Just to give you an idea of how crazy this would be in practice, below are some of the countries with which the U.S. runs a trade deficit.

China. Mexico. Canada. Germany. Japan.

We’re talking about some of America’s largest trading partners. Hundreds of billions of dollars in trade every month.

Actually stop trading with them and the consequences would be enormous. Supply chains would seize up. American companies would lose suppliers and customers. Prices on all kinds of imported goods would jump. Investment would almost certainly get postponed as companies tried to figure out what the hell was going on.

In other words, crazy.

So why would Trump put some or all of that on the line for one thing?

Well, he says it himself. He wants lower interest rates. Always has.

Trump spent years attacking Jerome Powell for not cutting rates fast enough. And he’s been banging the same drum again for months. America, he says, should be paying the lowest interest rates in the world.

I mean, it kind of makes sense.

The U.S. national debt crossed $40 trillion last month. And when you owe that much money, of course you want the smallest interest rate you can get.

It’s Not About Trade

Predictably, plenty of people on both sides of the political divide immediately started treating Trump’s threat like a trade story.

“Look at Trump. He wants us to stop trading with half the world. Interest rates are just the pretext. Tariffs and decoupling were always the goal.”

That completely misses the point. This is not a trade story.

So what is it about?

I think this is really about America’s debt and the increasingly difficult question of who is going to keep financing it.

Just consider this simple fact.

Many of the countries Trump is threatening to cut trade ties with are also the same countries that have spent decades financing the United States.

If you need a refresher on how this usually works, let’s start with a very simple example.

Say you buy a $50,000 Lexus made in Japan.

You get the car. Somewhere on the other side of that transaction, Japan gets $50,000.

Japan could turn around and spend those dollars buying something made in America. If that happened every time, trade would more or less balance itself out.

Obviously, that isn’t what happened.

America has been importing more than it exports for decades. So year after year, hundreds of billions of dollars flowed overseas to pay for Japanese cars, Chinese electronics, German machinery, Saudi oil, Korean semiconductors, and everything else Americans wanted to buy.

And those dollars had to go somewhere.

Some were spent on American goods. Some bought American companies, stocks, property, corporate bonds, and so on.

But a huge amount ended up in perhaps the most obvious place in the world to park a mountain of dollars.

U.S. Treasuries.

It’s been a remarkably convenient arrangement if you happened to be the U.S. government.

America bought the world’s stuff. The world accumulated dollars. Then the world lent a good chunk of those dollars right back to America.

Probably the best example of just how convenient this arrangement has been is the petrodollar system, which I went over in my piece about China and the Strait of Hormuz about a month ago.

America buys oil from Saudi Arabia and the rest of the Middle East. The oil exporters accumulate dollars. And instead of spending all those dollars on American goods, they recycle a lot of them back into American financial assets, including U.S. government debt.

The broader trade system worked in much the same way.

And that has a pretty obvious implication for Trump’s threat.

Actually blowing up those trading relationships would risk damaging the very system that has helped finance America for decades. Fewer dollars flowing abroad means fewer dollars naturally coming back into dollar assets. And using access to the American market as a weapon gives countries one more reason to reduce their dependence on the U.S. in the first place.

So taking the threat literally makes very little sense.

So what the hell is going on here?

The Rate Problem

I’ve written extensively about what a big problem America’s $40 trillion debt burden has become (here and here, for example), so I won’t beat that dead horse again.

But there is one number worth remembering.

America’s interest bill is already around $1 trillion a year. It’s now the second-largest line in the federal budget, bigger than the entire military and Medicare. Only Social Security costs more.

That’s what higher rates do when you’re sitting on $40 trillion of debt.

And of course the bigger that debt gets, the more every extra point of interest hurts.

So the people running the government have every reason to want lower financing costs.

And Mr. President wants them doubly so.

But there’s a problem.

The Fed can’t simply give them to him. Yes, even with Trump’s guy Kevin Warsh now running the place.

Inflation is still running well above the Fed’s target. The latest PCE reading was 3.7%. Energy costs have surged. Oil is above $100. And bond investors have already pushed the 10-year Treasury yield to around 5%.

Now imagine the Fed responding to all that by aggressively cutting rates.

“Inflation is rising, but the president asked us nicely, so we’re cutting rates.”

Bond investors would go crazy.

“We lent you money. Inflation is already eating away at what those dollars will buy, and now your central bank is deliberately making money cheaper?”

“Fine. Pay us more.”

So if rates ultimately have to come down, and believe me, with $40 trillion of debt there’s just no other way, policymakers need a reason to cut them without looking like they’re simply monetizing the government’s debt.

A stock market crash would do it. So would a serious recession or some kind of financial crisis.

But those are painful. And once they start, they’re notoriously hard to control.

Trade threats are different.

Do a convincing enough job threatening to shut down a huge chunk of world trade, and growth forecasts come down. Companies delay investment because they don’t know what tariffs they’ll face or where they’ll be able to source parts six months from now. Hiring slows. Consumers get nervous. Economic activity weakens.

Suddenly the Fed has a reason to cut.

Not because Trump told it to.

Because economic conditions supposedly require it.

Who Buys the Debt?

Of course, even that only deals with part of the problem.

As I write this on Wednesday, the Fed went ahead and raised the federal funds rate by a quarter point, exactly as the market expected. It’s the first hike since 2023. So it will be interesting to watch Trump’s rhetoric over the next few days.

But whatever he says, what really matters here goes far beyond today’s rate decision.

Let me explain.

The Fed does set the overnight federal funds rate and, by doing so, has enormous influence over the short end of the yield curve (basically, shorter-term debt). True.

But what it cannot simply dictate is what investors will accept to lend the U.S. government money for 10, 20 or 30 years.

That’s the long end of the curve.

Those rates are set in the market. And they matter because they feed through the rest of the economy.

Mortgages. Car loans. Corporate debt. Pretty much everything.

And this is where America’s foreign lenders come back into the picture.

Because for decades, some of the biggest buyers of U.S. government debt have been foreign governments and institutions.

Yes, many of the same countries Trump is now threatening with trade restrictions.

But here’s the real problem. Even without Trump’s latest rhetoric, those traditional foreign buyers have already stopped keeping pace with America’s borrowing.

An important turning point came around 2014.

Russia annexed Crimea. The U.S. and its allies responded with financial sanctions. That was an early reminder that access to the dollar-based financial system could be used as a geopolitical weapon. The lesson became much harder to miss after Russia’s central bank reserves were frozen following the 2022 invasion of Ukraine.

China, in particular, began reducing its Treasury exposure. I’ve been writing about that for years.

But forget China for a moment. Look at foreign official demand as a whole.

At the end of 2014, foreign central banks and other official institutions held a little over $4.1 trillion in U.S. Treasury securities.

By late 2025, that figure was below $3.9 trillion.

You might look at that and say, okay. A slight decline. Definitely no growth, but hardly the end of the world.

Now consider what happened on the other side of the equation.

Over roughly that same period, total U.S. federal debt went from around $18 trillion to around $40 trillion.

That’s an extraordinary divergence.

America added more than $20 trillion of debt while its traditional foreign official lenders added essentially nothing.

We also know where central banks have been putting a lot more of their money instead.

Gold.

Global central banks bought 863 tons last year, after three consecutive years of 1,000-plus-ton purchases. Over the past four years, they have bought an average of roughly 1,000 tons annually. That’s about twice the average pace of the preceding decade.

Needless to say, all of this creates an enormous problem for a country that needs to borrow trillions of dollars every year.

And that’s trillions more every year, on top of the $40 trillion pile already there.

If the traditional buyers won’t buy enough, where does the money come from?

That’s a subject worthy of a much longer essay, and I’ll probably write one. But there are basically four ways I see this playing out. Let me run through them quickly.

