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Welcome to the age of cuts

Welcome to the age of cuts

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The UK government faced a barrage of criticism over its National Insurance hike this week.  The tax – which theoretically pays for public services, pensions, and benefits – was in creased last autumn, before the political class became aware of the massive increase in gas and electricity prices coming later this year.  However, with cost-push inflation rising across the economy, and with rises in local taxes due to be announced, millions of British households are facing a massive squeeze on their standard of living.  This has given more weight to the idea that government should extend its pandemic borrowing until the economy has recovered, rather than raising new taxes at this point.

It goes without saying that nobody welcomes tax increases.  Nevertheless, as a consequence of the way this currency-creation system works, the government is rapidly running out of room to manoeuvre.  In the UK, around £500bn worth of government bonds are index-linked, so that as the inflation rate rises, so the cost of servicing the debt increases.  As James Sillars at Sky News reported this week:

“Interest payments on government debt hit a record £8.1bn for the month of December because of surging inflation…  The Office for National Statistics (ONS) said the cost of servicing the country’s £2trn+ debt pile was almost 200% or £5.4bn up on December 2020.

“It is because half a trillion pounds worth of government bonds are linked to the Retail Prices Index (RPI) measure of inflation which stood at 8.4% in December – its highest level since 1991.”

The problem will worsen in the spring as the new energy price cap comes into force, and as prices continue to rise across the economy.  This sets up one of contemporary democracy’s greatest flaws.  It is precisely during inflationary periods that the people begin to demand more government spending and less taxation…

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

Is the Crack-up Boom Here?

Is the Crack-up Boom Here?

Bloomberg News recently solicited advice from Argentinians who lived through that country’s high inflation on how Americans should cope with rising inflation. The Argentinians suggested Americans spend their paychecks as fast as possible to avoid future price increases. They also suggested taking out loans that can be paid back later in devalued currency.

These strategies may make sense for individuals. However, encouraging debt and discouraging savings is disastrous for the country. Relying on debt and spending one’s paycheck immediately encourages people to seek instant gratification instead of planning for the future. This depletes both economic and moral capital.

November’s 9.6 percent increase in the producer price index, combined with the consumer price index’s increase to levels not seen since the early 1980s, shows why fears of inflation have become the public’s number one concern. Even the Federal Reserve has acknowledged that inflation is not just “transitory.”

The Fed recently announced it is accelerating the timetable to reduce its monthly purchases of Treasury and mortgage-backed securities. The Fed also announced it is planning three interest rate increases next year. However, the Fed plans to increase rates by no more than one percent. So even if the Fed does follow through on its promise to hike rates, it will do little if anything to combat rising prices. If the Fed allowed interest rates to rise to anything approaching market levels, it would make the federal government’s debt servicing costs unsustainable. This puts tremendous pressure on the Fed to maintain low rates.

The biggest victims of the Federal Reserve’s erosion of the dollar are lower- and middle-class Americans whose paychecks do not keep pace with the Fed-caused price increases. Yet many progressives still cling to the fallacy that average workers somehow benefit from continued dollar devaluation.

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

Why Do Central Banks Want Higher Inflation?

Why Do Central Banks Want Higher Inflation?

Why Do Central Banks Want Higher Inflation?

The debt ceiling debate in U.S. Congress and related political nonsense brings even more to light the exponential growth in US federal government debt. US government debt has doubled in the 10 years since the last major debacle Congress created over raising the debt ceiling back 2011. The debate and Congress’s unwillingness to increase the limit back in August 2011 resulted in declining equity markets. It also resulted in Standard and Poor’s downgrading U.S. debt to AA+ from AAA!

