Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Deficit countries form ‘Rome Club’ to negotiate trade terms
Steen Jakobsen
Chief Investment Officer
Summary: The sustained and worsening divergence in current accounts between a group of surplus and deficit countries is a result of managed currencies and is not sustainable long-term. As the US debt situation has become uncontrollable, a group of six deficit countries form a ‘Rome Club’ to cooperate on reducing deficits by collectively negotiating new world trade terms with the surplus countries. We see gold and silver doing very well in an unpredictable environment for the world’s reserve currency and the unsustainable current accounts among deficit countries.
A ‘Rome Club’ is created to reduce the current account deficits of a group of highly deficit countries. In theory, an open and free trade economy is governed and self-regulated through currency adjustments, where deficit countries see their currencies devalue to reset competitiveness. In reality, many, if not almost all, countries control their currencies and, thus, end up creating either permanent deficits or surplus. We simply have a semi-fixed global currency regime, and this hinders the whole concept of free trade and there is no way the WTO can find a golden path to reduce this burden of ever-accelerating deficits in some nations. This leads to the formation of the ‘Club Rome’, which is a cooperation to fix the ever-growing divergence in the global trade and financial system.
In 2024, under a strong global recession and limited tools to cut interest rates due to persistently high inflation, the world’s largest deficit countries gather in Rome to set better terms for structurally reducing these surplus countries’ ability to keep growing their surpluses. The argument goes that resetting the deficits through gradual pegged revaluations of the surplus countries would enable a global reset, creating a more equal and stable economic model. The six founding countries of the ‘Rome Club’ are the US, UK, India, Brazil, Canada and France. Adjusting the divergence of the current account between the key countries is going to be a painful adjustment for the highest surplus countries which are China, Germany, Norway, Japan, the Netherlands and Singapore. \
The fact that US debt became uncontrollable in 2022 is the key catalyst. When the Paris Club, the official lenders club, was created in 1956, the US had a total debt of 273 billion, but fast forward to today and the debt balance sits at USD 33 trillion, a whopping increase of 14,000%.
Market impact: The fact that the world’s reserve currency is spinning out of control reduces faith in the fiat money system, setting up big gains for gold and silver.
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