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The World Is Sitting on a Powder Keg of Debt
The World Is Sitting on a Powder Keg of Debt
The Federal Reserve recently surrendered in its inflation fight. But price inflation is nowhere near the 2% target. Why did the Fed raise the white flag prematurely?
One of the major reasons is debt.
The world is buried under record debt levels and the global economy can’t function in a high interest rate environment.
Fed officials know that and it is certainly one of the reasons they don’t want to raise rates any higher and hope to bring them down as soon as possible.
Over a decade of easy money policies incentivized borrowing to “stimulate” the economy. As a result, governments, individuals, and corporations all borrowed to the hilt. That was all well and good when interest rates were hovering around zero, but when central banks had to hike rates to battle the inevitable price inflation, it pulled the rug out from under the borrow-and-spend economy.
Governments around the world are feeling the squeeze as they try to deal with trillions in debt in a rising interest rate environment.
According to projections by the International Monetary Fund (IMF) global government debt will hit $97.1 trillion in 2023. That represents a 40% increase since 2019.
By 2028, the IMF projects that global public debt will exceed 100% of global GDP. The only other time global debt-to-GDP was that high was at the height of the pandemic lockdowns.
Americans like to brag about being number one. Well, when it comes to debt, they’re right.
The US national debt makes up 32.4% of the total global government debt.
According to the IMF, America’s debt-to-GDP ratio stands at 123.3%.
This chart by Visual Capitalist captures the extent of the problem.
THE DEBT SPIRAL
Unless governments dramatically cut spending and/or raise taxes, this debt spiral will only get worse, especially if interest rates remain elevated.
…click on the above link to read the rest…
Deutsche Bank Economists Say the Fed Will Create More Inflation in 2024
Deutsche Bank Economists Say the Fed Will Create More Inflation in 2024
Deutsche Bank economists say the Federal Reserve will create more inflation in 2024.
OK, that’s not exactly what they said. But that is the implication of their latest forecast.
The Deutsche Bank analyst forecast that the Fed will cut rates by 175 basis points in 2024 in response to a “mild” recession. That would drive the Federal Reserve funds rate down to between 3.5% and 3.75%.
This loosening monetary policy, by definition, would create more inflation.
The Fed currently has interest rates set at between 5.25% and 5.5%.
Most mainstream analysts now think the central bank will cut rates next year, but not as steeply as Deutsche Bank economists.
The dominant narrative today is that the Fed has successfully beaten down price inflation. A cooler-than-expected CPI report for October reinforced this notion. With inflation on the run, mainstream analysts think that the Fed has initiated its last hike and will pivot to rate cuts next year to guide the economy to a “soft landing.” Even before the CPI data release markets were pricing in 75 basis points of rate decreases in 2024.
Many mainstream analysts and financial news network pundits have taken a recession completely off the table. But Deutsche Bank senior US economist Brett Ryan told Reuters he expects the US economy to hit a “soft patch” that will lead to a “more aggressive cutting profile.”
Ryan said he expects this economic weakness to further ease inflationary pressure.
The Problems With the Forecast
There are several problems with the Deutsche Bank projections, and the entire mainstream narrative more generally.
In the first place, the death of inflation is greatly exaggerated. No matter how you slice and dice the data, none of the numbers come close to the Fed’s 2% target. Core CPI is still double that number.
…click on the above link to read the rest…
The Myth of the Invincible Dollar
The Myth of the Invincible Dollar
I write a lot about the national debt.
And most people don’t care.
That’s because there’s a widespread belief that the dollar is invincible.
It isn’t.
The prevailing attitude is that the US government can borrow and spend indefinitely. After all, it hasn’t caused a problem so far. But a long fuse can burn for a long time before it finally reaches the powder keg.
I don’t know how long we have before the debt bomb explodes, but I do know we get closer and closer every day. And sadly, very few people care enough to address the problem.
The recent government shutdown drama is a case in point.
A stopgap spending deal swept the shutdown threat out of the headlines, but it’s still there lurking in the shadows of the halls of Congress. If lawmakers don’t figure something out by Nov. 17, the government will be forced to shut down.