The Political Standoff

The political standoff over raising this arbitrary restriction of how much debt the US can issue has become just another political lever in the dysfunctional Congress. As Secretary Yellen points out…

Raising the debt ceiling doesn’t authorize additional spending of taxpayer dollars. Instead, when we raise the debt ceiling, we’re effectively agreeing to raise the country’s credit card balance, and in this case, 97% of that balance was incurred by past congresses and presidential administrations. Even if the Biden administration hadn’t authorized any spending, we would still need to address the debt ceiling now. Raising the debt limit was a regular occurrence – congress has either permanently or temporarily raised the debt limit 80 times since 1960. And before 2011, this was done generally with little debate as raising the debt ceiling does not approve new or additional spending but allows the government to borrow in order to pay already approved spending.

Janet Yellen WSJ Op-Ed 19 September 2021

That’s right it doesn’t authorize new spending it only allows for the U.S. Treasury to borrow enough to carry out the mandates of Congress for spending that has already been authorised. At least for now Congress approved enough of an increase to keep the U.S. government solvent until December 3.

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

The Biggest Federal Reserve Scandal

The Biggest Federal Reserve Scandal

Following revelations that Federal Reserve officials made trades in financial assets while the Fed was taking extraordinary efforts to “stimulate” the economy, Federal Reserve Chairman Jerome Powell ordered a review of the Fed’s ethics rules. While these trades appear problematic, they pale in comparison to the biggest Fed scandal — the Fed’s impoverishment of ordinary Americans, enrichment of the elites, and facilitation of government debt and deficits.

The depression induced by coronavirus, though really caused by so-called public health actions government took in response, was the official reason for the Fed’s increased asset purchases last year. However, the Fed actually started ramping up its money creating activities in September of 2019, when it began pouring billions a day into the repo markets, which banks use to make short-term loans to each other, in order to keep repo market interest rates low.

Coronavirus was just a convenient excuse for the Fed to do more of what it was already doing. Now, the Fed is using the limited reopening as a scapegoat for rising prices. Of course, anyone who understands Austrian economics understands that rising prices are a symptom, not a cause, of inflation. Inflation is the very act of money creation by the Fed.

Rising prices that diminish the average American’s standard of living are not the only result of the Fed’s manipulation of the money supply. The manipulation distorts economic signals, producing results including booms, bubbles, and busts.

Inflation has always benefited the well-connected elites who receive the Fed’s newly created money before the new money causes widespread price increases. The true motivation behind Fed policies was revealed by former Fed official Andrew Huszar in 2013. Huszar, writing for the Wall Street Journal, confirmed that quantitative easing kept stock prices high, instead of helping Americans struggling with the aftereffects of the 2008 meltdown.

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

28 trillion reasons to have a Plan B

At the close of business on Monday March 1st, just a few days ago, the US national debt crossed $28 trillion for the first time in history.

To the penny, in fact, the national debt hit $28,004,376,276,999.35.

And bear in mind that figure doesn’t include the $1.9 trillion in ‘Covid stimulus’ that Uncle Sam is about to pass, let alone all the other deficit spending that they were already expecting for this current fiscal year.

So you can already see how the debt will quickly rocket past $30 trillion in no time at all.

It’s noteworthy that it took the United States more than two centuries to accumulate its first trillion dollars in debt– a milestone first reached on October 22, 1981.

In those two centuries (74,984 days, to be exact), the US fought two world wars, battled the Spanish Flu pandemic, dealt with the Great Depression, waged Cold War against the Soviet Union, fought the Civil War against itself, put a man on the moon, etc. before breaching $1 trillion in debt.

This most recent trillion of debt took a mere 152 days to accumulate.

Think about that: nearly 75,000 days for the first trillion, 152 days for the last trillion.

Even more startling, it was only September 2017 that the national debt first crossed the $20 trillion milestone.

So when the debt undoubtedly hits $30 trillion over the next few months, that means it will have grown $10 trillion in less than four years.

And there is absolutely no end in sight. The Treasury Department and the Federal Reserve are both in lockstep fanaticism: no amount of debt is too much, no amount of money printing is too much.

