Wednesday, September 20, 2023
The emergence and acceptance of Modern Monetary Theory have turned our economic system upside down. Skeptics of its substance and sustainability have been brushed aside. Still, most expect the MMT experiment to collapse and end in ruin. To us that believe in old-school economics, debt matters and is tied directly to interest rates and inflation. For years central banks across the world claimed a lack of inflation as the key that allowed their QE policy to continue, however, the moment inflation started taking root much of their flexibility was lost. Not only have central banks had to slow the flow of new money and the creation of debt, but governments have been forced to pay higher interest rates on their debt as monetary policy has tightened.
In short, the chart below shows, that our future is filled with huge ugly deficits.
Total Deficits, Primary Deficits, and Net Interest Outlays
|Data source: Congressional Budget Office. See .|
Global debt has surged since 2008. Throughout history, debt has always had consequences. Much of the massive debt load hanging above our heads in 2008 has not gone away it has merely been transferred to the public sector where those in charge of such things feel it is more benign. A series of off-book and backdoor transactions has transferred the burden of loss from the banks onto the shoulders of the people, however, shifting the liability from one sector to another does not alleviate the problem.
When the 2018 financial year budget was first unveiled it was projected to be $440 billion. An under-reported and unnoticed report painted a far bleaker picture. The report titled the “Mid-Session Review” forecast the deficit much higher than originally predicted. The newer report predicted the deficit would come in at $890 billion which is more than double what they predicted in March of 2017.
Back then, the summary that began on page one of the Mid-Session Review came across as a promotional piece using terms like MAGAnomicics. It praised and touted the Trump administration for its vision and great work. This is a time when it would be wise to remember numbers don't lie but the people using them do. That report is an example of how to re-frame a colossal train wreck into something more palatable. The report even went so far as to assure us that the deficit would fall to 1.4 percent of the GDP in 2028, from what was then 4.4 percent.
|In 2019, National Debt Hit 23 Not 12 Trillion dollars|
It is very disturbing that so many people have forgotten or never taken the time to learn recent financial history. By recent, I'm referring to the last fifty to one hundred years. The path that Fed Chairman Paul Volcker set right decades ago has again become unsustainable and many people will be shocked when this reality hits. Do not underestimate the value of insight gained from decades of economic perspective. It tells us the economy of today is far different from the way things have always been.
A Time For Action, 1980?
I recently picked up a copy of the book that I had read decades ago and while re-reading it I reflected on and tried to evaluate the events that brought us to today. As often the future is unpredictable, looking back, it is hard to imagine how we have made it this long without finding long-term solutions and addressing the concerns that Simon wrote about so many years ago. Back then it was about billions of dollars of debt, today it is about trillions of dollars. It appears that something has gone very wrong.
|Do Not Underestimate The Importance Of The Reset By Paul Volcker In 1980|
|Rates Today Are Ready To Fall Off The Chart!|
In 2012, with our debt at 23 trillion and growing the path has again become unsustainable and many people will be shocked when reality hits. As our debt climbs some Americans feel just as frightened and angry as Simon did so many years ago. America has kicked the can down the road, failing time and time again to face tough decisions. Part of the problem is the amount of debt has grown so large that we can no longer imagine or put a face on it. Until now, a series of different events have delayed the day of reckoning that will eventually arrive. Many of us see it coming, but the one thing we can bank on is that when it arrives most people will be caught totally off guard.
Saturday, September 16, 2023
The value of fiat money is derived from supply and demand and the stability of the
government that issues it. Over the years many promises have been made that simply cannot or will not be honored. History and many real-life examples exist that indicate that promises are easier to make than keep.
It is very possible in the near future we may see a strong bifurcation of the financial system. The Hard Asset Inflation / Paper Asset Deflation Theory laid out below is based on the idea that as wealthy individuals begin to realize the fragility of the current financial system they will shift their investment preferences to items of substance.
This repositioning of wealth in assets could occur rather rapidly during a period of inflation. If such a revamping of how the wealthy invest takes place it could drastically add to any inflationary trends. In short, some investments would fall like a stone while others soar. Imagine real estate doubling in value while pensions are cut and stocks falter. This dovetails with my theory the Fed should be ecstatic so many people have been willing to invest in intangible assets because it has helped to minimize inflation.
|Paid For Hard Assets In Your Possession Are Best|
While real estate is normally valued by the amount of income it can generate, this could change. Other factors exist such as replacement cost. The way things are taxed also plays a big part in this game. Another problem with many hard assets is they often require constant protection from the threat of theft. Regardless, the biggest factor we face is that it can be difficult to get out of the paper promise arena and into real assets. Reality places at risk all those pensions, stock holdings, and dollar signs held in banks and stored on computer files in some cloud.
