MacroVoices #260 Lyn Alden: Shifting from Monetary to Fiscal Dominance

Episode Summary

Executive Summary: Macro Voices episode 260 centers on a macro regime shift from monetary to fiscal dominance, with Lynn Alden arguing that massive fiscal spending plus QE is driving broad money growth, inflation risk, and financial repression. Hosts and guest discuss rising yields, weak gold, strong commodities, Japan’s policy parallels, and Bitcoin’s ongoing supply-shock bull case, while Patrick’s chartbook highlights a possible equity correction and long-volatility positioning.

Main Topics: Fiscal dominance and money creation (Priority: 5/5): Lynn Alden argues the post-2020 policy mix is fundamentally different from prior QE cycles because fiscal deficits now directly inject money into the broad economy, unlike reserve-only QE. This creates a regime where fiscal policy drives macro outcomes more than monetary policy. Inflation, real rates, and gold (Priority: 5/5): The discussion explains why gold has been weak despite reflation: rising nominal yields and backing-up real yields are pressuring the metal, even as long-term inflation expectations and money growth support a bullish long-term case. Rising yields and the yield curve (Priority: 5/5): Eric and Patrick focus on the sharp rise in Treasury yields, steepening of the curve, and whether the Fed will tolerate higher long-end rates or intervene with yield curve control once something breaks. Crude oil, copper, and the commodity upcycle (Priority: 4/5): Crude oil and copper are described as powerful reflation leaders, with oil approaching key resistance and copper accelerating sharply. Both hosts see commodities as central to inflation expectations and market stress. Equity market rotation and volatility risk (Priority: 4/5): Patrick’s post-game charts argue that growth/FANG stocks are under pressure while value, cyclicals, and equal-weight indices outperform. The market may be due for a correction, making long-volatility strategies attractive. Bitcoin and supply-halving dynamics (Priority: 4/5): Lynn presents Bitcoin as still in a bull cycle, driven by supply halvings, exchange outflows, and institutional accumulation. She sees the cycle potentially extending into late 2021 with a possible six-figure peak. Japan as a policy and market case study (Priority: 3/5): Japan is used to contrast base-money creation versus broad-money growth, and to show how fiscal/monetary policy, corporate deleveraging, and governance reforms can support equities even in a low-growth environment.

Key Arguments: QE alone is not enough to create broad inflation; broad money growth accelerates when QE is paired with large fiscal deficits that send money directly into the economy. The U.S. and other developed economies are moving toward fiscal dominance, meaning fiscal authorities—not central banks—are increasingly setting the macro trajectory. Rising nominal yields matter less than rising real yields for gold; gold weakness reflects higher real rates and should improve if inflation overtakes yields. The Fed may tolerate higher long-end yields until they break something, rather than proactively capping them immediately. Crude oil and copper are key leading indicators of reflation and can pressure bond markets and inflation expectations higher. Equity leadership is rotating away from high-duration growth stocks toward value, cyclicals, financials, and commodities as rates rise. Bitcoin’s supply-halving cycle and long-term holder behavior still support a bullish thesis, though upside likely decelerates versus prior cycles. Japan is not a clean analogy for the U.S. because its broad money growth has been much slower and it has a structural current account surplus and corporate deleveraging offsetting policy expansion.

Data Points: Macro Voices episode: 260 - Episode identifier Recording date: February 25, 2021 - Episode date U.S. broad money supply growth: +25%+ year-over-year - Lynn cites this as the kind of increase not seen since the 1940s Fed balance sheet / deficits comparison: QE + fiscal spending versus QE alone - Core thesis of fiscal dominance and broad money transmission Crude oil inventories: +1.3 million barrels - Unexpected U.S. crude inventory build discussed by Eric and Patrick Cushing crude inventories: +2.8 million barrels - Unexpected build in Cushing, Oklahoma U.S. crude production: 9.7 million barrels/day - Reported production after a 1.1 million barrel/day drop due to Texas freeze-out U.S. production change: -1.1 million barrels/day - Temporary freeze-related collapse in output WTI technical target: $65.65 per barrel - Eric’s near-term crude resistance/target level WTI time spread (Z1/Z2): 4.33 - Patrick notes a major move from -3.20, calling it an epic profit Gold channel support: 1746 - Eric’s downside channel support level Gold channel resistance: 1833 - Eric’s upside breakout level SPX correction level: ~10% below current levels - Patrick discusses a likely pullback area near 3,800 from the then-current market SPX reference support: ~3500 - Prior highs and a key technical level that could become support 10-year Treasury yield: above 1.5% - Hosts discuss rates ripping higher from around 1% a month earlier 10-year real yield: rising sharply - Used to explain gold weakness and bond market pressure Euro/USD technical move: breakout toward 1.24–1.25 - Patrick discusses possible dollar downside if euro strength persists Japanese money supply since 2000: <2x - Compared with U.S. broad money supply, which more than quadrupled U.S. broad money supply since 2000: >4x - Contrasted with Japan to show U.S. policy expansion magnitude Japanese average budget deficit: ~5% of GDP - Lynn notes this was significant but smaller than current U.S. deficits Japanese corporate debt reduction: ~2% of GDP per year - Offsetting force during Japan’s deleveraging Bitcoin block reward: 10 BTC to 25 BTC to 12.5 BTC - Lynn describes the programmed halving cycle (as stated in transcript)

Pivotal Quotes: "We're in a policy transition from monetary dominance to fiscal dominance." — Lynn Alden: Lynn’s central thesis on the new macro regime "What this really speaks to, in my mind, Patrick, is I don't want to just be in the stock market with a simple long position." — Eric Townsend: Eric on elevated volatility and the need for long-volatility strategies "The clear call here is that fiat currencies are being debased and devalued." — Eric Townsend: Eric’s view on the U.S. dollar and global fiat currency erosion

Implications: Investors should expect a regime where fiscal policy, inflation, and rates dominate returns. Favor commodities, value, selective real assets, and volatility hedges; be cautious on long-duration growth and nominal bonds.