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

 

Weekly Commentary: Short-Term Unsustainable

Weekly Commentary: Short-Term Unsustainable

Outstanding Treasury Securities began 2008 at $6.051 TN, or 41% of GDP. Treasuries ended 2019 at $19.019 TN, or 87% of GDP. And then, in only three quarters, Treasuries surged another $3.882 TN to $22.900 TN, or 108% of GDP. We must wait a few weeks for the Fed’s Q4 Z.1 report, but the federal government posted a fiscal deficit of $573 billion during this period, likely pushing outstanding Treasuries to near $23.5 TN, or about 110% of GDP. Since the end of 2007, Treasuries have inflated around $17.5 TN – approaching a three-fold increase.
For years now, I’ve listened as Washington politicians and central bankers admit to the obvious – that the trajectory of our federal debt is unsustainable – while invariably arguing it was not the time to be concerned or address it. With Treasuries blowing right through the 100% of GDP milepost – and likely poised to reach 125% within the next year or two – there’s no time like the present to recognize our nation is in serious fiscal trouble.

Senator John Thune (from Yellen’s confirmation hearing): “I’m going to try and roll a lot of thoughts and questions into sort of one big package here. But the one thing that concerns me that nobody seems to be talking about anymore is the massive amount of debt that we continue to rack up as a nation. And, in fact, the President elect has proposed a couple trillion dollar fiscal plan on top of that which we’ve already done – which would add somewhere on the order of about $5.3 trillion to deficits and that’s according to the committee for responsible budget of which you have been a board member.
…click on the above link to read the rest of the article…

Visualizing The Snowball Of Global Government Debt

Over the last five years, markets have pushed concerns about debt under the rug.

But, while economic growth and record-low interest rates have made it easy to service existing government debt, Visual Capitalist’s Jeff Desjardins points out that it’s also created a situation where government debt has grown in to over $63 trillion in absolute terms.

The global economic tide can change fast, and in the event of a recession or rapidly rising interest rates, debt levels could come back into the spotlight very quickly.

THE DEBT SNOWBALL

Today’s visualization comes to us from HowMuch.net and it rolls the world’s countries into a “snowball” of government debt, colored and arranged by debt-to-GDP ratios. The data itself comes from the IMF’s most recent October 2018 update.

Courtesy of: Visual Capitalist

The structure of the visualization is apt, because debt can accumulate in an unsustainable way if governments are not proactive. This situation can create a vicious cycle, where mounting debt can start hampering growth, making the debt ultimately harder to pay off.

Here are the countries with the most debt on the books:

Note: Small economies (GDP under $10 billion) are excluded in this table, such as Cabo Verde and Barbados

Japan and Greece are the most indebted countries in the world, with debt-to-GDP ratios of 237.6% and 181.8% respectively. Meanwhile, the United States sits in the #8 spot with a 105.2% ratio, and recent Treasury estimates putting the national debt at $22 trillion.

LIGHT SNOW

On the opposite spectrum, here are the 10 jurisdictions that have incurred less debt relative to the size of their economies:

Note: Small economies (GDP under $10 billion) are excluded in this table, such as Timor-Leste and Solomon Islands

Macao and Hong Kong – both special administrative regions (SARs) in China – have virtually zero debt on the books, while the official country with the lowest debt is Brunei (2.8%).

Global Debt Surpasses 244 Trillion Dollars As “Nearly Half The World Lives On Less Than $5.50 A Day”

Global Debt Surpasses 244 Trillion Dollars As “Nearly Half The World Lives On Less Than $5.50 A Day”

The borrower is the servant of the lender, and one of the primary ways that the elite keep the rest of us subjugated is through the $244,000,000,000,000 mountain of global debt that has been accumulated.  Every single day, the benefits of our labor are going to enrich somebody else.  A portion of the taxes that are deducted from your paycheck is used to pay interest on government debt.  A portion of the profits that your company makes probably goes to servicing some form of business debt.  And most Americans are continuously making payments on their mortgages, their auto loans, their credit card balances and their student loan debts.  But most people never stop to think about who is becoming exceedingly wealthy on the other end of these transactions.  Needless to say, it isn’t the 46 percent of the global population that is living on less than $5.50 a day.