• First, create new buyers. Stablecoins are the most obvious example. Under the GENIUS Act, dollar stablecoins have to be backed one-for-one by a narrow set of liquid assets that includes short-term U.S. Treasuries. So as the stablecoin market grows, potentially into the trillions, it creates another enormous pool of demand for government debt. Treasury Secretary Scott Bessent has been quite explicit about this, saying the law should lead to a “surge in demand” for Treasuries. Banks, money-market funds, insurers and pensions can all be pushed in the same general direction through regulation. Ultimately, the new buyer is you and me.

• Second, stop existing foreign buyers from becoming sellers. Think of it as a Treasury pawn shop. A country like Japan can use the Fed’s FIMA facility to get dollars by temporarily putting up its Treasury holdings as collateral rather than selling them into the market. In fact, right after this summer’s intervention to support the yen, Japan’s Ministry of Finance said it plans to do exactly that. Bessent has since called for the Fed to raise the facility’s $60 billion per-country cap. Need dollars? Fine. Pawn your Treasuries. Just don’t sell them, please.

• Third, issue more debt where rates are easier to influence. The Fed cannot dictate what investors demand on a 30-year Treasury, but it has much more influence over very short-term rates. So Treasury can lean more heavily on bills and other short-dated debt, moving more of America’s financing toward the part of the curve where the Fed has greater control. And conveniently enough, the stablecoin rules I just mentioned create demand for exactly this kind of short-term debt. Under the GENIUS Act, if stablecoin issuers use Treasuries as reserves, those securities generally have to mature within 93 days. In other words, the government gets a potentially enormous new buyer for precisely the part of the debt market where the Fed has the most influence over rates.

• And finally, there is one buyer that can never technically run out of dollars: the Federal Reserve. We’ve seen this movie before. And it doesn’t necessarily take the proverbial sky falling. If the economy weakens, financial conditions get too tight, long-term borrowing costs become uncomfortable, or the Treasury market itself comes under stress, the Fed can create reserves and buy government securities itself. Call it QE. Call it liquidity support. Call it whatever you like. The mechanics are the same, made possible by one simple fact: the buyer with the deepest pockets in the room happens to own the printing press.

Regards,

Lau Vegys

P.S. Interest rate hike or not, given everything I’ve talked about today, gold will continue to be money in the eyes of the market. So a good way to protect yourself from the continued erosion of your purchasing power is to convert some government currency into real money. That’s the first step. Then, for potentially greater profits, there are gold stocks, which give you leverage to the gold price. That’s why SNAFU Investing’s first monthly issue, which went out to paid subscribers recently, featured a fresh gold pick. It’s still trading below our buy-up-to price, so if you’re a paid subscriber, there’s still time to get in. If you’re not, the intro is free to everyone.

Yesterday I was woken from my Sunday slumber by this (the bottom half is in English, so you can read it for yourself).

Yellow just means nothing has been confirmed in the airspace, but something might be, so find somewhere safe and sit tight. The next level, Red, means it's actually up there, and you're meant to get to a shelter (underground parking, for example).

We’ve been getting more and more of these lately. Sometimes it’s a Russian drone. Sometimes it’s a Ukrainian one. And sometimes it’s a flock of smuggling balloons from Belarus, which have done a fine job of grounding flights at our airports.

I suppose I shouldn’t be surprised. We’re back in the part of Europe historian Timothy Snyder called the Bloodlands.

Good thing it was the weekend and we were all at home. The last one caught the kids at school. My two spent it in the shelter with their classmates, and between the novelty of that and the teachers looking a little lost themselves, they came home rattled.

Now, I’m not complaining. Being here has real advantages. The whole country holds about as many people as the city of Chicago, spread over an area roughly the size of West Virginia, so it never feels crowded. The cities are clean, everything works, and, not least, the kids’ grandparents live a few miles down the road, which was the single biggest reason we came back after almost two decades of vagabonding around the world.

So with everything going on, both here and around the world, some days inevitably feel a bit like a certain internet meme, drone alerts or not (a sentiment I’m sure you, dear reader, can identify with).

I don’t fancy the chances of the guy in the middle. But he does look like a man with a great deal of practice, which is about as much as any of us can reasonably aim for.

Anyway. Later that day we sat down to carry on with an Argentine series we’ve been watching, which is set in Bariloche. San Carlos de Bariloche, to give it its full name. A lake town in Argentine Patagonia, sitting on the shore of a glacial lake about the size of Lake Geneva, with the Andes behind it. The Argentines call it their Switzerland and they’re not far wrong.

And I spent most of the episode not following the plot. Looking at all that water and rock, my mind wandered off to plan B.

Look, living in the Bloodlands you’d be a fool not to have some sort of plan B, and we have done something about it. We’re permanent residents of Paraguay, the kids hold Paraguayan citizenship by birth, and there are a few other arrangements in place to keep the eggs out of one basket.

But Paraguay has its drawbacks, and for me the biggest one is the weather. Asunción in January averages 92 Fahrenheit (33 Celsius) with the humidity to match, and twenty-five days out of thirty-one qualify as muggy or worse. You could cook lunch on your windshield. So I’ve never really thought of it as the kind of plan B you pack up and move to for good.

Right before I put my head down I looked up the annual temperatures in Bariloche. Summers top out around 70 Fahrenheit (21 Celsius). Winters sit in the low forties by day (about 6 Celsius) and go to freezing at night, with proper snow, and it’s dry, because the Andes wring the rain out before it gets there. Which is, more or less, exactly my climate. My wife, a self-described creature of heat, will take considerably more persuading.

Either way, I reckon I can at least get her there for a look. As it happens, we’re going back to Asunción next year, as we tend to every couple of years, and Argentina is close enough to make a detour sensible.

Coincidentally, Argentine friends of ours emailed recently about Villa La Angostura, an hour or so up the road from Bariloche, and had nothing but good things to say. So that’s on the list now too.

Speaking of Argentine friends. If you read only one thing from last week, make it Joel Bowman’s essay (linked below along with the other pieces from last week). Joel writes Notes from the End of the World out of Buenos Aires, where he lives with his family. His piece was the first guest essay to appear in these pages.

I’d like to know what you made of it. If you enjoyed it, say so and I’ll get Joel back. And if you’d like to see more guest essays generally, tell me that too.

From the Comments

One of the things I’ve come to appreciate most about writing here is the conversation that happens in the comments. Here are seven that stood out last week, for different reasons. Each one links back to the piece it appeared on, so you can click through if you’re interested in the context.

Thanks again to everyone who left a comment last week. I read all of them, even the ones I don’t get a chance to reply to individually. Over the coming days, I’ll try to catch up on the questions and the longer threads.

Regards,

Lau Vegys

P.S. If you joined as a paid member last week, welcome aboard. A few links to help you find your way around:

• The first recommendation: a uranium play, with the full thesis, buy-up-to price, and tranche levels.

• The second recommendation: a silver pick, same treatment. The whole thesis, and exactly what to do about it.

• The third recommendation: a U.S. gold developer trading at a fraction of what its ounces are worth.

• The live portfolio: the scorecard of every open position and where each one stands.

• The first Special Report: a deep dive into uranium and the opportunity behind it.

It struck a nerve. Between the comments, notes, and my inbox, I got around seventy responses, with plenty of theories about what caused the decline.

Regulation. Taxes. Offshoring. Green mandates. Two-income households bidding up home prices. Schools failing to teach how a free country works. Politicians deliberately hollowing out the middle class. A generation expecting too much, too soon. “Planned demolition.”

Some of the responses added a lot to the discussion. Others, well... struck me as a little naive.

Take this comment, since deleted:

I think it’s obvious that the younger generation sees that capitalism isn’t the path it once was 50 years ago. The system is horribly corrupt and getting worse. Time for change. They see people living under the Nordic model are happiest in the world. Worth a shot.