There isn’t much talk about a shutdown right now, but when people do discuss the possibility, they almost always focus on the mythical crisis that shuttering the federal government might cause. That sidesteps the real problem — out of control government spending.
Conventional wisdom is that Congress needs to do whatever it takes to avoid a shutdown. If that means maintaining spending at current levels or even increasing spending, so be it. The handful of intransigent members of Congress who want to hold out for spending cuts are always cast as the bad guys in this kabuki theater. As economist Daniel Lacalle put it in a recent article published by Mises Wire, “The narrative seems to be that governments and the public sector should never have to implement responsible budget decisions, and spending must continue indefinitely.”
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The US Banking System Is Sound?
The US Banking System Is Sound?
Treasury Secretary Janet Yellen keeps insisting that the banking system is “sound.” Is it though? Because it doesn’t look particularly sound.
In fact, we just witnessed the second-largest US bank failure ever.
Government regulators seized control of First Republic Bank over the weekend and sold the majority of the bank’s operations to JP Morgan Chase. It was the third major bank failure this year and the biggest bank to collapse since the 2008 financial crisis. It was the second-largest bank by assets to fail in US history.
First Republic went under after it revealed $100 billion in deposit losses in the first quarter.
The beleaguered bank has been struggling for a while. It was initially bailed out back in March with $30 billion in deposits from several large banks, including JP Morgan and Wells Fargo. The bank also borrowed heavily from the Federal Reserve’s bank bailout program. First Republic shares tumbled 75% last week before the FDIC stepped in.
While JP Morgan is taking over First Republic’s business, the FDIC will provide “shared-loss agreements.” As the FDIC website explains it, “the FDIC absorbs a portion of the loss on a specified pool of assets sold through the resolution of a failing bank – in effect sharing the loss with the purchaser of the failing bank.”
If we are to believe the mainstream narrative, the failures of Silicon Valley Bank, Signature Bank and First Republic Bank were isolated events and do not reflect a broader problem in the banking system. But as we have reported, these bank failures are just the tip of the iceberg. A report by the Wall Street Journal cites a study from Stanford and Columbia Universities that found 186 US banks are in distress.
…click on the above link to read the rest…
Franklin D. Roosevelt’s Gold Heist
Franklin D. Roosevelt’s Gold Heist
Yesterday (April 5) marked the anniversary 0f the signing of Executive Order 6102 by President Franklin D. Roosevelt. It was touted as a measure to stop gold hoarding, but it was in reality, an attempt to remove gold from public hands.
Many people refer to EO-6102 as a gold confiscation order. But confiscation is probably not the best word for what happened in practice.
The order required private citizens, partnerships, associations and corporations to turn in all but small amounts of gold to the Federal Reserve in exchange for $20.67 per ounce.
The executive order was one of several steps Roosevelt took toward ending the gold standard in the US.
With the dollar tied to gold, the Federal Reserve found it difficult to increase the money supply during the Great Depression. It couldn’t simply fire up the printing press as it can today. The Federal Reserve Act required all notes to have 40% gold backing. But the Fed was low on gold and up against the limit. By enticing the public to give up its gold, the Fed was able to boost its own gold holdings and create more dollars.
EO 6102 followed on the heels of an order Roosevelt issued just weeks before prohibiting banks from paying out or exporting gold. Just two months after the enactment of EO 6102, the US effectively went off the gold standard when Congress enacted a joint resolution erasing the right of creditors to demand payment in gold. Then, in 1934, the government’s fixed price for gold was increased to $35 per ounce. This effectively increased the value of gold on the Federal Reserve’s balance sheet by 69%. By increasing its gold stores through the confiscation of private gold holdings, and declaring a higher exchange rate, the Fed could circulate more notes. In effect, the hoarding of gold by the government allowed it to inflate the money supply.
…click on the above link to read the rest…
BRICS Nations Developing “New Currency” as Quest for Global De-Dollarization Accelerates
BRICS Nations Developing “New Currency” as Quest for Global De-Dollarization Accelerates
China and Brazil recently finalized a trade deal in their own currencies completely bypassing the dollar, but that’s not the only bad news for the world’s reserve currency.