The world has never seen anything like this mountain of debt ever before, and one of the central themes of The Economic Collapse Blog is that all of this debt will ultimately destroy our society.  According to the Institute of International Finance, the total amount of global debt is now  “more than three times the size of the global economy”

The world’s debt pile is hovering near a record at $244 trillion, which is more than three times the size of the global economy, according to an analysis by the Institute of International Finance.

The global debt-to-GDP ratio exceeded 318 percent in the third quarter of last year, despite a stronger pace of economic growth, according to a report by the Washington-based IIF released on Tuesday.

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

Global Debt Surpasses 244 Trillion Dollars As “Nearly Half The World Lives On Less Than $5.50 A Day”

Global Debt Surpasses 244 Trillion Dollars As “Nearly Half The World Lives On Less Than $5.50 A Day”

The borrower is the servant of the lender, and one of the primary ways that the elite keep the rest of us subjugated is through the $244,000,000,000,000 mountain of global debt that has been accumulated.  Every single day, the benefits of our labor are going to enrich somebody else.  A portion of the taxes that are deducted from your paycheck is used to pay interest on government debt.  A portion of the profits that your company makes probably goes to servicing some form of business debt.  And most Americans are continuously making payments on their mortgages, their auto loans, their credit card balances and their student loan debts.  But most people never stop to think about who is becoming exceedingly wealthy on the other end of these transactions.  Needless to say, it isn’t the 46 percent of the global population that is living on less than $5.50 a day.

The world has never seen anything like this mountain of debt ever before, and one of the central themes of The Economic Collapse Blog is that all of this debt will ultimately destroy our society.  According to the Institute of International Finance, the total amount of global debt is now  “more than three times the size of the global economy”

The world’s debt pile is hovering near a record at $244 trillion, which is more than three times the size of the global economy, according to an analysis by the Institute of International Finance.

The global debt-to-GDP ratio exceeded 318 percent in the third quarter of last year, despite a stronger pace of economic growth, according to a report by the Washington-based IIF released on Tuesday.

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

Record Global Debt & Chaos in 2019 – John Rubino

Record Global Debt & Chaos in 2019 – John Rubino

Financial writer John Rubino says no matter what country, the global debt has exploded to record highs, and it’s going to go even higher in the coming years. Rubino contends, “Government debt is going to soar going forward no matter what. Whether we have three more years of growth or a recession next year, we are going to see massive new deficits and massive increases in government debt all over the world. This is coming at a time when we have already hit record levels of debt and blown right through previous record levels. The last crisis, that almost ended the global financial system, was debt driven. The next one is going to be that much, much more serious because we basically doubled the amount of debt that’s out there since 2005 and 2006.”

On the political front, Rubino says, “The idea that things get more extreme from here is not that out of the ordinary and not that hard to believe. We are not just going to see gridlock here in the U.S., we are going to see chaos. That means of the things that should be gotten done, very few of them will be. . . . Political chaos is good for precious metals . . . both metals are way undervalued.”

Few would disagree, that at some point, the financial system is going to explode. Rubino says, “Let’s look at what happens when this finally blows up. The pressure is going to be on currencies when the financial system starts to spin out of control next time. In other words, people are going to see the amount of debt we are taking on, see the amount of currency we are creating to service all this debt, and will wonder what that does to the value of the currencies that are being aggressively created. They will lose faith in those currencies.

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

Three Things That Will Definitely Happen In 2019

Three Things That Will Definitely Happen In 2019

Much about 2019 is uncertain. But a few things are pretty much guaranteed, including the following:

Government debt will rise at an accelerating rate
Like a life-long dieter who finally gives up and decides to eat himself to death, the US is now committed to trillion-dollar deficits for as far as the eye can see. And that’s – get this – assuming no recession in the coming decade. During the next downturn that trillion will become two or more, but in 2019 another trillion-plus is guaranteed.

