Potomac Two-Step
Since the start of 2025, HAI’s view has been that Trump administration 2.0 is all-in on a policy commitment to run the economy hot, inflate the debt away, implement industrial policy, and ultimately reindustrialize the atrophied U.S. manufacturing base as the key national security imperative, amounting to the MAGA priority. This week dramatically reinforced HAI‘s conviction that this thesis is correct, and that it implies a seriously negative impact to the purchasing power of the U.S. dollar.
Last week the Trump administration and the U.S. security establishment released the U.S. government’s latest National Security Strategy (NSS) report outlining national security policy. It hits hard on the same themes covered relentlessly in HAI over the past year. As the report says:
“After the end of the Cold War, American foreign policy elites convinced themselves that permanent American domination of the entire world was in the best interests of our country… Our elites badly miscalculated America’s willingness to shoulder forever global burdens to which the American people saw no connection to the national interest. They overestimated America’s ability to fund, simultaneously, a massive welfare regulatory-administrative state alongside a massive military, diplomatic, intelligence, and foreign aid complex.
They placed hugely misguided and destructive bets on globalism and so-called ‘free trade’ that hollowed out the very middle class and industrial base on which American economic and military preeminence depend…
In sum, not only did our elites pursue a fundamentally undesirable and impossible goal, in doing so they undermined the very means necessary to achieve that goal: the character of our nation upon which its power, wealth, and decency were built.”
In HAI‘s view, the latest NSS report confirms that the U.S. is now playing by a new set of rules. It confirms that U.S. policy has strategically moved beyond the post-1971 global order. Triffin’s dilemma has bitten hard, the pain has registered, and now we are attempting to dramatically change strategy and policy.
The NSS essentially acknowledged a long-held view by HAI and many in the gold community that U.S. policy is unsustainable and has been for far too long. We have been the snake eating its tail for decades, and change was never likely to come without turmoil.
Importantly, the NSS report went on to say, “America First diplomacy seeks to rebalance global trade relationships. We have made clear to our allies that America’s current account deficit is unsustainable.”
Acknowledging in the new NSS that the “current account deficit is unsustainable” is a very big deal. That means that the new national security priority is to end that current account deficit. But, as HAI has highlighted before, the issuer of the global reserve currency (dollars) and global reserve asset (Treasuries) cannot stop running a current account deficit without also forfeiting reserve status. The current account deficit is necessary to supply the rest of the world with the dollars needed in a dollar-based global system.
In HAI’s view, in describing the current account deficit as “unsustainable,” the NSS is aiming at an end of the post-1971 dollar-based system because the global reserve status of the U.S. dollar and Treasuries has resulted in a dollar so strong that the U.S. industrial base has been dangerously atrophied and offshored.
That is an incredibly impactful strategic decision. In a dollar-based global system, if we no longer supply the world with sufficient dollars (the U.S. no longer runs a current account deficit), the world must adjust to a new global trade and reserve system.
In other words, if U.S. national security now necessitates that we revitalize and reshore our atrophied manufacturing base by ending chronic current account deficits, it also necessarily implies that we need an alternative global reserve system. In HAI‘s view, that system is now emerging. It consists of the net settling in gold of international oil and commodity trading initially conducted in local currency, with gold thus serving as the new (albeit old) global reserve asset.
Gold is the only alternative reserve asset candidate that is universally trusted, neutral, and large and liquid enough to do the job.
That also means that, during a time of massive global structural transition, with world reserves in gold rather than U.S. Treasury debt, the U.S. will likely have to print a staggering amount of dollars to support/finance the U.S. bond market as the old global dollar recycling flows wane.
The choice for the U.S. is therefore: A) sacrifice the real value of the bond market (print to buy debt and suppress yields to below the rate of inflation in order to inflate debt away), sacrifice the purchasing power of the dollar (print and inflate), and sacrifice the post-1971 global dollar recycling system, or B) give up on the just released and dramatically updated U.S. National Security Strategy in which U.S. reindustrialization (and all that facilitates it) is the essential MAGA priority.
What’s becoming increasingly clear over time, however, is that anything short of a full commitment to reindustrialization is akin to locking in place a journey all the way down the road to ruin. A road Secretary of State Marco Rubio described in his January 2025 confirmation hearing.