This issue of perceived
value is put under a microscope and comes front and center with the
realization many of the promises that have been made cannot be
fulfilled. This all flows into what we buy and where we buy
it matters. For years much of the wealth people earn has been flowing
into paper assets and promises. There is a strong possibility this is
not only about to stop but reverse as people realize the fragility of
our current system.
When it comes to inflation, it appears the lag effect has begun to catch up to the figures we see. The easy inflation comparisons due to the base effect are coming to an end, now begins the battle of forces that determine the "price of everything." This is best seen in the service sector which is beginning to impact the Producer Price Index (PPI). This index is a measure of inflation at the
wholesale level. It measures the average change over time in the prices domestic
producers receive for their output.
One of the best indicators of where inflation is going is the cost of
gasoline and energy in general. The chart below indicates we are likely
to see inflation kick back up over the next few months.
|This Chart Indicates A Kick-up In Inflation Or Drop In Gas Prices|
It is important to consider the duration of a recession can be more important than its depth. How the Fed fights a recession also matters. We can expect the government to go into a super spend cycle but how the Fed accommodates this is also a factor in how things play out. It could be argued that consumers are choking on durable goods after the last wave of spending.
Considering the Fed is in a full-court press to halt inflation many people will miss the validity of this theory. It is important to remember inflation is uneven and supply and demand matter. Many people are praying and hoping for a return to ZERP and easy money. This is what they expect when they talk about Powell being forced to pivot. Some of us more focused on the long-term investment environment believe higher interest rates and inflation are here to stay even if prices occasionally drop before popping higher.
The MMT, Modern Monetary Theory or, More Money Today has already brought a lot of pent-up demand forward. It has also created a great deal of debt. Our tendency to view things as continuing as they have creates a recency bias that can blind us to future changes. It is normally infinite supply assets and those tied to scarce assets like energy that stay with the real rate or outpace true inflation. This means that while any country printing its own money may not default on its bonds in technical terms it can nominally through currency devaluation. This a real wealth killer.
(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)
Friday, September 8, 2023
A while back, an interview at The Family Leadership Summit in Iowa hosted by Tucker Carlson received a fair amount of attention. Mike Pence has stepped out as one of the many 2024 Republican Presidential candidates. As the former Vice-President, he may think he has an edge over many lesser-known candidates but this does not guarantee his effort will bear fruit.
During the interview, Pence was not given a pass and allowed to simply promote his platform but clashed with Carlson on several issues. At times Carlson appeared to, shall we say, laugh in Pence's face. Carlson was not shy when it came to giving the impression many Americans would not accept Pence's view on topics such as the war in Ukraine and voting machines. Part of Pence's problem stemmed from the fact Carlson didn't focus the "fireside chat interview" on family issues which unite the crowd of evangelical Midwesterners,
|Pence's Reelection Was Far From Guaranteed|
Other than an unwavering ability to stay on message Pence brings little good to the table. It is possible much of his style flows from his hosting an Indiana radio talk show (1992–99), which he described as “Rush Limbaugh on decaf” and a local Sunday morning TV program (1995–99). Like many in the media, he locks in and drills home a point of view with an air of authority and conviction acting like it is a fact rather than an opinion.
These views tie into a post that appeared here on AdvancingTime in mid-2019 concerning his influence on President Trump. It delves into how many of us familiar with Pence viewed him as one of the most divisive and polarizing politicians in America. I explained that when the announcement was made that Trump had put him on his ticket a cheer rang out in the state of Indiana. That cheer was not signaling approval of the choice but was rather a joyous celebration that Indiana would soon be rid of the unpopular Republican Governor who was running an uphill campaign to be re-elected.
Pence is a putz, even conservative-leaning Indiana did not want him. Many Indiana voters viewed Pence as a shallow stuffed shirt and an opportunist with a history of seeking power. By selecting Pence, these voters felt Trump was selling out to the establishment in an effort to silence the Stop Trump movement at the convention. Taking Pence as his VP legitimized the claims by Trump's detractors that he was a divider that would further polarize the country.
Apparently, Pence has decided the way to move forward in the polls is by stabbing the man who chose him as the VP in the back. A big part of Pence's message is framing the 2024 election as a fight for the future of conservatism. Pence is calling on fellow Republicans to reject the “siren song of populism” championed by former President Donald Trump and his followers. Pence said, “Should the new populism of the right seize and guide our party, the Republican Party we’ve long known will cease to exist and the fate of American freedom would be in doubt.”
While the Pence campaign has been struggling to build momentum since its launch that does not mean he has no chance. Voters have proven they are capable of making bad choices. Ironically my claim that Pence is a putz almost galvanizes his position as the Republican's Presidential front runner. Sadly but true, My history of being very very wrong or very very right leaves little room in the middle. When Biden entered the Democratic primary I was silly enough to post an article about him having little or no chance of ever becoming President. That article haunts me. It also stands as a monument to how Yogi Berra had it right when he said, "It's tough to make predictions, especially about the future."