US government debt three things for 2019

But the US debt binge is downright orderly compared to much of the rest of the world.

After Paris nearly burned to the ground last month, president Macron responded – surprise! – with massively higher spending:

Macron Bets Spending Binge Can Save His Plan to Transform France

(Bloomberg) – Emmanuel Macron is rolling the dice with France’s public finances to keep his grand plans for the economy alive after weeks of protests on the streets.

Macron’s government will set out a raft of measures to try to calm the so-called Yellow Vest protests on Thursday and they will almost certainly see France breach the European Union’s budget deficit ceiling next year.

The 40-year-old president is arguing the concessions are necessary to maintain public support for his efforts to make the economy more efficient.

“Macron is now facing an impossible trilemma,” said Bernhard Bartels, associate director at Frankfurt-based Scope Ratings. “You can’t have have popular support, ongoing structural reforms and fiscal consolidation all at the same time.”

Macron’s announcement Monday that he’ll raise the minimum wage, abolish taxes on overtime, and get rid of a controversial tax on pensions will send next year’s budget deficit to about 3.5 percent of output, up from a previous target of 2.9 percent, according to media reports. That’s well beyond the 3 percent limit imposed on members of the euro zone.

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

How Faux Capitalism Works in America

How Faux Capitalism Works in America

Stars in the Night Sky

The U.S. stock market’s recent zigs and zags have provoked much squawking and screeching.  Wall Street pros, private money managers, and Millennial index fund enthusiasts all find themselves on the wrong side of the market’s swift movements.  Even the best and brightest can’t escape President Trump’s tweet precipitated short squeezes.

The Donald mercilessly hits the shorts with a well-timed tweet. But as it turns out, this market is in a really bad mood at the moment. [PT]

The short-term significance of the DJIA’s 8 percent decline since early-October is uncertain.  For all we know, stocks could run up through the end of the year.  Stranger things have happened.

What is also uncertain is the nature of this purge: Is this another soft decline like that of mid-2015 to early-2016, when the DJIA fell 12 percent before quickly resuming its uptrend?  Or is this the start of a brutal bear market – the kind that wipes out portfolios and blows up investment funds?

The stars in the night sky tell us this is the latter.  For example, when peering out into the night sky even the most untrained eye can identify the three ominous stars that are lining up with mechanical precision.

These stars include a stock market top, followed by a monster corporate debt buildup, and a fading economy.  In short, the stock market’s latest break is presaging a corporate credit crisis and global recession.

 

BofA/Merrill Lynch US high yield Master II Index yield – this looks like a quite convincing breakout, impossible to tweet down. In other words, the corporate debt build-up is beginning to bite back – and rather bigly, if we may say so (ed note, in case you’re wondering: the little poems are from a Spectator competition in which people used phrases from actual tweets to put together Donald haikus and poems). [PT]

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

Moody’s Cuts Italy’s Debt Rating To One Notch Above Junk

Moody’s Investors Service has today downgraded the Government of Italy’s local and foreign-currency issuer ratings to Baa3 from Baa2. The outlook on the rating has been changed to stable, meaning that any downgrade to junk – the worst case scenario – has been taken off the table for the time being.

Moody’s also downgraded to Baa3 from Baa2 the local and foreign-currency senior unsecured bond ratings. The foreign-currency senior unsecured shelf and MTN ratings were downgraded to (P)Baa3 from (P)Baa2. Italy’s local-currency commercial paper rating and foreign-currency other short-term rating were downgraded to P-3/(P)P-3 from P-2/(P)P-2. The rating outlook is stable.
The key drivers for today’s downgrade of Italy’s ratings to Baa3 are as follows:

1. A material weakening in Italy’s fiscal strength, with the government targeting higher budget deficits for the coming years than Moody’s previously assumed. Italy’s public debt ratio will likely stabilize close to the current 130% of GDP in the coming years, rather than start trending down as previously expected by Moody’s. Moreover, the public debt trend is vulnerable to weaker economic growth prospects, which would see the public debt ratio rise further from its already elevated level.

