Ponzi Schemes, the demise of the PetroDollar, and WTF are Yield Curves and Recessions?!

Those of you who have been subscribed for a while may have noticed a lack of newsletters dropping into your inbox. You may even be confused about what this “MoneyVerse” shizzle is that you are now reading.

Well, firstly, my lack of writing has not been without reason. I have been busy. Busy learning and diving deeper into the mystical maze of money, the current system, its powers, how it’s controlled, and how every time in history (without question) it has fallen apart with a new system taking its place.

So what’s the plan? I am fortunate to have a front-row seat within the decentralized financial realm. A sphere in which I believe will be the next frontier of the monetary system. Digital assets, transparency, trust-minimized applications, and vast upgrades in efficiency and fungibility, leave me with an undeniable reason that this space will become a dominant part of the system in the next few years. In fact, it’s already taking place.

However, simply believing that without diving into the deeper reasonings of why, what the problems of the current system are, when it will play out, and what the future problems of the new system may be would be a cataclysmic failure. It would be naive. Money is more about finance, it is about freedom, and I truly believe that right now, we stand at a fork in the road that presents two paths.

Path One: You are uncontrollably pulled towards a crumbling system built on debt and debasement. You continue to work your ass off, while your hard-earned purchasing power rapidly declines, your wealth plummets, and you continue to live deep within the rat race for eternity.

Path Two: You educate yourself. You look back at history and learn how these things play out. You leverage the phrase that “History doesn’t repeat but it often rhymes” to understand how the shift will happen. You take a holistic, first-principle approach to navigate each sector of the financial realm and position yourself in the best place possible no matter the outcome. You aren’t a [Insert financial asset] maxi, you're open-minded, and welcome your beliefs to be questioned as you walk down the road of financial freedom.

Most importantly, you don’t allow cognitive dissonance to cloud your potential to learn.

The MoneyVerse will be my undertaking of traversing path 2. Each week, we will uncover resources within the Moneyverse of macroeconomics, finance, digital assets, and decentralized finance. We will break them down super simply, and provide potential action items from the newfound knowledge. Knowledge is power, and it’s via this guiding principle that we ultimately aim to educate ourselves, learn the rules, position ourselves accordingly, and unlock the freedom that money permits.

Right, fuck the noise, let’s get into it.

Watch this video.

The video is a few years old, but it offers a fantastic overview of the current monetary system and the hidden dangers that lurk around the corner. Ultimately, it uncovers how the current fiat-based money system is the ultimate Ponzi scheme.

After WW2, all nations were seeking a reserve currency that would allow the seamless ability to transact and trade with other nations. Due to the US’s favorable position being the largest creditor during the war, having untouched and flourishing infrastructure, and boasting 70% of the global gold reserves, the USD was chosen.

During the Bretton Woods agreement in 1945, nations agreed to peg the USD to Gold and set the $ as the world's reserve currency. This sole action sparked a global reliance on dollars and USTs (US Treasuries) for the trade of all major commodities and equities.

Then in 1971, the US abolished the Gold backing, and in the following years, spiraled into an economy and currency backed by an unprecedented amount of debt and falling $ purchasing power. In simple terms, it entrapped the global financial system in a debt-based fiat system. You can see by the chart below that since 1971, the amount of US debt has spiraled out of control by more than 32 trillion dollars!!

Money Printing goes brrrr… Continually increasing deficits, rampant inflation, unprecedented printing, and the reliance on the continuous purchase of USDs to prop up the purchasing power of the dollar… Cough Ponzi scheme cough

Fiat is a neverending house of cards built on debt and debasement, and eventually, like all Ponzi schemes, it will pop. What’s more, due to the USD being so ingrained in all countries’ foreign exchanges, it will have overreaching ripples and consequences. I highly recommend you watch the above video to grasp the bigger picture.

While no one can predict exactly when the cards will fall, there are shorter financial ebbs and flows that many are predicting. One of those is a recession.

WTF is a recession?

A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

In other words, a recession is a period when the economy of a country or region experiences a significant decline in business activity, consumer spending, employment, and overall economic growth. There is a slowdown in various industries, rising unemployment rates, and reduced income for many people.

