"Left Turn" is a new essay by Arthur Hayes. Brief retelling

Why do we need government? It provides us with roads, education, health care, social order and other benefits. In exchange for these services, we citizens pay taxes. A government with a balanced budget tries to provide as many services as possible with the amount of tax revenue it receives.

However, sometimes situations arise where the government borrows money to do something that it believes will have long-term positive value without raising taxes. For example:

Instead of levying additional taxes to build an expensive hydroelectric dam, the government issues bonds to raise funds. It is assumed that the economic return of hydroelectric power plants will be equal to or higher than the bond yield. In this way, the government invites citizens to invest in the future, paying a return close to the economic growth that the power plant will create.

If in 10 years the hydroelectric power station leads to economic growth of 10%, then the yield on government bonds should be at least 10% to attract investors. If payments are below 10%, then the government makes a profit at the expense of the population. If payments exceed 10%, then society earns at the expense of the government.

Now let’s zoom in and talk about macroeconomics. The rate of economic growth of a particular state is its nominal GDP, which consists of inflation and real growth.

If the government is trying to accelerate nominal GDP growth by running a budget deficit, then it makes sense that investors financing the deficit should receive a return equal to the growth rate.

However, while investors expect returns to equal nominal GDP growth, policymakers would like to pay less. If they can create a situation where the return on government debt financing is lower than the growth rate of nominal GDP, they can significantly increase spending without raising taxes.

How do politicians achieve this? They financially suppress citizens through the banking system. The easiest way to set government bond yields below nominal GDP growth is to instruct the central bank to print money and buy government bonds, thereby artificially lowering their yields.

Then all other banks are told that government bonds are the only “suitable” investment for the population and all citizens’ savings are directed into this low-yielding instrument.

But the problem is that such a system promotes ineffective investment. The first projects financed by government bonds are usually worthy ones. However, as politicians seek growth to win re-election, the quality of projects declines and public debt grows faster than nominal GDP.

When this happens, policymakers need to make the difficult decision to recognize the losses from poor investment today in the form of an acute financial crisis or in the form of low or no economic growth, but tomorrow. Typically, governments choose the second option because the future comes after they leave office.

The key challenge for investors is to understand when government bonds are a good investment and when they are not.. The easiest way to determine this is to look at the nominal annual GDP growth rate relative to the 10-year bond yield.

Real yield = 10-year government bond yield – nominal GDP growth rate

If real yields are positive, government bonds are a good investment. In addition, the government is usually the most creditworthy borrower, since it can use its monopoly on violence to force taxes.

If real yields are negative, government bonds are not the best choice. In this case, the investor needs to find assets outside the banking system, the growth of which will allow them to outpace inflation.

All major economic blocs pursue policies of financial suppression of investors and creation of negative real returns. China, EU and Japan will ultimately simply inherit US policies. Therefore, I will focus on the past and future monetary and fiscal situation in the United States.

“Omerika”

The chart below shows real government bond yields (USNOM index) and the balance sheet of the US Federal Reserve since 2009. I chose this date because Bitcoin’s genesis block was created in 2009.

USNOM index (white) and US Federal Reserve balance sheet (yellow). Data: Arthur Hayes.

As can be seen, after the deflationary shock caused by the 2008 global financial crisis, real yields changed from positive to negative. It only briefly turned positive again in 2019 due to the impact of COVID-19, but was then followed by an even stronger deflationary shock.

A deflationary shock is when real yields fall due to a sharp decline in economic activity.

With the exception of 2009 and 2020, government bonds were the worst asset class compared to stocks, real estate, cryptocurrencies and other instruments. Bond buyers could only profit because of the enormous leverage.

This unnatural state of the economy was possible because the Fed expanded its balance sheet by buying government bonds with printed money in a process called quantitative easing (QE).

The lifeline during this period of negative real returns was and remains Bitcoin, demonstrating constant non-linear growth. This growth is a property of a limited supply asset that is valued in inflationary fiat dollars.