I say naive because, having been born in the Union of Soviet Socialist Republics, I’m not convinced that putting “democratic” in front of socialism changes the brutal means required to reach the promised utopia (and no, the Nordic countries aren’t socialist). So, nope. I don't think socialism is “worth a shot.”

But when I reread the comment later, I realized the reader had actually put his finger on something important.

“Capitalism isn’t the path it once was 50 years ago.”

Why 50 years?

Because when you look at what’s happened to the American middle class, that timeframe comes up again and again.

So if we want to understand what caused the decline (and yes, before you wonder, this is very relevant to the investment decisions we make today), going back roughly half a century seems like a pretty good place to start.

Let’s see what America looked like back then.

The America That Was

The post-war era until the 1970s was the golden age of the American middle class. The cost of living was low, economic opportunities were plentiful, and people were friendly.

Now, as I mentioned in my last piece, I obviously didn’t witness that America firsthand. But my grandfather did.

He visited the U.S. for a track and field competition in the 1960s, and for the rest of his life he’d reminisce about the bustling streets, the thriving businesses, and those enormous American cars that made quite an impression on a young man from the Soviet Union. He used to call them “highway ships.”

I also told you about the Zenith portable transistor radio he brought home from that trip. What I didn’t tell you is that bringing a shiny new radio back from the “rotten capitalist West” wasn’t exactly something you did lightly in the Soviet Union.

And that raises an obvious question.

Why take the risk?

Because to my grandfather, it was worth it. American-made goods were coveted everywhere back then. American business was on top, and that “Made in the USA” label was a badge of honor, a guarantee of quality that set the United States apart from anywhere else.

A Zenith radio wasn’t just a radio to a young man from the Soviet Union. It was a little piece of the America he’d seen with his own eyes and never forgotten.

And that America really was on top of the world.

For the average American, that meant a pretty straightforward path to success: work hard, make more money, and move up in life.

Take a look at the next chart. It shows how wages, adjusted for inflation, and productivity rose side by side during the heyday of the American middle class. The harder you worked, the more you earned. It was the key to social and income mobility. And it nurtured a healthy middle class.

But then something weird happened in the early 1970s. Work and wages began to split apart. As the chart clearly shows, productivity kept climbing, while the real wages of the average worker essentially stagnated. And over the decades that followed, the gap only grew wider.

And here’s an even more dramatic way of looking at the same process.

Since the 1970s, wages have been getting a smaller slice of the income pie in the U.S. economy. Back in 1970, they made up about 52% of the total. By 2022 that had dropped to 43%. That’s a 17% decline.

So while the economy has been growing overall, wages haven’t been keeping up.

And here’s one more graph you might find intriguing.

As you can see, wages for the top 1% have grown 182% since 1979. For the bottom 90%, just 44%. Quite the difference.

To be clear, inequality itself isn’t the problem here. As the economist Thomas Sowell once wrote, “Nobody is equal to anybody. Even the same man is not equal to himself on different days.”

The issue is that this inequality wasn’t what you’d call natural. Sure, you might expect the wages of the top 1% to grow faster than those of the bottom 90%. But more than four times faster? That suggests something else was going on.

What Happened in 1971

Now, you’ve probably noticed that all the charts above have one thing in common: things start going downhill in the 1970s.

That’s no coincidence.

In 1971 — or more precisely, on the evening of Sunday, August 15, 1971 — the U.S. government made a historic move that set off the gradual extinction of the middle class. In terms of its consequences, it belongs alongside the 1929 crash, JFK’s assassination, and 9/11. Yet most people know nothing about it.

This is the date President Nixon killed the last remnants of the gold standard.

I say “remnants” because the U.S. had already left the gold standard for domestic purposes back in 1933. Americans couldn’t redeem dollars for gold. But under the post-war monetary system, foreign governments and central banks still could. Narrow as it was, it was the last real discipline against unlimited borrowing and spending.

It also allowed the U.S. to rebuild the global monetary system around the dollar, leveraging its victory in the war and its position as holder of the largest gold reserves on earth.

The new system, created at the Bretton Woods Conference in 1944, tied almost every nation’s currency to the U.S. dollar at a fixed rate. It also tethered the dollar to gold at $35 an ounce.

This arrangement made the dollar the world’s premier reserve currency, effectively forcing other countries to hold dollars for trade or redeem them with the U.S. for gold.

But by the late 1960s, spending on welfare and the Vietnam War (and printing money to cover the difference) had pumped far more dollars into circulation than there was gold to back them.

Other countries weren’t thrilled about holding all those dollars, so they started cashing them in. America’s gold stock drained from roughly 700 million ounces at its peak to around 290 million by 1971.

To plug the drain, Nixon “suspended” the dollar’s convertibility into gold. This ended the Bretton Woods system and severed the dollar’s last tie to gold.

The next chart paints a picture of what came next.

As you can see, the U.S. money supply took off after the early 1970s. When Nixon closed the gold window in August 1971, M2 stood at just $0.7 trillion. Today, it’s $23.2 trillion, more than 30 times as much.

And anyone with a basic grasp of economics knows what happens when you create more and more units of a currency. Each one buys less. Prices rise. That’s the actual definition of inflation: an increase in the money supply.

So I’m sure you can see where I’m going with this. Which is to ask: What happened to the dollar’s purchasing power once it was fully untethered from gold?

Well, the basket of goods and services used to calculate consumer price inflation that cost 41 cents in August 1971 cost 92 cents by August 1981. In other words, the dollar lost 56% of its purchasing power.

Think about that. More than half, gone inside a decade.

So much for “gradual” devaluation.

And, of course, it didn’t stop there. Today, the dollar has lost roughly 90% of the purchasing power it had in the early 1970s.

Everything, All at Once

Curiously, the upheaval that began in the 1970s had ripple effects far beyond just money and the economy. Almost every aspect of American life seems to have taken a turn for the worse. Incarceration rates, divorce rates, out-of-wedlock births, the sheer volume of laws on the books, the size of the government itself. All of them surged in the decades after 1971.

Or take something all of us have to deal with throughout our lives: healthcare.

The chart below shows total national health spending over the past six decades. As you can see, it went from just $27 billion in 1960 to around $4.1 trillion in 2020.

That’s a 152-fold increase.

Astonishing.

Now, before anyone in the comments says, “Yeah, but the country was much smaller back then,” even after adjusting for population growth, from 181 million Americans in 1960 to 331 million in 2020, healthcare spending still rose roughly 83-fold per person.

For Pete’s sake, even after adjusting for inflation, you’re still looking at roughly a tenfold increase in real healthcare spending per person. And inflation, again, is of course itself downstream of the monetary change we’ve been talking about.

There are plenty more hair-raising charts I could throw your way, enough to make you want to hurl your device across the room. But the point is, they would all drive home the same message.

When you break the underlying measure of value, everything starts to unravel.

That, as far as I’m concerned, is the biggest SNAFU of our time (the one that made so many of the others possible, from healthcare to wars and everything in between).

Situation normal. Position accordingly.

Enjoy the rest of your weekend,

Lau Vegys

P.S. Gold may not be money in the official sense anymore. But it remains money in the eyes of the market. So a good way to protect yourself from the continued erosion of your purchasing power is to convert as much government currency as you can into real money. That’s the first step. Then, for potentially greater profits, there are gold stocks, which give you leverage to the gold price. That’s why SNAFU Investing’s first monthly issue, which went out to paid subscribers recently, featured a fresh gold pick. If you’re a paid subscriber, make sure it didn’t land in your spam folder. If you’re not, the intro is free to everyone.

These are some of the ideas at the heart of the American Dream, the belief that anyone who works hard and is determined can achieve success and move up in life.

And, of course, it’s been a core tenet of American society for generations.

But increasingly, it seems the glitter of the American Dream is fading for most Americans. Earlier this year, YouGov asked Americans whether they had achieved the American Dream, or ever expected to.

The results were pretty disheartening, to say the least...

