U.S. response to geopolitical flare-up is ‘extremely inflationary,’ record deficits already

(Kitco News) – Any U.S. response to a sudden geopolitical flare-up will be “extremely inflationary,” posing a massive problem for the Federal Reserve and U.S. Treasury, which are already facing ‘monumentally irresponsible’ record deficits, says James Lavish, Managing Partner at Bitcoin Opportunity Fund.

The U.S. government has been printing and spending money at a time when the Federal Reserve has been battling sticky inflation, Lavish told Michelle Makori, Lead Anchor and Editor-in-Chief at Kitco News. “The government [is] spending $2.2 trillion more every year than we’re taking in in tax receipts,” Lavish said. “We’re running deficits that are record-size at a time when we’re not even in a recession.”

On top of that, heightened geopolitical tensions are defining this election-packed year – whether it is in the Middle East, Russia-Ukraine, China-Taiwan, or North Korea.

If the U.S. were to respond to any geopolitical event, it would be “extremely inflationary,” warned Lavish. “If we do have a geopolitical event, it would be catastrophic,” he said. “The central bank response [would] be tremendously liquid. They will be dumping massive amounts of liquidity into the markets, which would benefit things like Bitcoin, stocks, and gold. It will be extremely inflationary.”

To get Lavish’s year-end price forecasts for Bitcoin and gold, watch the video above. 

Bitcoin and gold “will sniff” incoming massive money printing, Lavish added. “It’s not going to be $5 or $6 trillion. It’s going to be $10-$20 trillion because that’s where we are in the leverage of the system. It’s an endless doom debt loop that we’re in and we’ve got to keep it going. And that’s the only way,” he noted. “They need liquidity in the Treasury market. If that becomes dysfunctional, that’s a massive problem for the Treasury because of all of the deficits that we’re running.”

Lavish’s comments come at a time when the Fed has pointed to higher-than-expected interest rates amid persistent inflation as the biggest threat to financial stability, according to its Financial Stability Report. The semiannual report cited results from a survey of financial market contacts as well as the central bank’s assessment of risks.

“The risk of persistent inflationary pressures leading to a more restrictive than expected monetary policy stance remained the most frequently cited risk,” the Fed said.

This year’s higher-than-expected inflation could force the Fed to post-pone rate cuts even further, with the markets already pushing back their first rate cut expectations to September or November – according to the CME FedWatch Tool.

“We’re in an election year. You just heard the Fed come out, and Powell reiterated that ‘we’re not where we need to be on inflation, and we’re going to keep rates where they are.’ Yet at the same time, you’ve got Congress spending endlessly,” Lavish stated.

UBS is even warning that there is a “real risk” of the Fed hiking rates to 6.5% next year. “If the expansion remains resilient and inflation gets stuck at 2.5% or higher, there would be a real risk the FOMC resumes raising rates again by early next year, reaching 6.5% Fed Funds by mid-next year,” UBS strategists said in a note last week.

Washington to double money supply in the next 10 years – gold and Bitcoin are hedges

Lavish pointed out that the fiat system is failing as governments worldwide continue to debase their currencies.

“We created this fiat system, and we’re watching it fail in real-time. We’re seeing tremendous separation of wealth. We’re seeing that inflation and the debt situation have gotten out of control. Every single major developed country that can print money and denominate debt in their own fiat currency is doing that,” he said.

This makes assets like gold an excellent store of value. Lavish explained: “In 600 BC, you could buy 350 loaves of bread with an ounce of gold. Today, you can buy about 350-ish loaves of good bread with an ounce of gold. It holds value.”

Gold saw a sudden surge higher amid heightened geopolitical tensions and increased central bank buying. At the time of writing, spot gold was up around 13% year-to-date – and that is despite hitting nearly a three-week low due to receding risk aversion early his week.

“I fully expect the irresponsibility to continue out of Washington. They will continue to print money and expand the money supply, which means that you need more dollars to buy that ounce of gold. They’re going to double the money supply in the next ten years. So gold will absolutely double,” Lavish explained.

Gold’s rally has led to major banks revising the gold price forecasts for this year. Citigroup is now calling for a $3,000 gold price over the next 6 to 18 months, which is an upward revision of 40%. Goldman sees a $2,700 an ounce gold price by the year-end, while UBS is calling for a $2,500 year-end price target.

Lavish added that Bitcoin is still in its adoption phase, but once it gets through that phase, the cryptocurrency will take “gold’s mantle and be the future of money.” He described, “Bitcoin will be the thing that will buy your 350 loaves of bread for your equivalent of one ounce of gold.”

At the time of writing, Bitcoin was trading above $66,700, up 58% year-to-date.

To get Lavish’s take on why Bitcoin still tends to sell off when market sentiment turns risk-off, watch the video above. 

It is very important to keep an eye on the institutional adoption phase in Bitcoin, according to Lavish. “When that happens, you’re going to see Bitcoin not just take a little bit of market share from gold, but you’ll start seeing people allocate out of their long bond portfolios into Bitcoin,” he said.

Lavish pointed to red flags in the recent U.S. Treasury bond auctions. For insights on what these troubling auctions are signaling and what’s next, watch the video above. 

He also revealed Bitcoin’s next big price catalyst. Watch the video above for details.