As Rubio put it, “If we stay on the road we’re on right now, in less than 10 years virtually everything that matters to us in life will depend on whether China allows us to have it or not.”
HAI expects this administration to do all it can to sacrifice the post-1971 global dollar recycling system, the real value of the bond market, and the purchasing power of the dollar because, as bad as all of that will be in the short-term, Rubio’s road to ruin would ultimately be much worse for the country.
What does that mean? Expect the dollar to go down, inflation to go up, and some form of yield curve control to be implemented to cap yields in a very likely “run it hot” inflationary playbook where hard assets will flourish.
This week, Jay Powell and the Fed certainly did their part to dutifully facilitate an eventual manifestation of accelerated inflation, negative real yields, and a significantly weakened U.S. dollar. Despite inflation currently at 3% and remaining well above target for over four and a half years, on Wednesday the Fed cut interest rates by 25 basis points for the third straight meeting. Even more jaw dropping, after just ending quantitative tightening (balance sheet reduction at the start of December), Powell also announced that, effective Friday, December 12th, the Fed began buying Treasury bills again (expanding the Fed balance sheet in QE-like fashion) at a pace of $40 billion over the next 30 days.
HAI has previously said pay attention to what they do, not what they say. This week is case in point. Powell and the Fed say they are administering “insurance” rate cuts to prevent a significantly deteriorating labor market, and that $40 billion in Treasury bill purchases is just “technical” buying to “manage market liquidity.”
Well, it’s often said that if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. As this author sees it, this Fed meeting was a duck! It’s hiding right there in plain sight. It’s not that people can’t see it; in HAI’s view, it’s just that people don’t want to believe it. Nearly five years into inflation running well above target, the Fed is cutting rates again, buying $40 billion in Treasury bills, and assuring us all that they are laser-focused on their price stability mandate.
But critically, if we dare to see what we don’t want to believe, things become much clearer. De facto, the Fed already raised the inflation target years ago; it just hasn’t made that official. And the Fed is already serving another mandate—weaken the dollar, ease the government financing burden with low rates, and keep the bond market calm by hook or by crook.
If alarm bells over potential future inflation aren’t already going off, then consider the following astute observation from highly respected macro commentator Jim Bianco this week. On MacroVoices after the FOMC policy decision and Powell presser, Bianco said, “Jay Powell said today that every member of the Fed expressed a concern that inflation is too high. I agree with him, [but] not one member of the Fed, according to Jay Powell, has as their base case any consideration of raising rates in the future… Think about what I just said, we’re all worried about inflation, but we’re not going to do anything about it, because doing something about it would mean raising rates.”
Bingo! We are absolutely not in Kansas anymore. HAI has said it before, and will say it again, but this week it’s Jim Bianco essentially saying the same thing. In HAI‘s view, perhaps the single most important “new normal” to grasp as it relates to the global macro situation is that “we’re all worried about inflation, but we’re not going to do anything about it.” Other priorities have taken precedence. In HAI‘s view, that new policy reality must be fully digested before one can appropriately prepare and position for the decade to come.
In short, despite the reported tension between the Trump administration and Jay Powell’s Fed, all is not as it seems. Despite the public spat, at the end of the day Trump and Powell are still managing a relatively synchronized Potomac two-step.
HAI expects weak-dollar government policy synergy to continue under Powell, and certainly under Trump’s next appointed Fed chair. In HAI‘s view, there is no doubt that gold, silver, precious metals miners, and hard assets more broadly are all the portfolio prescriptions for the macro situation we’re all going to be facing for the foreseeable future.
Weekly performance: The S&P 500 was up 0.31%. Gold was off 0.50%, silver gained 3.31%, platinum was lower by 1.61%, and palladium was up 1.52%. The HUI gold miners index was off 2.02%. The IFRA iShares US Infrastructure ETF lost 1.42%. Energy commodities were volatile and higher on the week. WTI crude oil was up 2.72%, while natural gas surged 12.03%. The CRB Commodity Index was up 1.49%. Copper was up 3.63%. The Dow Jones US Specialty Real Estate Investment Trust Index was down 1.64%. The Vanguard Utilities ETF was down 4.41%. The dollar index was off 0.48% to close the week at 98.98. The yield on the 10-yr U.S. Treasury was up 12 bps to close the week at 4.14%.
Have a wonderful weekend!
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