31% said they never will. Another 22% didn’t know. Only 26% said they had already made it.

Break it down by age and the picture gets even bleaker.

Among Americans 65 and older, 55% say they’ve achieved the American Dream.

Among Americans under 30?

Just 5%.

Jeez... with numbers like that, no wonder (democratic) socialism is suddenly finding an increasingly receptive audience.

But when you look at what the American Dream actually costs these days, those numbers start to make more sense.

According to a recent study by Investopedia, living the “American Dream” could set you back just over $5 million over your lifetime. When I last wrote about this, about two years ago, the figure was $3.4 million.

Meanwhile, the average American with a degree is projected to earn just over $2.8 million over a typical career.

You may already see the problem.

Grandpa's America

But what is the American Dream anyway?

If you’re picturing the classic scene of a man and woman with two kids, a white picket fence, a suburban house, and a car straight out of the 1960s, then you’re not far off.

At its core, the American Dream is about being middle class.

Now, I’m a fan of the middle class. It’s made up of people who want to work hard, create and run businesses, take care of their families, and move up in life.

And for a long time, America was perhaps the best place in the world for people like that to prosper.

The decades after World War II were the golden age of the American middle class. Inflation was relatively low, wages were rising, and millions of ordinary families were enjoying a standard of living their parents could only have dreamed of.

Now, I didn’t witness it firsthand, but my grandpa got a glimpse of that America when he visited the U.S. for a track and field competition back in the 1960s.

He’d reminisce about the vibrant American streets, bustling businesses, and those classic American cars that left a lasting impression on him, a Soviet citizen. Every time he shared those stories, he’d proudly gesture to an old Zenith portable transistor radio he brought back from the trip.

Unfortunately, as I found out decades later, that golden age didn’t last.

Through the 1970s, 80s, 90s, and into the 21st century, the middle class’s share of total U.S. household income kept getting smaller and smaller.

As you can see in the chart below, it went from 62% in 1970 to below 50% in the 1990s, and today sits at around 40%.

As I write this, the American middle class is 51% of the adult population. In 1971, it was 61%.

In other words, the middle class has shrunk by about a sixth since 1971. And it has lost nearly a third of its share of the income.

Not great.

The Biggest Expense of Your Life

If I had to point to one thing that’s put the most pressure on America’s middle class over the years, it would be housing.

Owning a home has always been a cornerstone of the American Dream. It’s also the biggest expense most families will ever take on. I’m sure you’ll agree on both counts.

Below is a look at just how dramatic the decline in home affordability has been.

Now, we all know home prices have risen dramatically since the middle of the last century. That’s not the problem. The problem is that, over time, they’ve risen much faster than incomes.

As you can see in the chart above, the income-to-home-price ratio today stands at 20%. In 1970, it was 58%.

To put some flesh on those numbers, in 1970 the median American family earned $9,870 a year, according to the Census Bureau. The median home was worth $17,000. So a single year’s income covered well over half the price of a middle-class house.

In 2024, the median home sold for about $419,000. To match that 1970 ratio, the typical American household would need to be earning just over $240,000.

They aren’t, of course. Not even close. Median household income in 2024 was $83,730 — enough to cover 20% of the price of a house.

In other words, it now takes the combined income of nearly three households to buy what one family could buy in 1970.

To me, the collapse in home affordability is the clearest illustration of just how badly the American standard of living has taken it on the chin.

What the Middle Class Is For

But why should we care, dear reader?

Well, aside from the fact that you and I are, in all likelihood, both members of said middle class, the middle class has historically been one of the great stabilizing forces in American society. Any society, really.

The reason is simple enough to understand: it gives masses of people a stake in the system, something to work for, something to protect, and, perhaps most importantly, a reason to believe they can move up.

Hollow that out and you end up with two Americas: a relatively small group at the top and a much larger group struggling below. That’s fertile ground for resentment, political radicalism, and eventually the kind of class divisions that can turn into outright class war.

We may agree or disagree on the finer points of this argument, but my larger point is this:

When a country doesn’t have a strong middle class, it’s in trouble.

Perhaps the growing embrace of socialism among young Americans is simply an early symptom of that process already underway.

And here’s something else you have to consider. Almost everything we’ve looked at so far happened before another disruptive force entered the picture (one that could only accelerate the whole trend).

AI.

As I’ve been writing for some time now, AI is coming directly for many of the white-collar jobs that have traditionally supported the American middle class. Estimates vary, but we’re talking about tens of millions of American jobs exposed to some degree of AI-driven automation or displacement.

In other words, a middle class that has already been shrinking for half a century may be about to face its biggest squeeze yet.

Where this ultimately leads, I’m not sure. But we’re heading toward a real socioeconomic crisis.

I wonder what Grandpa would make of it all now.

Regards,

Lau Vegys

Right up to 1989, official turnout routinely ran at around 99%, with roughly the same 99% voting for the Communist bloc.

So, naturally, the assumption I grew up with, and that everyone around me grew up with, was that this was the whole problem. Get real elections and the rest follows. Give people a genuine choice and they will choose well.

Well, in December 1991 the Soviet Union broke apart, and the republics, along with the satellite states, rejected the socialist system. Or so the story goes. In reality, the communist parties mostly just changed their coats.

In Lithuania, the old Communist Party renamed itself the Democratic Labour Party and took parliament in a landslide in 1992. Its leader, the last Party boss in the country, was president by 1993.

In Poland the post-communists took parliament in 1993 and the presidency in 1995, when a minister from the old regime beat Lech Wałęsa, the shipyard electrician who founded Solidarity and brought the whole thing down.

In Hungary the communists rebranded as socialists, won an outright majority in 1994, and had the prime minister by that summer.

My point is that while the system changed, and thank God it did, in many ways the same people were still running the show.

Belarus is probably the best example of that. Alexander Lukashenko, the man who runs the place to this day, also came to power democratically, back in the 90s. He never left, though. He has been in charge for three decades, and today they call him Europe’s last dictator.

Interestingly, Belarus is also the one country that never really bothered to change the furniture. The flag and the coat of arms are Soviet, brought back by referendum in 1995: the same wheat, globe and red star the Byelorussian SSR used, with the hammer and sickle swapped out for an outline of the country. The secret police is still called the KGB, and it still claims Felix Dzerzhinsky as its patron, the man who founded the Cheka, Lenin’s secret police and the outfit that ran the Red Terror.

Which is why the piece below, by my long-time buddy Joel Bowman, stopped me.

“Apologists for modern democracy are quick to denounce those who abuse it,” he writes, “but loathe to ask whence the rogue’s gallery of villains and tyrants drew their power.”

He then runs the list, and it’s longer and worse than you’d like. Not one of these men had to storm anything. They arrived through the ballot box, and nothing about the counting stopped what came next.

Joel writes Notes from the End of the World out of Buenos Aires, which is a useful desk to think about this from. Argentina was one of the richest countries on earth a century ago and voted its way to where it is now, one free and fair election at a time.

I’ve known Joel for years. We met around 2011 in that same Buenos Aires, and, funnily enough, he was one of the guys who first told me about Bitcoin. He’s also one of the few people I read with the rare knack of being funny about serious things without being unserious about them.

His column, which I decided to share with you today, is below. If you like what you read, I encourage you to go and subscribe to Notes from the End of the World. There’s plenty more where this came from.

Regards,

Lau Vegys

Mobjority Rule

By Joel Bowman, editor of Notes from the End of the World

Joel Bowman with today’s Note From the End of the World: Buenos Aires...

What is the “post political era”... and are we on the cusp of a New Dawn?

We left you with this delectable morsel last week, dear reader, at the conclusion of our little Future Uncertain series. (Read Parts I, II and III.)

We’ll come back to that anon. But first, let us ponder for a moment the full and glowing present, pregnant as it is with tomorrow...

