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…

A Most Dangerous Assumption: Mining the Future to Spend More Today

June 20, 2024

A Most Dangerous Assumption: Mining the Future to Spend More Today

What the cheerleaders are actually claiming is the process of adding zeroes to “money” is limitless, but there are limits on the utility of devaluing currency, too.

How prosperous would the world be if we hadn’t collectively borrowed and spent $315 trillion—-333% of global GDP? We all know the answer–not very prosperous at all, for production, consumption and profits would all be mere fractions of their current totals if we could not borrow money and could only spend cash on hand. Global Debt Hit $315 Trillion In Q1 2024.

All this money that’s been spent/invested has effectively been mined / extracted from future resources, labor and capital. The basic idea is that the interest that must be paid on this debt will be paid out of earnings generated by the productive use of resources, labor and capital in the future. Once the debt matures and the principle must be returned to the lender / bond purchaser, this principle must also be mined / extracted from assets available in the future.

Mining / extraction is the appropriate analogy because nothing is unlimited in the real world. Imagination–yes, it’s unlimited. Denial and delusion: yes, both are limitless. But tangible resources that can be recovered at costs the economy can bear, productive labor and capital are not limitless. If we mine the future too intensively, there won’t be enough left in the future to spend/invest at the level we enjoy today.

The fundamental assumption behind mining the future is that the pool of resources, labor and capital will continue expanding forever, effortlessly funding the interest and principle due on today’s borrowing and leaving more than enough to consume and invest in the future.

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

The Ideological Battle Behind the U.S. Debt Crisis

June 9, 2024

The Ideological Battle Behind the U.S. Debt Crisis

The U.S. national debt is at 34.7 trillion dollars. If you laid that many dollar bills end-to-end, it would wrap around the Earth 134,599 times. That’s enough to travel to the sun and back 17 times. Suffice it to say, we’re in a pickle.

America is slowly approaching the precipice of debt default. This is no minor dilemma. A default could cause approximately 8 million jobs to be lost. In other words, the bill would come due.

For many politicians, the debt crisis is not a pressing concern. At least not enough to take measures to fix it. The Biden administration passed a 1.2 trillion-dollar infrastructure bill in 2021, adding 256 billion dollars to the budget deficit over the next ten years. Biden has also forgiven 167 billion dollars in student loans during his tenure, which was financed through increased government spending. Despite already being one of the most indebted countries in the world, politicians continue to dig the U.S. into an even deeper hole. The problem is not simply a monetary one. There is an ideological battle underlying our descent into debt.

The ideas that have caused America’s current debt crisis were birthed during the Great Depression. In 1932, Franklin D. Roosevelt issued a series of spending measures that were intended to stimulate economic activity in what was called the “New Deal.” FDR spent over 950 billion (inflation-adjusted) dollars on the program while being touted as an economic “savior.” The deal was promoted as what released America from the bonds of the recession. In reality, it made the problem worse.

A study conducted by two UCLA economists found that the New Deal actually extended the Great Depression by seven years. By artificially increasing wages while unemployment remained rampant and below projected recovery rates, FDR’s program harmed economic health. Simply pumping money into the economy wasn’t the fix-all solution it was advertised to be.

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

CEO Of Russia’s Second-Largest Bank Warns: “US Is Inevitably Headed For A Serious Economic Crisis”

May 28, 2024

CEO Of Russia’s Second-Largest Bank Warns: “US Is Inevitably Headed For A Serious Economic Crisis”

Last September, we told readers that the US national debt was skyrocketing at a staggering $1 trillion every three months—roughly every 100 days.

Since then, the debt spending has gotten worse.

Out-of-control spending has delayed the US economy’s day of reckoning in this year’s presidential election cycle. But it has become very evident an economic crisis looms in the years ahead.

One River Asset Management CIO, Eric Peters, recently said, “I have a growing conviction that in the coming 2-5 years, we’re going to face a US debt sustainability crisis, sparking a major global market event.”

BofA CIO Michael Hartnett recently noted what we said previously about the unsustainable debt explosion…

And now, fresh comments from Andrey Kostin, CEO of Russia’s second-largest bank, have emerged—comments that Western mainstream media dare not share with their audiences. Why is that? … Well, the Washington censorship blob wouldn’t allow it.

Russian state-owned news agency TASS cited Kostin’s interview with the Fontanka publication, who warned if it wasn’t for the dollar’s status as the world’s reserve currency, a sovereign debt crisis would’ve already been underway in the US. No matter what, he warned the US economy is on the verge of an economic crisis.

“I am thoroughly convinced that America is inevitably headed for a serious economic crisis. The amount of debt currently held by the US today has reached inconceivable, astronomical levels. And the dollar’s monopoly on the global stage is the only thing enabling the Americans to maintain such a level of debt. If the Chinese or the Arabs took their money out of the US, a complete collapse would ensue for the financial sector and the government,” he said.

Kostin added:

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

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