2. The negative implications for medium-term growth of the stalling of plans for structural economic and fiscal reforms. In Moody’s view, the government’s fiscal and economic policy plans do not comprise a coherent agenda of reforms that will address Italy’s sub-par growth performance on a sustained basis. Following a temporary lift to growth due to the expansionary fiscal policy, the rating agency expects growth to fall back to its trend rate of around 1%. Even in the near term, Moody’s believes that the fiscal stimulus will provide a more limited boost to growth than the government assumes.

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

IMF Issues Dire Warning – ‘Great Depression’ Ahead?

IMF Issues Dire Warning – ‘Great Depression’ Ahead?

– “Large challenges loom for the global economy to prevent a second Great Depression” warn IMF
– Massive government debts and eroded fiscal buffers since 2008 suggest global dominos await a single market crash
– 2008 crisis measures cast long, dark “terrifying” shadow

Is another “Great Depression” on the horizon?

It would be easier to dismiss these words from Nouriel Roubini, Marc Faber or other doom-and-gloom prognosticators. Coming from Christine Lagarde’s team, though, they take on a new dimension of scary.

The International Monetary Fund head isn’t known for breathlessness on the world stage. And yet the IMF sounded downright alarmist in its latest Global Financial Stability report, stating that “large challenges loom for the global economy to prevent a second Great Depression.”

Even some market bears were taken aback. “Why,” asks Michael Snyder of The Economic Collapse Blog would the IMF use this phrase “in a report that they know the entire world will read?”

Perhaps because, unfortunately, the findings of other referees of global risks – including the Bank for International Settlements – hint at similar dislocations.

Ten years after the Lehman Brothers crisis, these worrisome warnings that will be explored in depth at this week’s annual IMF meeting in Bali. The tranquil setting, though, will offer few respites from cracks appearing in markets everywhere – from Italy to China to Southeast Asia, where currencies are cratering like it’s 1998 again.


Source: Wikipedia

Potential flashpoints and a long line of dominos

Italy is the current flashpoint – and the latest target of “domino effect” chatter in frothy world markets. China’s shadow-banking bubble, and the extreme opacity and regulations that enable it, also came in for criticism. And, of course, the 800-pound beast in any room where global investors gather these days: Donald Trump’s assault on world trade.

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

Warren Buffett Explains Bubbles: But He Doesn’t Know We Are In One

Buffet explains bubbles: “People see neighbors ‘dumber than they are’ getting rich.”

Warren Buffett explains Why Bubbles Happen

Buffett was asked by CNBC’s Andrew Ross Sorkin if he is worried another crisis will happen again.

“Well there will be one sometime,” Buffett said in an interview for CNBC’s “Crisis on Wall Street: The Week That Shook the World” documentary. The documentary airs Wednesday night at 10 p.m. ET/PT.

“People start being interested in something because it’s going up, not because they understand it or anything else. But the guy next door, who they know is dumber than they are, is getting rich and they aren’t,” he said. “And their spouse is saying can’t you figure it out, too? It is so contagious. So that’s a permanent part of the system.”

That last paragraph perfectly explains Bitcoin. Most of those investing in cryptos have little idea how they work, or what they are even buying.

Buffet made no mention of the corporate bond bubble, the equities bubble, or even the crypto bubble. He does not see any bubbles now, at least that he mentioned.

Symptom or Cause?

Buffett confuses a symptom (rampant speculation) with the true cause

  • The Fed (central banks in general), keep interest rates too low, too long
  • Fractional reserve lending
  • Moral hazards like bank bailouts
  • Poor fiscal policies and massive government debt

In short, there is no free market in anything and thus no valid price discovery. There would always be speculation, but Fed policies and fractional reserve lending are the root cause of bubbles.

Olduvai IV: Courage
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Olduvai II: Exodus
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