Maria’s Note: Maria Bonaventura here, managing editor of the Diary. For this weekend’s guest edition, we turn to Tom Dyson. As longtime readers know, Tom is the guy who went “all in” on gold after Bill shared his Dow-to-Gold trading model with him. Below, Tom offers a bold prediction about the Federal Reserve’s balance sheet… and how it could lead to gold’s revaluation…

WEST PALM BEACH, FLORIDA – All my work and research over the last year can be boiled down to one singular prediction: The Federal Reserve’s balance sheet is about to EXPLODE higher…

The latest numbers are out. (More below.)

Stretched Finances

At the beginning of the year, before anyone in America had heard of coronavirus, the U.S. government found itself in the most precarious financial position it had ever been in.

It had $23 trillion in debt, ran a budget deficit of more than a trillion dollars a year, and it mostly financed itself with short-term debt, which is a lot less secure than long-term debt.

And it found itself in this position after 10 years of an economic expansion and soaring stock markets.

The government’s gargantuan demand for cash had been weighing heavily on the public markets for more than a year.

I used to work for the “repo” (short-term loans) desk at Citigroup. So when I started studying the markets again in 2018 after my two-year sabbatical, it was the first thing I noticed.

“The plumbing beneath the banking system is blocked,” I wrote.

The cause: Enormous amounts of cash the government was soaking up and the inability of the banking system to meet its appetite.

As I warned many times last summer, if they didn’t unblock the money markets things would “start blowing up.”

Things blew up on September 17, 2019 when the interest rate on short-term loans spiked from 2% to 10% in a matter of minutes.

The Fed turned on its printing press and began bailing out the government. It couldn’t let the government collapse financially.

That was the moment I was sure we were about to get inflation.

When I considered the government’s obscene consumption of cash…

…its inability to fund itself in the public markets…

…the Fed’s willingness to bail it out…

…and the likelihood of a coming recession – even though I had no advance knowledge of a pandemic…

…it was clear to me the Fed’s balance sheet would grow by trillions and trillions of dollars over the next few years.

Hyperinflation, Monstrous Obligations

Look at this chart. It shows the latest picture of the Fed’s balance sheet. It’s started to hyperinflate…

Of course, the coronavirus outbreak has been the trigger for this hyperinflation.

The economy has all but shut down, the markets are crashing, companies are going bankrupt, people are losing their jobs, and the credit markets are jammed up.

To soften the blow, the federal government is about to begin sending cash to every American, upping social benefits and cutting taxes.

Current estimates put the cost of this stimulus at $2 trillion. I reckon it’ll end up being far higher… especially when the Treasury begins bailing out corporations.

This is in addition to the three monstrous financial obligations the U.S. government already has anyway… to Baby boomers, to the military budget, and to foreign creditors.

Meanwhile, its tax revenues are about to plummet because its revenues are tightly connected to the economy and stock market.

$10 Trillion Hole

The bottom line is, this recession and bear market we’ve just entered is about to BLOW A HOLE in the government’s already-stretched finances.

From my reading, I reckon this hole could easily reach $10 trillion.

That means the government is going to have to borrow $10 trillion on top of the $23 trillion it already owes creditors… and the $1 trillion deficit it was already running each year.

This is happening at a time when:

  1. There has been a year-long shortage of cash in the banking system to fund the government’s appetite for borrowing (noted above)

  2. Asset managers are dumping their Treasuries holdings to meet redemption requests and margin calls

  3. The oil-exporting nations won’t be buying Treasuries

  4. China won’t be buying Treasuries

  5. Emerging markets are having to dump their Treasuries to support their plummeting currencies

  6. And the stock market is falling

The ONLY way the government will be able to finance these spending plans – and avert a hard-screeching bankruptcy – is if the Fed monetizes its debt.

And that’s why the Fed’s balance sheet has started to hyperinflate.

It’s at $4.5 trillion now. If I’m right about the hole the government finds itself in right now, the Fed’s balance sheet will pass $10 trillion later this year… and then pass $20 trillion or $30 trillion in the next few years.

It’s inevitable.

How will they maintain confidence in the U.S. dollar during this hyperinflation? There’s only one way, in my opinion.

As I wrote about here, they must revalue the price of gold on the Fed’s balance sheet…


Tom Dyson
Editor, Postcards From the Fringe

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