Perusing the papers of record, what do we find?

An on again/off again war with Iran... from a president who promised no more costly conflagrations in the Middle East...

A $40T Jenga tower of national debt... listing and leaning in the wind... (The government ran a $432.3 billion deficit in July, the single largest monthly shortfall since March, 2021.)

The rise of the Democratic Socialists of America (DSA)... a rabble band of soap-dodging midwits who appear to be positively allergic to the lessons of history...

And that’s just in the American Empire... which is arguably fairing better than large swathes of the anglophone world...

All the King’s Mayhem

Take, for example, the (Dis)United Kingdom. Currently trialing its 6th Prime Minister this decade, the politically promiscuous kingdom is increasingly presenting itself as borderline ungovernable. (For comparison, the UK had only 16 PMs in the entire 20th century.)

Immigration... anemic wage growth... rising cost of living... the housing crisis... rampant crime... a dopey king who seems chosen by providence to test the ruin in a realm... many are the woes that plague Ol’ Albion.

Or how about Canada, a nation that almost reached economic parity with its brash southern neighbor back in the 2010s... the Dominion suffered a decade of wage and productivity stagnation, such that it now ranks somewhere between Oklahoma and Arkansas in terms of per capita GDP.

Or Australia, a land which so “abounds in nature’s gifts, of beauty, rich and rare,” that it takes a parliament of uncommon ignorance and ineptitude to ensure the relatively tiny population does not live in the lap of luxury.

Instead, the Lucky Country suffers one of the highest household debt-to-GDP loads in the world (114%) and one of the largest household debt to disposable income figures (195%), key contributing factors in its own, self-inflicted cost of living crisis.

Indeed, looking around him today, the honest voter might well be horrified... mortified... petrified… but should he really be mystefied?

After all, what has modern democracy delivered us, really? Herewith, a quick reminder…

The House that Democracy Built

In July of 1932, the National Socialists Party (aka, the Nazi party) was the largest democratically elected party in Germany. From its fetid depths emerged a man, the likes of whom the world had probably not seen for centuries. You know the guy. Toothbrush mustache. So-so artist. Not a big fan of the Jews.

The embers of that global conflict had barely cooled when, in 1946, Juan Perón won 52% of the popular vote here in Argentina. Upon taking office, the demagogue promptly seized control of the media, harassed, jailed and tortured his political opposition, spent down the country’s foreign-exchange reserves, and consolidated power unto the executive branch.

In 1951, modern democracy spoke in his favor, when a marching majority returned him to office with 62% of the vote.

Next, through the 1960s and ‘70s, the world’s largest democracy saw fit to elect Indira Gandhi, a beastly woman who instituted brutal authoritarian rule, oversaw mass political imprisonment and conducted a vast eugenics program of coercive sterilization for millions of her country’s poorest people.

It is sometimes considered a “triumph of democracy” that she was eventually voted out of office… which is a bit like feting one’s kidnapper for eventually being let out of the basement after 15 years solitary confinement and abuse. “But without my kidnapper, how would I ever be free?”

Call it “Political Stockholm Syndrome” at its most depraved.

Then, in the 1980s, modern democracy gifted Africa’s “bread basket” nation, Zimbabwe, the human parasite that was Robert Mugabe, a ghastly specimen who was elected on a familiar “land redistribution” platform, only to spend the better part of the next four decades compulsorily expropriating the ground beneath the farmer’s feet, then redistributing the nation’s riches unto himself and his gun-toting cronies... all while his people starved en masse in the streets.

Ah, but modern democracy was not done with the weary 20th Century just yet...

The 1990s saw the “free and fair” election of Hugo Chavez who, according to the international election watchdog The Carter Center, received 56% of the popular vote. As many as 2 million political refugees fled Venezuela during Chavez’s iron-fisted regime. He remained until 2013, when he passed into the shades not a moment too soon... reportedly with billions in ill-gotten loot to his name.

Apologists for modern democracy are quick to denounce those who abuse it... but loathe to ask whence the rogue’s gallery of villains and tyrants drew their power. Choose a side, they implore, and choose a bogeyman. Just don’t look under the covers.

Vladimir Putin... Recep Erdoğan... Daniel Ortega... Volodymyr Zelensky... all democratically elected.

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Insanity Defined

In the Land of the Free, too, voters toss around such venomous pejoratives as would make most hiphop artists blush, accusing their political opponents of being the devil incarnate... and worse.

Bush... Obama... Trump... Biden... and Trump again... all were burned in effigy... denounced in public... cursed to Hades... and elected by earnest voters.

Disgusted with what they see from their leaders, good citizens weep for their nation, their future, their children’s future. And so, determined not to allow tomorrow to unfold in the image of yesterday, they take a good look in the mirror, roll up their sleeves, spit on their hands, and boldly declare:

“By Jove, next time I shall vote even harder!”

But after a quarter-millennium doing the same thing over and over... and expecting different results... surely there is a “less insane” way to achieve the desired outcome, no?

More on what comes “post politics” in your next Notes From the End of the World...

Cheers,

Joel Bowman

Lau’s Note: Interested in more of Joel’s writing? Be sure to head over to Notes from the End of the World.

Notes from the End of the World

Free Markets, Free Minds, Free People - Covering The Greatest Political Experiment Of Our Time.

By Joel Bowman

The Fed meets on the 16th, and the market is now pricing in a two-in-three chance that it raises rates.

Which makes it all the more interesting that I spent last week writing almost entirely about gold. Higher rates are supposed to be poison for it. Why hold something that yields nothing when government paper pays you more than 4% just to sit there?

That’s what the textbook says, anyway.

The problem is, that same textbook assumes everything else carries on as usual. And while I don’t have a crystal ball, I think that assumption will be put to a real test this time around.

I mean, just look at what’s happening with that government paper.

Two days from now, on September 9, the Treasury begins buying back its own long-dated bonds at double the previous rate. It announced the increase back on August 19, lifting each operation from $2 billion to at least $4 billion, and it will carry on until November 4.

A buyback here means exactly what it sounds like. The government goes into the market and buys back bonds it has already sold. This isn’t new borrowing. It’s the Treasury taking its own paper off dealers’ hands with cash.

As crazy as it sounds, given the circumstances, it’s not hard to see why the government would resort to buying its own debt.

The Treasury has $739 billion of new debt to sell this quarter, on top of more than $9 trillion of old debt to roll over this year (with the national debt having recently crossed $40 trillion).

As you can see from the chart above, that $9.2 trillion is a big bill. For context, back in 2008, the same figure was about $2 trillion.

Meanwhile, the people who used to buy that paper without blinking are backing away. In June, foreign investors were net sellers of U.S. government debt. And as I showed you a couple of weeks ago, that wasn’t a one-month blip. Their share of the market has been sliding for fifteen years, from close to half in 2011 to about 30% today.

Which complicates that choice between gold and government paper. To put it mildly.

Setting all that aside, it’s worth remembering what usually happens when the Fed goes on the offensive. Historically, it tends to raise rates until something breaks. Then, of course, it cuts again.

You can see the pattern in the chart below. The dot-com bust in 2000, the financial crisis in 2008, COVID in 2020. Each time, rates eventually ended up back on the floor.

Of course, if the Fed really is serious about hiking rates, what’s different this time is the kind of crisis it might bring on. Any hike would land on rates that haven’t been this high since early 2008 (bar the three years from late 2022 to last December), while years of refinancing at higher coupons have already driven the government’s interest bill to the highest level in its history.

Keep in mind, interest is now the second-largest line in the federal budget, ahead of the military and Medicare. Only Social Security is bigger. In fact, the government now spends 22 cents of every dollar it collects just servicing the debt, against a fifty-year average of 12 cents. And every extra percentage point in rates will add roughly $3.2 trillion to the interest bill over the next decade.

So if rates go up again, the thing that breaks may not be a bubble or a bank.