Last week, a Russian official announced that the BRICS nations are working to develop a “new currency,” yet another sign that dollar dominance is waning.
State Duma (the Russian legislative assembly) deputy chairman Alexander Babakov said the transition to settlements in national currencies is the first step. We’ve already seen this occur with recent oil deals between India and Russia being settled in currencies other than dollars.
The next one is to provide the circulation of digital or any other form of a fundamentally new currency in the nearest future. I think that at the BRICS [leaders’ summit], the readiness to realize this project will be announced, such works are underway.”
That summit is scheduled for August.
Babakov said the BRICS nations are developing a strategy that “does not defend the dollar or euro” and that “a single currency” would likely emerge within BRICS, pegged to gold or “other groups of products, rare-earth elements, or soil.”
Brazil, Russia, India, China, and South Africa make up the BRICS block. It accounts for about 40% of the global population and a quarter of the global GDP.
Last year, Iran officially applied to join BRICS, and according to a report by The Cradle, several nations have expressed interest in joining the bloc, including Saudi Arabia, Algeria, UAE, Egypt, Argentina, Mexico, and Nigeria.
Former Goldman Sachs chief economist Jim O’Neill coined the BRIC acronym. In a recent paper published by Global Policy Journal, he urged the expansion of BRICS.
“The US dollar plays a far too dominant role in global finance,” he wrote. “Whenever the Federal Reserve Board has embarked on periods of monetary tightening, or the opposite, loosening, the consequences on the value of the dollar and the knock-on effects have been dramatic.”
…click on the above link to read the rest…
If You Can’t Hold It, It’s Not Really Yours
If You Can’t Hold It, It’s Not Really Yours
The failure of Silicon Valley Bank and Signature Bank reminds us of a very important truth — if you can’t hold it in your hand, you don’t really own it.
That’s why it’s wise to hold at least some of your wealth in hard assets like gold and silver that are in your direct possession or at least stored in a secure, allocated, segregated, and insured storage facility.
The FDIC insures bank deposits up to $250,000. If you have more than that in a financial institution, you could lose everything above that limit if a bank fails.
Depositors at SVB and Signature Bank lucked out. The government has made provisions to cover uninsured deposits. But there’s no guarantee that will happen when the next bank goes under.
And even if you don’t have more than $250,000 in the bank, you could easily find yourself locked out of your account. Just last week, a computer glitch caused money in some Wells Fargo accounts to disappear.
There are also more nefarious reasons you could lose access to funds. The Nigerian central bank recently limited bank withdrawals in order to incentivize people to use its new central bank digital currency. In 2017, India faced cash shortages when the government declared that 1,000 and 500 rupee notes would no longer be valid with just a four-hour notice. And during its crisis, the Greek government shuttered banks and seized some bank deposits.
Most people assume “that can’t happen here” in the US. But as we saw over last week, the US banking system is vulnerable to collapse.
…click on the above link to read the rest…
Fed Paper Admits the Central Bank Can’t Control Inflation; Finger-Points at Federal Government
Fed Paper Admits the Central Bank Can’t Control Inflation; Finger-Points at Federal Government
It appears somebody at the Federal Reserve has figured out that the central bank can’t tame inflation, so it’s setting up a scapegoat – Uncle Sam.
A paper co-authored by Leonardo Melosi of the Federal Reserve Bank of Chicago and John Hopkins University economist Francesco Bianchi and published by the Kansas City Federal Reserve argues that central bank monetary policy alone can’t control inflation.
The paper’s abstract asserts, “This increase in inflation could not have been averted by simply tightening monetary policy.”
In a nutshell, Melosi and Bianchi argue that the Fed can’t control inflation alone. US government fiscal policy contributes to inflationary pressure and makes it impossible for the Fed to do its job.
