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Unintended Consequences of Monetary Inflation


“In short, the Fed is committed to rescue businesses from the greatest economic catastrophe since the great depression and probably even greater than that, to fund the US Government’s rocketing budget deficits, fund the maintenance of domestic consumption directly or indirectly through the US Treasury, while pumping up financial markets to achieve these objectives and preserve the illusion of national wealth.

“Clearly, we stand on the threshold of an unprecedented monetary expansion.”


President Reagan memorably said that the nine words you don’t want to hear are “I’m from the government and I’m here to help.” Governments in all the major jurisdictions are now making good on that unwanted promise and are taking responsibility for everything from our shoulders.

Those receiving subsidies and loan guarantees are no doubt grateful, though they probably see it as the government’s duty and their right. But someone has to pay for it. In the past, by the redistribution of wealth through taxes it meant that the haves were taxed to give financial support to the have-nots, at least that was the story. Today, through monetary debasement nearly everyone benefits from monetary redistribution.

This is not a costless exercise. Governments are no longer robbing Peter to pay Paul, they are robbing Peter to pay Peter as well. You would think this is widely understood, but the Peters are so distracted by the apparent benefits they might or might not get that they don’t see the cost. They fail to appreciate that printing money is not just the marginal source of finance for excess government spending, but it has now become mainstream.

…click on the above link to read the rest of the article…

America’s “Debt Crisis Is Coming Soon”

America’s “Debt Crisis Is Coming Soon” 

– America’s “debt crisis is coming soon” warns economist Martin Feldstein
– To avoid economic distress, the government has to reduce future entitlement spending
– The most dangerous domestic problem facing America’s federal government is the rapid growth of its budget deficit and national debt

According to the Congressional Budget Office, the deficit this year will be $900 billion, more than 4% of gross domestic product. It will surpass $1 trillion in 2022. 

The federal debt is now 78% of GDP. By 2028, it is projected to be nearly 100% of GDP and still rising.

All this will have very serious economic consequences, and the CBO understates the problem. It has to base its projections on current law—in this case, the levels of spending and the future tax rules and rates that appear in law today.

Source: USDebtClock.org

Those levels don’t match realistic predictions.

Current law projects that defense spending will decline as a share of GDP, from a very low 3.1% now to about 2.5% over the next 10 years. None of the military and civilian defense experts with whom I’ve spoken believe that will happen, given America’s global responsibilities and the need to modernize U.S. military equipment. It is likelier that defense spending will stay around 3% of GDP or even increase in the coming decade. And if the outlook for defense spending is increased, the Democratic House majority will insist that the non-defense discretionary spending should rise to match its trajectory.

If defense and other discretionary spending stays steady as a share of GDP, the annual deficit will increase by nearly 1% of GDP—from 4.2% of GDP now to about 5% of GDP 10 years from now. At the same time, the tax increases in current law that the CBO assumes will occur during the next decade as some of the recent cuts are phased out probably won’t happen. Congress will face strong political pressure to avoid a functional tax increase.

 …click on the above link to read the rest of the article…

Salvini Threatens To Collapse Italy’s Government If Deficit Target Is Changed

Italy’s Deputy Prime Minister Matteo Salvini escalated the ongoing standoff between the EU and Italy, saying he would bring down the government if the coalition’s budget deficit target was changed.

The remarks by Salvini, Italy’s de facto leader who has been enjoying a steady climb in public opinion polls as he has continued his hardline negotiating approach with the European establishment, were quoted by newspaper La Repubblica hours before the country’s prime minister, Giuseppe Conte, was scheduled to make an attempt in Brussels to convince the European Commission that the country’s budget is sound. That, as is widely known by now, include the 2.4% deficit goal for 2019 that has become a lightning rod for Commission objections.

“The 2.4 percent deficit target can’t be touched, otherwise I will bring down the government,” Repubblica quoted Salvini as saying in a telephone call to Conte. The report said Salvini was willing to make only minor concessions in next year’s spending plan.

