Table Of Contents
1. The Core Claim
Why financial assets detach from physical reality.
2. Globalisation And Financialisation
How outsourced production feeds asset inflation.
3. The Dollar As Global Reserve
Why the US must supply dollars to the world.
4. The Exorbitant Privilege
Cheap borrowing, deep markets, and hidden costs.
5. Capital Recycling And Asset Bubbles
Why foreign surpluses flow into US treasuries and equities.
6. Triffin’s Dilemma In Practice
Why reserve status contains the seeds of its own failure.
7. What Happens If The World Stops Buying Treasuries
Debt monetisation, financial repression, and inflation.
8. From Financial Claims To Physical Assets
Why value migrates from paper to commodities.
9. Gold As Monetary Signal
Why precious metals move first.
10. The Value-Rotation Wave
From gold to industrial metals and real assets.
11. System Reset Cycles
Why monetary systems reset roughly every eighty years.
12. Conclusion
Why physical reality reasserts itself.
Glossary Of Key Terms
Short definitions for non-specialist readers.
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1. The Core Claim
Why financial assets detach from physical reality.
Financial assets sit on layers of leverage, promises, and policy support. The result is chronic overvaluation.
Their prices are inflated in US-dollar terms because globalisation, the outsourcing of production to lower-cost economies, has been matched by financialisation, reinforced by the US dollar’s role as the global reserve currency. As global trade requires dollars to switch between currencies and settle, surplus foreign earnings are recycled back into US financial assets, inflating their valuations relative to the underlying real productive economy.
In the real economy, production begins with physical inputs: energy, materials, labour and capital. Yet the profits generated from this process, often earned abroad, are recycled back into US financial assets, treasuries, equities, and prime real estate, in search of liquidity, safety, and above-average returns.
This creates a structural imbalance: demand for financial assets becomes unlimited, their supply is not.
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2. Globalisation And Financialisation
How outsourced production feeds asset inflation.
Financialisation has mirrored globalisation. As production was outsourced, capital increasingly flowed into financial assets rather than physical investment. This reinforced the dominance of balance sheets over factories and asset prices over output.
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3. The Dollar As Global Reserve
Why the US must supply dollars to the world.
As issuer of the global reserve currency, the United States must supply dollars to the rest of the world. This is the other side of the accounting equation.
3.1 Why “Must” Is The Correct Word
The word must is correct because the role of reserve-currency issuer is not optional once it is accepted. This is the cost of issuing the world's reserve currency, the cost of this Exorbitant Privilege, ie the advantage enjoyed by the reserve-currency issuer in borrowing cheaply and in its own currency.
If the US dollar is used to settle global trade, service international debt, and sit in central-bank reserves, the rest of the world requires a continual net supply of dollars. Those dollars can only come from the United States.
3.2 What This Means Operationally
Operationally, this means the US must run:
• Trade deficits
• Capital-account surpluses
This is not a policy choice in the narrow sense, it is a structural requirement of reserve status.
If the United States attempted to stop supplying dollars, global trade would contract, dollar shortages would emerge, and financial stress would spread.
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4. The Exorbitant Privilege
Cheap borrowing, deep markets, and hidden costs.
If on the other hand, foreign governments and investors stopped recycling surplus dollars into US Treasuries, the US government would be forced to fund itself domestically.
In practice, this means the Federal Reserve would step in, print, and buy government debt directly or indirectly, monetising deficits through money creation. Borrowing costs would be capped by policy rather than markets. This is where we are currently in the cycle.
Confidence in Treasuries as a real store of value would weaken more and more, accelerating the move towards inflation, financial repression, and ultimately a monetary system reset.
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5. Capital Recycling And Asset Bubbles
Why foreign surpluses flow into US treasuries and equities.
In the real economy, profits earned abroad are recycled back into US financial assets in search of liquidity and safety. This creates a feedback loop in which foreign surpluses inflate asset prices while suppressing real investment elsewhere.
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6. Triffin’s Dilemma In Practice
Why reserve status contains the seeds of its own failure.
This is the core insight of Triffin’s Dilemma: the reserve-currency issuer must prioritise global liquidity over domestic balance, even though doing so ultimately undermines and will destroy completely confidence in the reserve currency.
The dollar therefore serves two roles simultaneously:
• Medium of trade
• Store of value
Triffin’s Dilemma and Brent Johnson’s Dollar Milkshake explain why global capital is structurally pulled into financial assets regardless of underlying productive value, until foreign governments and investors say “stop”.
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7. What Happens If The World Stops Buying Treasuries
Debt monetisation, financial repression, and inflation.
The consequence of the US dollar’s reserve-currency role, reinforced by global financialisation and persistent capital recycling into US markets, is persistent overinvestment in financial assets and chronic underinvestment in commodities.
Eventually, when the risks and returns on financial assets are no longer there because the currency has been so terribly debased, investors switch into real.
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8. From Financial Claims To Physical Assets
Why value migrates from paper to commodities.
This repricing is spreading from precious metals into industrial and other commodities.
Physical assets are not like financial. They cannot be printed, rehypothecated, or decreed into existence by policy. Commodities anchor value in energy, materials, and food (consumer staples), the foundations of any functioning economy.
For investors focused on preserving real purchasing power rather than chasing nominal returns, commodities re-emerge not so much as tactical trades, but as strategic holdings, held as long-term stores of value, held as protection against inflation and currency debasement.
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9. Gold As Monetary Signal
Why precious metals move first.
Gold does not change. It remains a fixed physical quantity.
What changes is the number of dollars required to buy one troy ounce. Gold appears to rise in price only because the currency used to measure it is losing purchasing power.
The sharp rise in gold prices, measured in US dollars, is the first clear signal that confidence in financial claims on future value is eroding. The price rises is so sharp, well beyond inflation, that it seems that gold's price rate-of-change is front-running (anticipating) future inflation (currency debasement).
Think Weimer Republic
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10. The Value-Rotation Wave
From gold to industrial metals and real assets.
Capital rotates from monetary metals into industrial metals, energy and physical inputs (hard assets) to the production process, as inflation moves from monetary debasement into real-world scarcity.
Rotate into where?
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11. System Reset Cycles
Why monetary systems reset roughly every eighty years.
Debt accumulation, currency debasement, and political pressure converge. Financial systems periodically reset back toward physical reality.
These resets are structural, not accidental.
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12. Conclusion
Why physical reality reasserts itself.
When confidence in paper-based financial abstractions erodes, capital migrates back to the real physical world.
Commodities are not so much fashionable, as they are fundamental to investing success in this quarter of Ray Dalio’s model.
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Glossary Of Key Terms
Some short definitions
Financialisation - The dominance of financial markets over productive investment.
Triffin’s Dilemma - The structural conflict in issuing the world’s reserve currency.
Currency Debasement - Loss of purchasing power through monetary expansion.
Rehypothecation - Reuse of the same collateral multiple times within the financial system.
Real Purchasing Power - What money can actually buy.
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