Trend inflation is fully controlled by the monetary authority only when public debt can be successfully stabilized by credible future fiscal plans. When the fiscal authority is not perceived as fully responsible for covering the existing fiscal imbalances, the private sector expects that inflation will rise to ensure sustainability of national debt. As a result, a large fiscal imbalance combined with a weakening fiscal credibility may lead trend inflation to drift away from the long-run target chosen by the monetary authority.”
There are a couple of startling admissions in this single paragraph.
First, the authors acknowledge that the federal government uses inflation as a tool to handle its debt. In other words, it acknowledges that we’re all paying an inflation tax.
Peter Schiff talked about this inflation tax in an interview on Rob Schmitt Tonight.
Inflation is a tax. It’s the way government finances deficit spending. Government spends money. It doesn’t collect enough taxes, so it has to run deficits. The Federal Reserve monetizes those deficits – prints money. They call it quantitative easing, but that’s inflation…
…click on the above link to read the rest of the article…
The Inflation Blame Game
The Inflation Blame Game
Now inflation is Russia’s fault. Or is it greedy businesses pushing up prices? Maybe a combination of the two.
It seems that government officials and central bankers are looking everywhere for a place to pin the blame for inflation except the one place they need to look — in the mirror.
I’m already seeing headlines about how Russia’s invasion of Ukraine is causing inflation. CBS broadcast this storyline on the first day of the invasion. As Peter Schiff put it in a recent podcast, Russia is the latest “excuse variant” for inflation.
It is true that the Russian invasion and economic sanctions have caused some prices to spike. Oil was over $130 a barrel over the weekend. Copper hit record highs. The price of wheat surged. But this is not necessarily inflationary. Inflation causes a general rise in prices across the board. In this situation, some prices will rise while others fall. As consumers spend more on food and energy, they will cut spending on other goods and services. Ostensibly, those prices will drop.
Inflation — an increase in the money supply — causes prices to rise more generally. It’s the result of more dollars chasing the same number of (or fewer) goods and services. As Peter explained, the culprit is the central bank.
What makes the prices go up is when the central bank responds to rising energy prices or rising food prices by printing more money, which is what they are going to do. Because as consumers have to tighten their belts because food is so expensive, because home heating oil and gasoline are so expensive, and they cut back spending on everything else, that causes a recession. And that results in the Fed printing more money, and that’s what’s inflationary.”
…click on the above link to read the rest of the article…
If the Fed Can’t Hit It’s Inflation Target, Why Not Just Move the Goalposts?
If the Fed Can’t Hit It’s Inflation Target, Why Not Just Move the Goalposts?
The Fed has an inflation problem.
The CPI is running well above the mythical 2% target and there isn’t any sign that it will ease soon. To deal with this problem, the central bank should tighten its monetary policy. But that would create a whole new problem, given that it can’t tighten in this economic environment. So, what is a central banker to do?
Well, if the Fed can’t hit the target, how about just moving the target?
That idea is apparently seriously being considered.
In a Wall Street Journal article, Greg Ip floated the idea.
One strategy [Powell]—or his successor—should consider in that eventuality is to simply raise the target.”
Ip buys into Keynesian economic voodoo and thinks straitjacketing the Fed with a 2% inflation target will hinder job creation.
Why would higher inflation ever be a good thing? Economic theory says modestly higher, stable inflation should mean fewer and less severe recessions, and less need for exotic tools such as central-bank bond buying, which may inflate asset bubbles. More practically, if inflation ends up closer to 3% than 2% next year, raising the target would relieve the Fed of jacking up interest rates to get inflation down, destroying jobs in the process.”
In a sense, the Fed has already raised the inflation target. Not so long ago, it was a hard 2% target. But the COVID-19 pandemic gave the Fed just the excuse it needed to move the inflation goalposts.
Jerome Powell announced the shift to “average inflation targeting” during his Jackson Hole speech in August 2020. In effect, the Fed will allow the CPI to run “moderately” over 2% “for some time” to balance out periods where it runs under that level.