For Savlini the threat of new elections poses little downside risk: according to a recent poll, most Italians view Salvini, the outspoken leader of the anti-immigrant League party, as the real head of government, with just one in six casting Prime Minister Giuseppe Conte in that role. The monthly survey in La Repubblica newspaper showed 58% considered Salvini the leader, while 16 percent picked Conte and 14 percent chose Luigi Di Maio, who heads the anti-establishment 5-Star Movement and is the co-head of the coalition government. Salvini and Di Maio are deputy prime ministers in Conte’s coalition government, which took office in June and which the Demos poll found that 58 percent of respondents support.

…click on the above link to read the rest of the article…

Treasury Announces Record Debt Sale In Upcoming Refunding Auction

Treasury Secretary Steven Mnuchin is about to surpass Timothy Geithner’s achievement of selling a record amount of notes and bonds as he seeks to finance America’s soaring budget deficit.

According to the latest quarterly refunding statement, the US Treasury is about to sell a record amount of debt, surpassing levels seen both in the aftermath of the Great Depression and the Global Financial Crisis.

On Wednesday, the US Treasury Borrowing Advisory Committee unveiled that it will increase the amount of debt to be sold at the upcoming quarterly refunding auctions to $83 billion from $78 billion three months earlier. This will be the fourth straight quarter of increasing refunding auction sizes and is driven by the soaring US deficit shortfall, which in 2018 hit $779 billion the highest since 2012, as well as the Fed’s ongoing balance sheet shrinkage.

Here are the details of the TBAC’s proposal:

  • Auctions for 2-, 3- and 5-year notes will increase by $1 billion in both of the next two months; last quarter Treasury implemented increases in all three months
    • As a result, the size of 2-, 3-, and 5-year note auctions will increase by $2 billion, respectively, by the end of January.
  • Auctions for 7-, 10-, 30-year notes to be raised by $1 billion in November and then kept steady through January
  • Auctions for 2-year floating-rate note will rise by $1 billion in November
  • Auctions for TIPS will see various changes with total tips issuance rising $20 billion-$30 billion in 2019, however there will be no TIPS supply changes over next three months; a new CUSIP 5-year will be added to the TIPS calendar, with the new security to be introduced October 2019

In total, the Treasury will sell $83 billion in long-term debt next week – consisting of $37BN in 3 Year notes, $27BN in 10 Year notes and $19BN in 30 Year notes, versus $78 billion in August’s refunding week sales.

…click on the above link to read the rest of the article…

US Spending On Interest Hits All Time High As Budget Deficit In Trump’s First Year Soars To $779 Billion

One month ago we already knew that the U.S. budget deficit for the 2018 fiscal year – Trump’s first full year in office – would be jarring after the August deficit soared to $211 billion, nearly double the deficit gap from one year ago (largely due to calendar quirks) which on a cumulative basis for the first 11 months of the fiscal year was a staggering $895 billion, $222 billion or 39% more than the previous year. This was largely due to outlays which climbed 7% while revenue rose a mere 1%.

Today at 2pm we got official confirmation of the rapid expansion in the US budget deficit when the Treasury announced that in Trumps first full fiscal year as president, the U.S. budget deficit grew 17% to $779 billion from $666 billion…

… the highest full year total since 2012 amid tax cuts and spending increases, if below the trailing 12 month total as of August which, as noted above, was a whopping $895 billion.

The budget gap for the 12 month period ended September was 17% greater than the same 12-month period a year earlier, as spending rose 3.2% and revenue gained just 0.4%.

The deficit as a share of GDP was 3.9% in fiscal 2018, up 0.4% point from the prior year.

To fund this deficit, the U.S. government borrowed $1.08 trillion from the public in Fiscal 2018, more than double the amount borrowed in 2017 ($498.3 billion) and the most borrowed from the public in a fiscal year since FY’12.

There was some good news: contrary to more pessimistic expectations, the surplus for the fiscal year’s final month of September jumped to $119 billion, the largest windfall for the last month of any fiscal year on record. However, like in August, there were calendar effects in play – and if not for timing shifts, last month’s surplus would have been just $44BN, $7BN (13%) less than Sep ’17 surplus.