In simpler terms, a recession is when the economy and the people within are struggling.

Why are so many speaking of a recession? One of the most accurate indicators is something known as the Yield Curve.

The mystical Yield Curve

The Yield Curve shows the slope, measured by the spread between the yields on ten-year and two-year U.S. Treasury securities. Normally, the yield curve looks like a gentle hill due to Interest rates being low for short-term loans and gradually increasing for longer-term loans. This makes sense because if you lend money for a longer time, you usually expect a bit more interest in return.

But sometimes, the yield curve can look like an upside-down “inverted” hill, where short-term interest rates are higher than long-term ones. The inversion often suggests that investors expect interest rates to fall in the future, and are willing to accept lower yields on long-term bonds because they anticipate that short-term rates are on the verge of dropping due to economic uncertainties or central bank policy changes.

If we look at the charts below, the shaded grey areas resemble a recession. Every time the slope has been below the black line and inverted, the US has entered a recession in the following months.

The image below shows how the S&P500 reacted in these recessions.

The petrodollar & the inevitable reccession.

Luke Gromen (one of the most respected names in the global research sector) believes that we are “in the final innings of a sovereign debt crisis that will upend much of the status quo as we know it”. Ultimately, he believes the next global recession is now inevitable.

Luke opens the discussion with the fact that for a long time dollar = energy. However, he now states we are witnessing a disconnect between the two. A common phrase that most may be familiar with is the petrodollar.

As we explained above, the Bretton Woods agreement set the USD as the global reserve currency. The term "petrodollar" refers to the U.S. dollar's central role in exporting and importing OIL within international markets.

Luke breaks down how trade historically operates between China, the US, and OIL.

1. The US imports goods from China.

2. The US pays for these imports in USD.

3. Rather than just holding USD on their foreign reserves, China lends this USD back to the US for US treasuries.

4. China holds ‘Risk-Free’ US debt, in return for a USD yield.

5. China earns a yield on their FX reserves until they need to purchase goods like OIL.

6. After a duration, they receive their principal, plus the bonds yield back and buy LNG from OIL-rich countries with the USD.

However, Luke states that recently this mechanism has begun to change.

1. The US imports goods from China.

2. The US pays for these imports in USD.

3. Rather than lending for USTs, China is now going straight to the source.

4. Instead of holding the USD, China pre-buys future years’ supply of LNG.

5. They do not want to hold the “risk-free” US debt and earn yield for doing so.

6. Signaling they have no faith in the USD as a store of value moving forward.

Not to add that China has begun trading in CNY rather than USD for a large portion of its OIL and Coal purchases.

And that’s only China...

Luke believes this is widespread with multiple nations looking to reduce reliance on the dollar, with another telling sign being the increase in countries starting to stockpile Gold, with the central bank’s demand for gold increasing at unprecedented rates.

Luke states the reliance on USD for trade is falling. The US is reliant on other nations buying USTs to fund its ongoing deficits. However, with the shift that is taking place, rather than other countries buying USTs, Luke believes the FED will become the buyer of last resort; Buying treasuries with the money printer, and continually inflating the money supply.

The result? A one-way path to a debt-based dollar system that sees increasing interest rates until something POPS.

Luke says the only option to stop inflation is to cut fiscal spending, but states there are only a few things that can be cut.

1. Treasury Spending (Cut rates) - This is inflationary.

2. Cut entitlements and defense by 40-60% immediately and permanently. - No politician will do.

So, what’s the outcome? What are Luke's calls to action?

Luke says he is invested in the following.

• Cash

• US Short-Term treasuries

• Gold

• Bitcoin

• US Electrical infrastructure equities

• OIL

Luke finishes by saying, he has very little conviction on how it will play out in the short term, hence the cash and short-term USTs for liquidity and optionality. In the long term, he says he has extremely high conviction - The FED is going to have to finance the debt of the government, and Luke says Gold and Bitcoin will be the best investments to position oneself for the inevitable FED printing.

That’s it for this week. Next week we will dive into how digital assets will play a crucial role in this shift.