…click on the above link to read the rest of the article…
The Mainstream Is Wrong About Rising Bond Yields and Gold
The Mainstream Is Wrong About Rising Bond Yields and Gold
Prices are going up. The Federal Reserve is printing money at an unprecedented rate. The US government continues to borrow and spend at a torrid pace. As Peter Schiff put it in a recent podcast, we’re adrift in a sea of inflation. Gold is supposed to be an inflation hedge. So, why isn’t the price of gold climbing right now?
In a nutshell, rising bond yields have created significant headwinds for gold. And the mainstream is reading rising yields and their relationship to gold all wrong.
It really comes down to expectations. Most people in the mainstream view rising yields as an inflation signal, and they expect the Federal Reserve to respond to this inflationary pressure in a conventional way. They expect the Fed to tighten monetary policy, raise interest rates and shrink its balance sheet.
As Peter Schiff has explained on numerous occasions, this won’t happen. The Fed won’t fight inflation because it can’t. It will ultimately surrender to inflation.
Right now, the markets sense that inflation is going to be moving higher. And maybe even higher than what the Fed is acknowledging. But I think the markets still believe the Fed — that the Fed will be able to contain the inflation problem before it really runs out of control. So, it’s the expectation that the Fed’s going to fight inflation by raising rates — that’s what’s pressuring gold. But the markets are wrong. The Fed is not even going to attempt to fight inflation. It’s going to surrender. Inflation is going to win without a fight…
…click on the above link to read the rest of the article…
MICHAEL MAHARREY, schiffgold, inflation, money printing, credit expansion, central banks, qe, quantitative easing, peter schiff, fed, us federal reserve, gold,
Gold’s Record Price Is All About Currency Debasement
Gold’s Record Price Is All About Currency Debasement
Gold broke its all-time price record on Monday and held above that level throughout the day.
So, what is this telling us?
It’s easier to understand gold’s record-breaking move up if you look at it from the other side of the equation. The dollar is now at its all-time low compared to gold.
In simple terms, the dollar is losing value.
This is a direct result of US government borrowing and spending backed by Federal Reserve money printing.
TD Securities reiterated that dollar debasement is driving gold in a note.
The USD weakens amid massive fiscal and central bank stimulus, a bloating debt pile and a slow growth environment.”
Since the economy crashed thanks to the governments’ shutdowns in response to the coronavirus, the federal government has borrowed trillions of dollars for its stimulus program. The June budget deficit was bigger than all but five of the yearly deficits in history. Meanwhile, the Fed is monetizing a big chunk of that debt through its government bond purchase program. In effect, it is buying up US debt and paying for it with money printed out of thin air.
All of this money creation is inflation. The rising price of gold reflects the inflationary pressure.
As more dollars go into circulation, each individual dollar is worth less, all other things equal. That’s why the price of gold is going up in dollar terms. We have more dollars chasing roughly the same amount of gold. That means it takes more dollars to buy an ounce.
This isn’t mere speculation. Money supply growth hit a new all-time high for the third month in a row in June. The only time we’ve seen money supply growth anywhere near this level was during the inflationary years of the 1970s. In June, year-over-year growth in the money supply came in at 34.5%. That was up from 29.5% in May.
…click on the above link to read the rest of the article…
We’re Not Going Back to Normal
We’re Not Going Back to Normal
Turn the key and the economy will restart.
That’s a myth a lot of people in the mainstream have peddled since governments started shutting down the economy in response to the coronavirus pandemic.
That’s not going to happen. We’re not going back to normal.
In fact, things weren’t “normal” before the pandemic.
As Peter Schiff has been saying, too many mainstream pundits and prognosticators have focused exclusively on the pin and ignored the economic bubble that it popped. They argue that since the economic damage due to the COVID-19 shutdowns was self-inflicted, it’s not a real recession. It’s not a realeconomic collapse. It’s not that businesses are closing because the economy is bad. We just decided to shut them down. Therefore, we can just decide to open everything back up and everything will be fine. But as Schiff said, it’s not that simple.
What matters is that we got a wound. Look, if I grab a knife and I stab myself in the chest, I’m not OK because the wound is self-inflicted. … It doesn’t matter how I got stabbed. What matters is I have a knife in my chest and I’m bleeding. So, I can’t just ignore the wound because I was dumb enough to stab myself.”