…click on the above link to read the rest of the article…

Italian Stocks Crash Most In 2 Years, Bond Yields Soar Amid Budget Deficit Liquidation Panic

After yesterday’s last minute decision by Italy’s ruling coalition to boost the country’s 2019 deficit to 2.4% of GDP, a number that challenged Brussels and its demands for a deficit no greater than 2.0% and made a mockery of the finance minister’s insistence on a funding hole no greater than 1.6% of GDP, we said that it was only a matter of time before the market freaked out as Italy is now on collision course with Europe, and that time came this morning when traders dumped Italian assets with the bathwater, as Italian equities, bank stocks and bonds all tumbled in unison after deputy premier Matteo Salvini vowed to “press ahead” with the controversial budget plan including a deficit that would be three times larger than the deficit under the previous administration.

Italy’s FTSE MIB stock index tumbled to session lows, down 3.7%, after opening sharply lower and failing to find a floor so far; this was the biggest intraday drop for Italian stocks since June 2016, with several banking stocks halted limit down.

The worst performing sector were Italian banks, with the FTSE Italia All-Share Banks Index falling as much as 5.3%, most since May; the biggest decliners were Banco BPM -6%, UBI -4.7%, UniCredit -3.9%, Intesa -3.5%, with most of them being halted, limit down amid the selling chaos.

The bond market was not spared, and Italy’s 10Y bond was taken to the cleaners as the relentless selling sent the yield some 36bps higher to 3.25%…

… surpassing the peaks hit during the recent two Italian liquidation panics.

Italian debt had been volatile in recent days, but rallied for much of September in anticipation economy minister Giovanni Tria would reel in the government’s spending plans. That failed to happen last night when Tria capitulated to demands by Salvini and Di Maio to boost the deficit to support populist promises for basic income which would cost some €10 billion.

…click on the above link to read the rest of the article…

America The Insolvent


America The Insolvent

A reckoning is due. One the elites are already readying for.

Watching the world these days, I’m experiencing the same fury that rises up from my gut when the driver in the car ahead me is weaving drunkenly, endangering everyone on the road.

Fury is a normal and rational human response when threatened with unnecessary harm. Women who are groped (or worse) by a disgusting predator like Harvey Weinstein, pensioners whose funds are stolen by Wall Street shysters, everyone who is being fleeced by corporations in search of a few extra dollars this quarter —  all have the right to be infuriated.

It’s been especially hard of late for those of us who are “reality”-based; who value data, fundamentals and historical context.

I earn my living by reading, analyzing and making sense of the world, and then working to help orient people’s actions to align with both the current reality and future probabilities. But that’s become pretty damn difficult in a world where the financial markets are rigged and the main news outlets are unwilling (unable?) to cover the real issues, preferring instead to focus on distractions that mainly serve to keep us isolated and divided.

The trajectory our global society is on will not end well, and that infuraties me. And the fact that most of the coming suffering is unnecessary if only we’d make better choices — that really pisses me off.

Here’s just a small smattering of the threats we’ve created for ourselves:

  1. $247 trillion of global debt, growing exponentially
  2. Off-budget liabilities well over a quadrillion dollars globally ($220+ trillion in the US alone)
  3. Massively underfunded pensions mathematically unable to meet their future obligations
  4. A coming peak in world oil supply somewhere between 2020-2030 (and around 2022 for the US)
  5. A global economy that requires perpetual growth, but can’t grow for much longer due to planetary resource constraints

…click on the above link to read the rest of the article…

Rising Debt + Rising Rates

Rising Debt + Rising Rates

Have they all lost their collective minds? Look I get that some people are leaning Democrat versus Republican and vice versa and that’s fine, but what exactly are voters getting? If, on the one hand, you think Democrats tax and spend too much you get Republicans on the other hand who cut taxes with disproportional benefit to the top 1% and then spend even more. Fiscal conservatives? Please.

In early February the US government was already scheduled to borrow nearly $1 trillion this year. 

A week later and that figure is already out the door as this week both parties agreed to expand spending caps seemingly preparing for World War III. An incremental hundreds of billions of dollars to the military budget alone in just 2 years. What for? To what end? It’s a bonanza for defense contractors surely and the president apparently wants a parade, but have we entered the math no longer applies zone?