It may be the budget.

Now, you’ll hear that this is all fine. That the Fed will do what it has to do to “squash inflation,” and that Volcker proved “it can be done.”

True. When Paul Volcker took over as Fed chairman in 1979, inflation was above 11% and climbing. It eventually peaked near 15%. He took the fed funds rate to 19%, broke inflation, and by 1983 it was down to 2.5%.

What conveniently gets left out is that federal debt was just 31% of GDP at the time. Today it’s more like 123%. And even with a fraction of today’s debt, Volcker’s cure came with two recessions and a great deal of pain.

The point is, Warsh doesn’t have Volcker’s room to maneuver. Not unless he’s willing to administer a cure that might kill the patient.

So, yeah, gold may not pay interest. But it’s also one of the few assets you can own that isn’t someone else’s liability. And as I showed you last week, there isn’t exactly a flood of new supply coming either. Even with the gold price nearly tripling since 2018, miners have managed to produce just nine extra tons a year.

But if, against your better judgment, you still don’t own any, don’t despair. Perhaps you have an old gold or silver certificate lying around. Apparently, you can just take it to the government and exchange it for the metal.

At least according to Treasury Secretary Scott Bessent.

You may have already seen the clip in the Fort Knox piece below. If not, here it is. Bessent rather proudly explains that those old certificates can still be redeemed for physical gold and silver:

There’s just one problem. It’s complete nonsense.

Silver certificates stopped being redeemable for silver in 1968. Gold certificates stopped being redeemable for gold in 1933.

Bear in mind, this is the same man assuring us that every ounce of gold at Fort Knox “is present and accounted for.” (More on that in the first piece below.)

Bessent’s little history lesson reminded me of a Soviet joke a reader sent me about a month ago. It seems rather fitting given how much faith we’re asked to place in the people running the show. Thanks for this one, Joe. And since you know I like ending these Monday notes on something a little more cheerful, I’ll leave you with it:

Last week's pieces are linked below in case you missed any of them, along with an alert on our silver miner breaking ground.

From the Comments

One of the things I’ve come to appreciate most about writing here is the conversation that happens in the comments. Here are seven that stood out last week, for different reasons. Each one links back to the piece it appeared on, so you can click through if you’re interested in the context.

Thanks again to everyone who left a comment last week. I read all of them, even the ones I don’t get a chance to reply to individually.

See you in the comments this week.

Regards,

Lau Vegys

And as it happens, something caught my eye recently that makes for a perfect springboard into all of this.

Over a month ago, Treasury Secretary Scott Bessent went on Jesse Watters Primetime. The two were standing in front of a display of historic U.S. currency at the Treasury Department when the conversation turned to Fort Knox.

Take a listen below.

Here’s the transcript, if you’d rather read:

Jesse Watters: What are we looking at here? These look exquisite.

Scott Bessent: These are the displays of our currency over the years. Some of it, like, we used to have silver certificates. We used to be backed by silver, sometimes gold. And then in the ‘70s we just went to what was called fiat currency where you didn’t have to keep gold or silver in the vault. If any of these are still outstanding, the silver or gold is at Fort Knox waiting to be claimed if so needed.

Jesse Watters: Have you visited Fort Knox?

Scott Bessent: I haven’t. People on my staff have. We are going to the Treasurer’s office. The Treasurer has been to Fort Knox, and I’m happy to say all gold is present and accounted for. The U.S. has the largest pile of gold in the world. Over $1 trillion at current market value.

Jesse Watters: And we are getting more from Venezuela, I hear.

Scott Bessent: We are getting a lot from Venezuela.

Now, before we even get to how hard a sell it is to take Scott Bessent at his word that the gold is “present and accounted for” at Fort Knox (even though he admits he hasn’t seen it himself, and take note of Jesse’s reaction to that, by the way), I’m a little bothered that the current Secretary of the Treasury doesn’t seem to know that the U.S. ended the public’s right to redeem gold and silver certificates for metal decades ago.

I mean, is he actually saying I can snatch up some of the tons of these certificates for sale in coin shops and online, walk into the Treasury, and they’ll hand me my silver’s worth? I actually know people who still own them. Better let them know. What a fantastic arbitrage!

The Audit That Wasn’t

Of course, it’s not the first time Bessent has come off as clueless, which conveniently brings us back to the gold question. Last year, he gave an interview with Bloomberg where he confidently stated that there’s a report confirming the gold is indeed there. What’s more, Bessent also claimed they audit the gold every single year.

U.S. Treasury Secretary Scott Bessent: I don’t have any plans [to visit Kentucky]. I can tell you that we do an audit every year. I can tell the American people on camera right now that there was a report—September 30th, 2024—all the gold is there. Any U.S. senator who wants to come and visit can arrange a visit through our office.

And, similarly, he was dead wrong here too. This is the document he’s referring to.

Here’s what the auditors actually wrote:

In our opinion, the Schedules present fairly, in all material respects, the balances of the United States’ Deep Storage Gold and Silver Reserves in the custody of the Mint as of September 30, 2024 and 2023, in accordance with U.S. generally accepted accounting principles.

Translation? They reviewed the schedules of gold reserves. Not the gold itself.

And a schedule, in accounting, is exactly what it sounds like. A list. A supporting table of balances that sits behind a line in a financial statement. The auditors’ job is to check that the list adds up, that it agrees with the underlying books, and that it’s presented the way the accounting rules require. All fine and well. It just has nothing whatsoever to do with whether there’s any metal in Kentucky.

So no, they didn't inspect, weigh, or test a single bar at Fort Knox. They reviewed a spreadsheet.

And that spreadsheet? It’s essentially this, from page 8 of the report:

Those figures are in dollars, and in thousands. So that $10,364,687 is really $10.36 billion. (And “liability to Treasury” just means the Treasury owns the metal while the Mint holds it, which is why the two lines cancel out to zero.)

Now, $10.36 billion is a strange number for the largest pile of gold on Earth (Bessent himself put it at over $1 trillion in the video above). The reason for the gap, as you may know, is that the official “book value” of U.S. gold hasn’t changed since 1973. It’s still valued at $42.22 an ounce, the outdated statutory price the Treasury continues to use.

It’s easy enough to double-check.

Just divide that amount by $42.22 and you get roughly 245 million ounces, which is, of course, the amount of gold we’re told the U.S. government holds in deep storage (plus another roughly 16 million ounces held elsewhere, bringing the total to about 261.5 million ounces).

If you want to examine the report for yourself, here’s the link.

At any rate, the point I’m trying to make is that this isn’t an audit of the physical gold. It’s an accounting exercise, a restatement of what the Treasury already has on the books.

That’s not to say this was a demanding task. The entire report runs just 12 pages. Table of contents, a few summary tables, and some boilerplate language. That’s it. Nothing ChatGPT couldn’t crank out in a few minutes.

So if this is what the Treasury Secretary is passing off as a real audit, it’s just as well the U.S. government is getting all that Venezuelan gold he says it’s getting so much of.

So, Where’s the Audit?

Now, in case you’re wondering, the last time the entire Fort Knox holding was audited in a single exercise was back in 1953, under President Eisenhower. Even that was just a spot check.

There was also a notable photo-op in 1974, when the Treasury opened Fort Knox to about 100 journalists and members of Congress following rumors that the vault was empty. Cameras rolled, gold bars were displayed, and everyone left with a souvenir sound bite.

But nothing was weighed. Nothing was assayed. No serial numbers were matched.

One radio reporter summed it up best:

All I can say is that I saw gold in there.

That same year, the Treasury launched what they called a “continuing audit program.” Starting in 1975, they conducted annual reviews of small portions of the gold.

By 1982, about 80% of the gold had reportedly been verified. The program continued for several more years, and by 1986 that figure had (reportedly) reached roughly 92%.

After that? The continuing audit program was discontinued.