I’ve been saying the same thing for weeks. The economy doesn’t stop and start on a dime. Just because Donald Trump snaps his fingers and says, “Go!” doesn’t mean that the crisis ends. The economic damage done to the economy by that knife is deep. In fact, the economy was already suffering from multiple knife wounds long before COVID-19 reared its ugly head.
It appears some people in the mainstream are starting to wake up to reality – sort of. Reuters recently ran an article headlined “With confidence shattered, the road to a ‘normal’ US economy looks long.”
…click on the above link to read the rest of the article…
You Will Sacrifice and It Will Hurt
You Will Sacrifice and It Will Hurt
Many people have likened the battle against coronavirus to a war and invoked imagery of the US fighting World War II. President Trump has even deemed himself a “wartime president.”
The president told reporters at a White House briefing that fighting the virus would require a sacrificial national effort just like it took to defeat the Axis in the Second World War.
Every generation of Americans has been called to make shared sacrifices for the good of the nation. To this day, nobody has ever seen like it, what they were able to do during World War II. Now it’s our time. We must sacrifice together, because we are all in this together, and we will come through together. It’s the invisible enemy. That’s always the toughest enemy, the invisible enemy.”
But listening to all the rhetoric coming from politicians and pundits, one has to ask, where exactly is the sacrifice?
The government is promising bailouts for everybody. We’re just weeks into the crisis and there is already an expectation that the government will be sending everybody checks. Peter Schiff called it “bailout nation.”
Apparently, the government wants “sacrifice” with no pain.
Unfortunately, that’s not a thing.
Americans didn’t get checks from the government in World War II. They got higher taxes. Schiff summed it up in a tweet.
During WWII middle-class Americas sacrificed to support the US government’s war effort. They paid much higher taxes, substantially reduced their consumption, and loaned their savings to the government. The people support the government. The government can’t support the people.”
Therein lies the ugly truth. There is no sacrifice without pain. The government can bail out the airlines. It can bail out the hotels. It can helicopter money in and drop it on your head. You’re still going to pay, either through higher taxes in the future or through inflation.
…click on the above link to read the rest of the article…
Peter Schiff: They’re Going to Need a Bigger Rate Cut!
Peter Schiff: They’re Going to Need a Bigger Rate Cut!
Stop and pause for a moment and think about what just happened. The Federal Reserve says the US economy is strong, but it just initiated emergency monetary policy last seen during the worst financial crisis since the Great Depression.
Something doesn’t add up.
The Fed cut rates 50 basis points on Tuesday. It was the first interest rate move between regularly schedule FMOC meetings since the 2008 financial crisis. The Fed funds rate now stands between 1.0 and 1.25%.
The decision to cut rates was unanimous.
As the Wall Street Journal pointed out, this kind of Federal Reserve move has been reserved for “when the economic outlook has quickly darkened, as in early 2001 and early 2008, when the US economy was heading into recession.” The 50-basis point cut was the first cut of such magnitude since December 2008. Pacific Management investment economist Tiffany Wilding called it a “shock-and-awe approach.”
It may have been shocking, but the results weren’t awesome.
Stocks tanked anyway.
The Dow Jones closed down 785.91 points, a 2.94% plunge. The S&P 500 fell 2.81%. The Nasdaq experienced a similar drop, closing down 2.99%.
Meanwhile, gold rallied, quickly pushing back above $1,600 and gaining over $50. Wednesday morning, the yellow metal was knocking on the door of $1,650.
Bond yields sank again as investors continued their retreat into safe-havens. The yield on the 10-year Treasury dipped below 1%.
In a press conference after the announcement, Federal Reserve Chairman Jerome Powell said the central bank “saw a risk to the economy and chose to act.”
“The magnitude and persistence of the overall effect on the US economy remain highly uncertain and the situation remains a fluid one. Against this background, the committee judged that the risks to the US outlook have changed materially. In response, we have eased the stance of monetary policy to provide some more support to the economy.”
…click on the above link to read the rest of the article…