The numbers are staggering:

Ok, if nobody will say it I will: This is insane.
Just the increase alone is larger than Russia’s entire annual military budget.
“The budget deal would raise military spending by $80B through the rest of fiscal year and by $85B in fiscal year 2019”https://www.marketwatch.com/story/congressional-leaders-say-theyve-struck-two-year-budget-deal-2018-02-07?link=sfmw_tw 

The end result? Much, much more borrowing and deficits into the trillion+ range forever and ever amen:

2019? Looks lot be $1.4 Trillion.

I didn’t see these figures mentioned in any campaign brochures have you? And this is all pre-recession folks. We get a recession and you are looking at 2-3 trillion dollar deficits.

Think I’m going hyperbole on you?

…click on the above link to read the rest of the article…

The Mystery Of Saudi Treasury Holdings Solved: US Reveals Saudi Holdings For The First Time

The Mystery Of Saudi Treasury Holdings Solved: US Reveals Saudi Holdings For The First Time

In the aftermath of Saudi Arabia’s explicit threat to sell off US Treasurys (of which according to the NYT it had some $750 billion) should the US pursue legislation that could hold it liable for the September 11 bombings, Wall Street’s analysts quickly tried to calculate whether Saudi Arabia had anywhere remotely close to that amount of US paper available for liquidation.

As a reminder, despite starting to release data on foreign ownership of Treasuries in 1974, the Treasury’s policy has been to not disclose Saudi holdings, and it has instead grouped them with those of 14 other mostly OPEC nations, including Kuwait, Nigeria and the United Arab Emirates.  The group held $281 billion as of February, down from a record of $298.4 billion in July. For more than a hundred other countries, from China to the Vatican, the Treasury provides a detailed monthly breakdown of how much U.S. debt each owns.

A few days after the NYT’s disturbing article on Saudi Treasury liquidation, in hopes of bringing some clarity to this all too important topic, we penned an article titled “Does Saudi Arabia Have $750 Billion In Assets To Sell?” we cited Stone McCarthy which analyzed oil exporter reserve holdings and observed that “at the end of January, Asian oil exporters held $563.6 billion of U.S. securities, with Treasuries and U.S. equities accounting for 92.2% of the total. Treasury holdings totaled $268.2 billion.”

SMRA speculated further, adding that “these figures reflect holdings that Treasury can directly attribute to the Asian oil exporting countries. Regular readers of our updates on the TIC data know that foreign investors often hold securities at custodial institutions in other countries. For example, in February, the five major custodial centers held $1.1 trillion of Treasury securities.



…click on the above link to read the rest of the article…

Former IMF Chief Economist Admits Japan’s “Endgame” Scenario Is Now In Play

Former IMF Chief Economist Admits Japan’s “Endgame” Scenario Is Now In Play

Back in October 2014, just after the BOJ drastically expanded its QE operation, we warned that the biggest risk facing the BOJ (and the ECB, and the Fed, and all other central banks actively soaking up securities from the open market) was a lack of monetizable supply. We cited Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, who said that at the scale of its current debt monetization, the BOJ could end up owning half of the JGB market by as early as in 2018. He added that “The BOJ is basically declaring that Japan will need to fix its long-term problems by 2018, or risk becoming a failed nation.”

Which is why 17 months ago we predicted that, contrary to expectations of even more QE from Kuroda, we said “the BOJ will not boost QE, and if anything will have no choice but to start tapering it down – just like the Fed did when its interventions created the current illiquidity in the US govt market – especially since liquidity in the Japanese government market is now non-existent and getting worse by the day.”

As part of our conclusion, we said we do not “expect the media to grasp the profound implications of this analysis not only for the BOJ but for all other central banks: we expect this to be summer of 2016’s business.”

Since then, the forecast has panned out largely as expected: both the ECB and BOJ, finding themselves collateral constrained, were forced to expand into other, even more unconventional methods of easing, whether it be NIRP in the case of the BOJ, or the outright purchases of corporate bonds as the ECB did a month ago.