Note: There’s a reason many folks view 1953 as the last true inspection. Everything after it was done a compartment at a time. And once a compartment holding the gold was counted, it was closed with an Official Joint Seal, a numbered document with wax seals and tamperproof tape, and so long as that seal held, never opened again. From then on, auditing it meant checking the seal, not the gold behind it.

Now, the most recent effort to actually implement a real audit that I can think of came last year. Representative Thomas Massie introduced a bill called the Gold Reserve Transparency Act, and Senator Mike Lee introduced the Senate version on November 19.

Between them, they’d require a full external audit and inventory within nine months, followed by another audit every five years, plus an assessment of the physical security around the reserves.

They’d also look into whether any of the gold in the vaults has been lent out, pledged, or swapped, and whether anybody else has a claim on it. Because I’m pretty sure there is gold in there. The question is how much of it still actually belongs to America.

At writing, both bills are sitting in committee. Neither has advanced.

Make of that what you will.

(In the meantime, the assurance on offer is the word of a man who hasn’t been to Fort Knox and thinks you can walk an old silver or gold certificate into the Treasury and come out with the metal.)

Enjoy the rest of your weekend,

Lau Vegys

P.S. None of this makes me want to own less gold. Which is roughly what SNAFU Investing’s first monthly issue is about. What I wanted was a company that already controls defined ounces somewhere a mine can actually get built, at a price that hasn’t caught up with the metal it’s sitting on. It went out to paid subscribers last weekend. If you’re a paid subscriber, make sure you haven’t missed it. And if you’re not, the intro is free to everyone.

First, it started climbing after the Treasury said it would double the size of its long-end buyback operations, which I wrote about in the first monthly issue of SNAFU Investing on Saturday. That pushed gold to its highest level since May.

Then Fed Chairman Kevin Warsh rattled the market on Friday by calling inflation concerning and hinting that rates may go up rather than down.

As I write this, it changes hands around $4,330 an ounce. That’s about a quarter more than it was a year ago, but still well below where it was in January. So depending which chart you put in front of someone, you can make the bull case or the bear case. I’m firmly in the bull camp, and I’d find it hard to be anywhere else with everything that’s going on.

But I want to talk about something else today. Something that won’t have changed whatever the Fed decides later this month, and that very few people are discussing.

Earlier this year the World Gold Council published a forecast. It expects global gold mine production to peak as soon as next year, in 2027, and to decline gradually from 2028 onward.

In case it needs spelling out, peak means the most gold the world will ever pull out of the ground in a single year.

Nine Tons

It isn’t hard to see why they’d say it. Because if you look at the hard data, the mining industry simply isn’t finding enough new gold.

Take a look at the chart below. It shows what the world’s gold mines have produced over the past eight years, set against the price of the metal.

As you can see, global mine production hit 3,672 metric tons last year. That’s technically a record, but only barely. Back in 2018, miners produced 3,663 tons.

The gold price, meanwhile, went from an average of about $1,270 an ounce in 2018 to roughly $3,430 last year. It nearly tripled.

And what did all that extra money coax out of the ground?

Nine tons.

In other words, global gold production went essentially nowhere in seven years.

In almost any other market, a price signal like that would have brought a flood of new supply. In gold, it brought virtually nothing.

Fewer, and Smaller

So what’s going on?

Well, major producers have been depleting their reserves faster than they can replace them for more than a decade now.

And it’s not for lack of trying to find more. They’ve spent billions on exploration, scouring prospective belts all over the world for new deposits. Yet the discoveries keep getting fewer and smaller. Take a look at the chart below.

As you can see, the average major discovery now holds 4.4 million ounces, down from 7.7 million in the decade before. That’s a drop of more than 40%. And there have only been six major discoveries since 2020.

Of course even when they do find something worthwhile, there’s another problem. It takes forever to turn a discovery into a mine.

According to S&P Global, mines that came online between 2020 and 2024 took nearly eighteen years on average to go from discovery to first production. Back in the 1990s, it took about six.

Which means a world-class gold deposit discovered this morning probably won’t produce a single ounce until sometime in the mid-2040s. And the industry isn’t finding enough deposits to fill even that timeline.

(There’s recycled gold too, of course. But that’s metal already sitting above ground rather than anything new, and most of it is jewelry scrap. And even that barely moves. Last year the average gold price rose 44%. Recycled supply rose 3%.)

So what are the majors doing about it?

Well, the obvious thing. When you can’t find it, you buy it.

Since 2024 there have been nine major gold takeovers committing more than $24 billion, part of a broader mining deal wave of around $139 billion. That’s the busiest the sector has been since 2011.

What’s interesting is that buyers are reaching further and further down the chain, acquiring companies that have never poured an ounce of gold. Which makes sense, when the alternative is watching your own reserve base shrink while the gold price climbs.

And there’s a predictable consequence to all this. Every deal that closes takes another buildable project off the market. Which makes the ones still standing that much more valuable.

Regards,

Lau Vegys

P.S. If the majors can’t find gold and have to buy it instead, the interesting question becomes who they’d have to buy it from. That's the thinking behind the recommendation in the first monthly SNAFU Investing issue, which went out this weekend. What I wanted was a company that already controls defined ounces somewhere a mine can actually get built, at a price that hasn’t caught up with the metal it’s sitting on.

So if you're a paid subscriber, make sure you haven't missed it. And if you're not, the lead is free to everyone.

Quick update on our second recommendation.

Read more

There's a chart I wanted to share with you this Monday. It shows the dollar's share of the world's allocated foreign exchange reserves. In plain English, how much of the money central banks hold in reserve sits in dollars rather than euros, yen or anything else.

As you can see, the dollar accounted for 71.5% of those reserves as recently as 2001. By the end of last year that was down to 56.4%, the lowest reading since 1995.

Watching the dollar’s story unfold is a bit like watching a train wreck in very slow motion. Year to year, nothing much happens. You even get a bump here and there. But step back far enough and the trajectory is unmistakable. Fifteen percentage points, gone.

All of this was back on my mind last week while I was putting together SNAFU Investing's first monthly issue, which went out on Saturday (linked here and below, along with the other piece from last week).

There’s a reason the inaugural issue carries a gold recommendation, and the chart above is a good deal of it. Because the obvious question it raises is what those same institutions have been putting their money into instead.

Gold.

As I show in the issue, since 2022 central banks as a group have bought roughly 1,000 tons of it a year. About double what they averaged over the previous decade. And when the price spiked earlier this year and buying tailed off for a quarter, what did they do in the next one, after the price had fallen? Came back with a vengeance. 289 metric tons.

Which brings me to the part of the story I find most interesting, and the reason this month’s pick is what it is.

The world wants more gold, yes. The trouble is, the mining industry simply isn’t finding enough of it.

I get into all of that, and a good deal more, in the issue. So if you’re a paid subscriber, make sure you haven’t missed it. If you're not, the lead is free to everyone (and if you've been on the fence, this might be a good moment to come inside).

From the Comments

One of the things I’ve come to appreciate most about writing here is the conversation that happens in the comments. Here are five that stood out last week, for different reasons. Each one links back to the piece it appeared on, so you can click through if you’re interested in the context.

Thanks again to everyone who left a comment last week. I read all of them, even the ones I don’t get a chance to reply to individually. Over the coming days, I’ll try to catch up on the questions and the longer threads.

Regards,

Lau Vegys

P.S. On a slightly related note, one of our precious metals positions in the portfolio started building its new mine last week. Fully financed, no debt, and no trip back to the market to pay for it. The money is coming from cash on hand and the mine it already operates.

That’s about six weeks from recommendation to groundbreaking with nothing having gone sideways in between, which in this sector is worth noting.

Paid subscribers, a proper alert follows tomorrow.

A word before we start. This is the first of the SNAFU Investing monthly issues, and they’ll come at the end of each month. This one carries a new gold recommendation, below the paywall.

