Government liquidity index

The government liquidity index is a metric that measures the ease or difficulty of trading in government securities, such as U.S. Treasury bonds. It is a gauge of deviations in yields from a fair-value model, indicating the level of liquidity in the market.

Measures of liquidity in the Treasury market are near crisis levels, raising concerns about underlying fragility in the functioning of the market. This can lead to historically large daily swings in yields, making it difficult for traders to carry out trades.

Government Intervention

In response to these concerns, the U.S. Treasury has announced that it will begin regularly buying back its bonds starting May 29, for the first time in over two decades. This move is aimed at improving liquidity in the market and reducing the risk of market mayhem.

In a recent tweet, market analyst Tavi Costa explains what this means:

The liquidity index for US government securities is deteriorating significantly, now at its worst levels since the European debt crisis in 2011.

Notably, it’s already more severe than the environment during the Covid crash in 2020.

What is even more alarming today is that this is all happening while the US currently has one of the largest interest rate differentials compared to other developed economies in history, yet liquidity appears to be eroding.

This situation is setting the stage for the US to experience its own “Bank of England moment” as we approach elections.

In September 2022, UK yields saw one of the steepest increases in history after the announcement of £45 billion in unfunded tax cuts, which raised concerns over increased borrowing needs and debt sustainability.

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

Debt Brakes and Treaty Requirements About to Smash the EU

June 27, 2024

Debt Brakes and Treaty Requirements About to Smash the EU

The EU has launched an Excessive Debt Proceeding against France. It won’t stop there.

Debt Proceedings

Please note the EU Rebukes France, Italy and Others Over Excessive Debt.

The assessments of the 27 EU states’ budgets and economies will be published by the European Commission on Wednesday, with France, Italy and Belgium among the member states to be reprimanded over their accumulated excessive new debt.

The Commission said it was satisfied that “the opening of a deficit-based excessive deficit procedure is warranted” in the case of seven countries. The group also included Hungary, Malta, Poland and Slovakia.

The EU suspended debt and deficit regulations to help countries cope with the economic fallout of the COVID-19 pandemic and Russia’s invasion of Ukraine.

The rules are now back in place and now any EU country going over debt and deficit limits run the risk of legal action.

EU’s Golden Rules

According to the reformed rules, an EU member state’s debt may not exceed 60% of gross domestic product (GDP).

Highly indebted EU countries with debt levels over 90% of GDP have to reduce their debt ratio by one percentage point annually, countries

Additionally, the general government deficit — the shortfall between government revenue and spending — must be kept below 3%.

According to the commission’s economic forecast, France is at -5.5%, Italy is at -4.4% and Belgium is at -4.4% and will breach this deficit limit in 2024.

Austria, Finland, Estonia, Hungary, Malta, Poland, Romania, and Slovakia also have deficits that are too high according to the rules. Spain is at exactly -3.0%.

Snap Elections

French President Emmanuel Macron was hammered in the European Parliamentary elections as expected in this corner, and generally elsewhere.

Winners: The Far Right

Losers: Renew Europe (Macron), and the Greens.

The response by Macron caught everyone off guard. He dissolved parliament and called for snap elections.

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

U.S. Government Historical Debt

June 27, 2024

U.S. Government Historical Debt

Chart of the Week #7

Over the years, meeting people from all walks of life, I’ve noticed something: when you bring up the massive U.S. debt that’s starting to take over our whole economy, some just shrug and say, “Well, the U.S. has always had a ton of debt — it’s just how things are, nothing to be too surprised about.”

When I come across this line of thinking, I like to whip out the following chart. Take a look. It shows the U.S. government’s debt since 1790.

What you’ll notice right away is that government debt was pretty much nonexistent from the early days of our country until about halfway through the 20th century.

But this situation changed in the second half of the century, first gradually and then alarmingly. This happened with the expansion of federal government spending under Presidents Franklin D. Roosevelt, Lyndon B. Johnson’s, Richard Nixon. And debt just kept snowballing since.

That said, President Biden really took it to levels we hadn’t seen before.

In the years since taking office in 2021, Biden went on a trillion-dollar spending spree with stimulus projects like the American Rescue Plan, the Infrastructure Investment and Jobs Act, and the Inflation Reduction Act.

The unmistakable result of such policies is the current national debt standing at $34.8 trillion — more than a quarter-million dollars for every household — compared to “just” $27.8 trillion in 2021.

Come to think of it… “standing” may not be the best word. The U.S. government debt never stands still; it grows relentlessly with every passing moment. Here’s a link if you want to watch it go up live, but be warned, it’s quite disturbing.

U.S. Government Debt vs. GDP

June 22, 2024

U.S. Government Debt vs. GDP

Chart of the Week #8

I don’t usually do these more than once a week unless I come across something really pressing that I want to share with you. But after a reader named Laramie made an interesting comment under the chart I published earlier this week, showing U.S. government historical debt, I figured this topic needed a follow-up for more context. Here’s a snippet of what he wrote:

We know a debt level at 120% or more of GDP eventually leads to chaos in countries that do not have the world’s reserve currency.

Laramie is spot-on. Once a country reaches a certain level of debt relative to its economy, something tends to break. And usually, it’s not just one thing.

As it happens today under Biden, the U.S. government’s $34.8 trillion debt is already about 125% of America’s Gross Domestic Product (GDP). This places us in the company of nations like Venezuela, Sudan, and Lebanon on the list of Top 10 countries with the highest debt-to-GDP ratios.

None of these countries are successful, vibrant economies, or places you’d want to hang your hat in — quite the opposite. It’s just not a great club to be a part of.

And what’s really frustrating is that things haven’t always been like this in the good ol’ US of A. In fact, the only comparable period when the nation was this deep in debt relative to its economy was during World War II and its immediate aftermath. Not even the years of the Great Depression came close. Take a look at the chart below.

Just think about it — it took the mother of all emergencies, a world war no less, to bring the U.S. debt-to-GDP ratio to where it is now. If that doesn’t give you pause, I’m not sure what would.

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

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