…click on the above link to read the rest of the article…

Canada goes full Krugman. Finance minister jacks up borrowing and spending, confirms gold sale – Peter Diekmeyer

Canada goes full Krugman. Finance minister jacks up borrowing and spending, confirms gold sale - Peter Diekmeyer

Bill Morneau took centre stage last week in the Canadian Parliament and didn’t disappoint. The new Liberal finance minister’s first budget jacked up program spending across the board, to be paid for by borrowing and, eventually, presumably, money printing. His rhetoric was coated with suggestions that “economic growth” would solve the country’s problems. The only folks left out were taxpayers and savers.

On the face of it, Morneau’s logic makes sense. With interest rates near zero and the Canadian government’s debts among the lowest in the G-7, why not borrow a bit and invest in infrastructure? Well, there are several reasons – and all of them augur well for the future of gold.

Canadian government debt at record levels

Morneau is technically right. The Canadian government’s debt is at low levels compared to that of other advanced economies. However, those numbers are shaky. For one, they include only federal debts, not provincial debts. If you include all Canadian government debts including the provinces (US states are not allowed to run deficits), things look far worse.

Furthermore, Morneau’s numbers don’t include huge debts that the former Conservative Harper Government never bothered to record as liabilities, such as deferred pension and healthcare costs, a policy Prime Minister Trudeau’s Liberal government is continuing. Canada’s Fraser Institute estimates that such unfunded liabilities totalled nearly $4.1 trillion1 in 2014. Those unrecorded debts alone are equal to more than 200% of Canada’s GDP. Worse, Canadians, whose household debt-to-disposable-income ratios are at record levels, are in no position to finance those additional government obligations.

Sell off gold, spend the cash

During the hours before Mr. Morneau tabled the budget, he wandered into the lock-up room, where reporters were poring over advance copies of the document.

…click on the above link to read the rest of the article…

Olympics In Doubt As Brazil Sports Minister Quits, Rio Governor Says “This Is The Worst Situation I’ve Ever Seen”

Olympics In Doubt As Brazil Sports Minister Quits, Rio Governor Says “This Is The Worst Situation I’ve Ever Seen”

In less than five months, Brazil is expected to host the Summer Olympics.

If you follow LatAm politics, you know that that is an absolute joke. Last summer, the country descended into political turmoil and the economy sank into what might as well be a depression. Nine months later, inflation is running in the double digits, output is in freefall, and unemployment is soaring. On Wednesday, the government reported its widest primary budget deficit in history and less than 24 hours later, the central bank delivered a dire outlook for growth and inflation.

Meanwhile, VP Michel Temer’s PMDB has split with Dilma Rousseff’s governing coalition, paving the way for her impeachment and casting considerable doubt on the future of the President’s cabinet.

On Thursday, we learn that sports minister George Hilton has become the latest casualty of the political upheaval that will likely drive Rousseff from office in less than two months. “Brazil’s sports minister is resigning four months before the country hosts the Olympics, amid continuing uncertainty over the fate of six other cabinet ministers,” The Guardian wrote this afternoon, before noting that earlier this month, “Hilton left his party in an apparent bid to hold onto his job.”

Hilton had been sports minister for just over a year and although we’re sure any and all Brazilian cabinet positions come with lucrative graft opportunities, we imagine Hilton won’t end up regretting his decision to distance himself from the government and from this year’s Summer Olympics.

After all, there are quite a few very serious questions swirling around the Rio games. For instance: Will the water be clean enough for athletes to compete in? Will there be enough auxiliary power to keep the lights on? And, most importantly, will the games take place at all?

…click on the above link to read the rest of the article…

Brazil Posts Largest Budget Deficit Ever As Rousseff Cries “Coup,” Olympic Ad Sales Top $1 Billion

Brazil Posts Largest Budget Deficit Ever As Rousseff Cries “Coup,” Olympic Ad Sales Top $1 Billion

On Tuesday, embattled Brazilian President Dilma Rousseff was dealt a bitter blow when PMDB – the party of VP Michel Temer and House Speaker Eduardo Cunha – officially left the coalition government.

“Dialogue, I regret to say, has been exhausted,” Tourism Minister Henrique Eduardo Alves, a PMDB leader and former speaker of the lower house of Congress, said on Monday as he resigned from Rousseff’s cabinet.