You may not have noticed it amid the ongoing Iran war and everything else happening right now, but gold has been on quite a run lately. Last week alone, it jumped more than 5%, reaching its highest level since May. Take a look at the chart below.

So what happened?

Well, several things actually.

If you look closer at the chart you’ll see the move started on Wednesday the 19th. But it didn’t start in the gold market.

What happened was that that afternoon the Treasury announced it would at least double the size of its long-end buyback operations, from $2 billion apiece to $4 billion, running from September 9 through November 4.

Now, a buyback here means exactly what it sounds like. The government goes into the market and buys back bonds it has already sold. This is not new borrowing. It’s the Treasury taking its own paper off dealers’ hands with cash.

In case you’re wondering why the Treasury would do such a thing, look at the position it’s in.

It has to sell $739 billion of new debt this quarter. It also has close to $10 trillion of old debt to roll over this year.

Meanwhile, the people who used to buy that paper without blinking are backing away. In June, foreign investors were net sellers of U.S. government debt. And as I showed you on Wednesday, that wasn’t a one-month blip. Their share of the market has been sliding for fifteen years, from close to half back in 2011 to about 30% today, the lowest in two decades.

The problem is that when fewer buyers show up for your debt, the yield goes up. And when the yield goes up, every dollar you borrow costs more, which means you borrow more.

Unless of course you buy the bonds yourself.

That’s the reason a program like this exists at all.

This isn’t a new idea, by the way. The Fed spent the first half of this year doing its own version of it, buying short-term Treasury bills by the tens of billions and calling it reserve management. I called it what it was back in December. Money printing in anything but name.

Now, you may be thinking, but wait Lau, $4 billion isn’t all that impressive. After all, against the $739 billion the Treasury has to borrow this quarter, $4 billion an operation barely registers.

So why did gold care at all?

The reason is simple, actually. The market wasn’t pricing the amount of money. It was pricing the precedent, and the willingness to go further. In fact, the day after the announcement, Treasury Secretary Bessent signaled the operations could run bigger than $4 billion if needed.

Remember, this is the same Bessent who, earlier this month, publicly asked the Federal Reserve to “upsize” an emergency lending facility (currently capped at $60 billion per country) so Japan could get the dollars it needs without dumping a single Treasury on the market.

Those dollars, of course, wouldn't come out of a drawer. The Fed would create them. Print them, if you will. I wrote about it last week.

Put it all together, and it seems the Treasury is working around the clock to hold the bond market up.

Which is why gold is where it is even after Fed Chairman Kevin Warsh got up at Jackson Hole yesterday, called inflation at 3.7% concerning, and hinted that rates may have to go up rather than down.

And my guess is that’s how it trades from here. Higher, and not especially bothered by talk of rate hikes. (Which is why this month’s issue adds a gold position to the portfolio.)

The Only Way Out

None of this is happening in isolation, of course. The U.S. national debt crossed $40 trillion this month, which I wrote to you about earlier this week.

And as I mentioned there, the headline number is bad enough on its own. But the bigger problem is the acceleration, which is to say how quickly it keeps getting worse. Take a look at the chart below if you missed it.

I ended that piece by saying there’s only one realistic way out of this, and that’s devaluing the dollar. So let’s talk about that, because this is the big picture that really matters.

The easiest way to see why this is the obvious way out is with a simple illustration that hits closer to home.

Say your family has a fixed $500,000 mortgage. Then high inflation hits and prices across the economy rise dramatically. Over time, your salary and your partner’s salary double or triple along with most prices, while that $500,000 mortgage stays exactly where it is. Suddenly, the debt feels a whole lot lighter. Your mortgage payments haven’t changed, but they now eat up a much smaller portion of your income.

Just as importantly, the politically connected elites (the only people who really matter) tend to do just fine out of it too. During inflation, asset prices rise. Stocks, real estate, private equity, all of it goes up in nominal terms. Which is precisely why devaluation is such a convenient path of least resistance for those in power. For the majority of Americans watching their savings and purchasing power disappear, not so much.

Now, you might reasonably ask why they don’t simply cut spending instead.

Well, aside from the fact that we recently watched Musk’s DOGE try (and fail) to make a meaningful dent in federal spending, balancing the budget today would require roughly $2 trillion in cuts every single year. For context, the entire Social Security program costs about $1.5 trillion annually, while the military budget is roughly $900 billion. Even eliminating either one completely wouldn’t be enough.

Put yourself in a politician’s shoes. Imagine stepping up to the microphone: “My fellow Americans, we need to slash government spending by $2 trillion a year. We’ll start by cutting Social Security payments…” You wouldn’t finish that sentence before being booed off stage, assuming you made it past your campaign donors.

History shows that when governments face choices like these, they almost always take the path of least resistance. Cutting spending is politically toxic. Default is off the table. But gradual devaluation? That’s always the preferred stealth option.

But don’t let the word “gradual” fool you. America’s own history shows that devaluation can happen a lot faster than those in power would have you believe.

Consider this. When Nixon took the dollar off gold in 1971, it took less than ten years for the dollar to lose more than half its purchasing power. Think about that. More than half, gone inside a decade. And it didn’t stop there. Today, that same dollar buys roughly 90% less than it did in the early 1970s.

And before anyone tells me this couldn’t happen in America, it already has in a country very much like America. In 1976, the United Kingdom, then one of the world’s leading economies, went hat in hand to the IMF for the largest loan package the fund had ever arranged. The pound had collapsed, inflation had hit 27% the year before, and the government was struggling to finance itself. Being a rich, developed nation didn’t protect it.

And guess what. None of this is lost on the people sitting on trillions of those dollars.

Follow the Money

I’m talking about central banks, of course. And judging by their actions, they answered the devaluation question a long time ago. Take a look at the chart below. It shows central bank gold buying over the past eight years, with the last four set against the four before them.

As you can see, since 2022 central banks as a group have bought roughly 1,000 tons of gold a year. That’s about double what they averaged over the previous decade. And it’s probably the most underappreciated reason gold has done what it’s done.

Now, in case you’re wondering why 2022 was the turning point, that was the year the West froze roughly $300 billion of Russia’s foreign reserves following the invasion of Ukraine. The U.S. also effectively cut Russia’s central bank and some of its biggest banks off from the dollar system. As the rest of the world watched, every reserve manager on earth suddenly had to reckon with the fact that the world’s dominant reserve currency could be weaponized against them.

Now, if you take another look at the chart, you’ll notice central banks bought less gold in 2025 than in the previous three years. In tons, that’s true. But not in dollars. Gold cost 44% more that year, so they actually spent about $95 billion, compared with roughly $84 billion the year before.

Now, before someone in the comments section points out that gold buying was tepid in the first quarter this year, yes, according to revised World Gold Council (WGC) figures, buying dropped to double digits as gold spiked toward $5,600.

But here’s the thing. We also know it came back with a vengeance, jumping to 289 tons in the second quarter after the price had fallen about 30%.

Which tells you central banks are more than willing to buy the dip, because they still want the ounces. Badly.

Recent surveys of the people actually making these decisions confirm it.

Earlier this year, OMFIF, a London-based think tank, published its annual survey of some of the world’s largest public investors, collectively managing more than $10 trillion. Among the central banks surveyed, a net 30% said they intend to add more gold to their holdings over the next year or two.

Interestingly, they’re not expecting to get it cheaply, either. Some 61% expect gold to be trading between $5,000 and $6,000 an ounce by June 2027. And only 28% said the current price was discouraging them from buying.

Note: A separate WGC survey found much the same thing, with a record 45% of central banks planning to increase their gold holdings over the next twelve months.

Which leaves one obvious question.

Where’s the Gold?

Now, before I get to this month’s pick, there’s one more piece of this story we need to talk about. It’s the part few people seem to mention. And it’s also the reason this month’s recommendation is what it is.

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