USNOM index (white) and Bitcoin price (yellow). Data: Arthur Hayes.

It explains the past, but markets are focused on the future. Why should we “turn left” on the crypto investor curve and believe that this bull market is just getting started?

Everyone wants something for free. Nothing in the universe works this way, but that doesn’t stop governments from promising benefits without raising tax rates to pay for them.

Support for any politician – no matter in a democratic or authoritarian system – is conditional on his ability to generate economic growth. After taking simple and obvious measures for this growth, politicians take out the printing press to reward their supporters at the expense of the rest of the population.

However, politicians can only offer free handouts to their supporters as long as the government borrows at negative real rates of return.. Thus, the more polarized a state is, the more willing the ruling party is to improve its chances of re-election by spending money it does not have.

2024 is a turning point, since presidential elections will be held in many large states. The US elections are critical for the world as China, the EU and Japan will inherit the fiscal and monetary policies of the Pax Americana.

The stakes inside the United States are also high.. Today we are witnessing the highest index of polarization of the electorate since the end of the 19th century.. In electoral terms, this means winner takes all.. Democrats know that if they lose, Republicans will undo many of the policies they have put in place, so their main goal is to find the easiest way to ensure their re-election.

US Political Polarization Index. Data: Arthur Hayes.

And the solution to this problem is economics. Undecided voters vote for president based on economic performance. An incumbent’s chances of re-election drop from 67% to 33% if citizens perceive the economy to be in recession during an election year.

. ” class=”wp-image-225233″ srcset=”https://incrypted.com/wp-content/uploads/2024/04/LeftCurve5.png 1400w, https://incrypted.com/wp-content/uploads/2024/04/LeftCurve5-300×170.png 300w, https://incrypted.com/wp-content/uploads/2024/04/LeftCurve5-1024×579.png 1024w, https://incrypted.com/wp-content/uploads/2024/04/LeftCurve5-768×434.png 768w” sizes=”(max-width: 1400px) 100vw, 1400px”>Historical chances of winning the US elections depending on the state of the economy. Data: Arthur Hayes.

How can the ruling party, which controls monetary and fiscal policy, ensure that there is no recession?

Nominal GDP growth is directly affected by government spending. Thus, US government spending amounts to 23% of nominal GDP. This means the ruling party can paint whatever growth it wants as long as it is willing to borrow enough money to finance its spending.

Annual government spending relative to nominal GDP. Data: Arthur Hayes.

For many Western-educated economists, the “strength” of the US economy is puzzling as all economic indicators point to a looming recession.. But as long as the ruling political party can borrow at negative rates, it will generate the economic growth it needs to stay in power.

That is why Democrats led by Joe Biden will do everything possible to increase government spending. Next, US Treasury Secretary Janet Yellen and Fed Chair Jerome Powell must ensure that Treasury yields remain below nominal GDP growth.

But what happens to government spending if Donald Trump wins the election? Nothing. Experts predict Trump will spend even more as his tax cut campaign pushes the deficit further.

Forecast of US budget deficit relative to GDP after the presidential election. Data: Arthur Hayes.

Given the political situation in the US, I’m sure the money printer will go wild. Decisions taken to address the effects of the 2008 global economic crisis or COVID-19 will no longer seem so absurd. If policymakers can create 6% growth while borrowing at 4%, why should they stop spending at all?

In addition, wars on the periphery of Pax Americana continue, and as conflicts escalate, the costs of financing them will only increase.

As we enter northern hemisphere summer, cryptocurrency volatility will decline. This is the ideal time to take advantage of the recent market decline and add to your position.

I have a list of shitcoins that have fallen over the past week, and I will talk about them in the following essays. Also in the near future we will see many token launches with relatively low hype, which will create an excellent entry point for those who were unable to invest at the pre-sale.

I encourage all crypto investors to move to the left side of the curve. Your assumption that money printing will accelerate as politicians finance handouts and wars is correct. Don’t underestimate the elite’s desire to maintain their position.