To let the market tell it, a complete political meltdown is great news. As we showed yesterday and as we’ve discussed on a number of occasions this month, the more precarious things get politically in Brazil, the harder the BRL and Brazilian risk assets rally. Why? Because the assumption is that when it comes to the country’s floundering economy, anything is preferable to the current arrangement. With output in free fall, inflation running in the double digits, and unemployment marking an inexorable rise, it’s difficult to imagine how things could possible get any worse.

Indeed, the prospect that Rousseff and Lula will be sent packing has created so much upward pressure on the BRL that the central bank has begun selling reverse swaps to keep a lid on the currency lest its rapid appreciation should end up short circuiting a much needed economic adjustment.

Meanwhile, Brazilian stocks have soared this year amid the turmoil. Of course this state of affairs simply isn’t sustainable. As Craig Botham, an emerging markets economist at Schroder Investment Management put it, “you don’t invest in a place where you don’t know who’s in charge.

Right. And you also don’t invest in a place where the economic fundamentals get worse by the day.

…click on the above link to read the rest of the article…

Remember the people involved

Remember the people involved

People_in_waders_and_boots_working_to_restore_a_pondWhen I was in University, I vividly remember one of my economics professors telling students to always remember the people involved when analyzing a policy change. I was reminded of this sage advice upon reading Matthew McCaffery’s Mises Daily article titled, Who will pay for it?” is the wrong question to ask politicians. McCaffery’s point is the question often focuses too much on the question of who and how to pay which distracts from more important issues such as what is being paid for? I would add to that, who is being paid? By emphasizing the basic problem of finding the money, what is sometimes overlooked is the problem of whether new government programs will actually work of whether they will be wasteful and counterproductive, and who the tax consumers are.

Asking questions such as “who will pay for it?” and “what, specifically, is being paid for?” are particularly pertinent given the federal budget is to be unveiled today.   Early reportssuggest cumulative budget deficits over the next two years will be well above $50 billion (about 1.3% of GDP). The question, “who will pay for it?” is answered quickly as the federal government has only three sources of revenue: current taxpayers, future taxpayers and increasing the money supply (inflation) by selling bonds to the Bank of Canada.

The consequences of higher taxes and more inflation doesn’t seem to faze many people, including some well-known economists in Canada. Doug Bandow observed that left-wing activists tend to favor corporate taxation. They imagine a society divided between businesses and people. However, firms are owned by people, employ people, sell to people, and contract with people. Taxing companies means taxing people.

…click on the above link to read the rest of the article…

Why Tomorrow’s “Secret” Meeting Between Russian, Saudi Oil Ministers Will Not Lead To A Cut In Production

Why Tomorrow’s “Secret” Meeting Between Russian, Saudi Oil Ministers Will Not Lead To A Cut In Production

For the past two weeks recurring flashing red headlines of an agreement, or at least a meeting, between Russia and Saudi Arabia – the world’s two largest oil producers – have led to aggressive short-covering rallies in oil on just as recurring hopes that the Saudi strategy of flooding the market with excess supply (by its own calculations as much as 3 million barrels daily) adopted during the 2014 Thanksgiving Day OPEC meeting, will come to an end.

Tomorrow this endless “headline hockey” will come to an end, following what is now a confirmed “secret” meeting between the two oil superpowers when, as Bloomberg reports, Saudi Arabia’s oil minister will meet with his Russian counterpart in Doha on Tuesday “to discuss the oil market.”

According to Bloomberg, Ali al-Naimi, the most senior oil official of the world’s biggest crude exporter, will speak with Russia’s Alexander Novak in the Qatari capital, “according to the person, who asked not to be identified because the talks are private.” The person didn’t say what the agenda of the meeting will be, which will also be attended by the kingdom’s fellow OPEC member Venezuela. The energy ministries of Russia and Saudi Arabia declined to comment.

Going into the meeting, one thing is certain: over the past 15 months Saudi Arabia has never once indicated any interest in curtailing production: after all, that would go against its unstated directive of putting marginal oil producers, read US shale companies, out of business:

Saudi Arabia has insisted that it won’t reduce production to tackle the global oil glut unless major producers outside the Organization of Petroleum Exporting Countries co-operate.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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