Thursday, June 10, 2021

The US economy as seen from 30,000 feet

As the Covid-19 panic fades into the sunset, it's time to climb to 30,000 feet and review some of the economy's macro vital signs.

Despite the destructive impact of economic and social shutdowns which resulted in millions of lost jobs and businesses and untold damage to the physical and mental health of even more millions, and despite the government's efforts to ameliorate the damage by borrowing trillions in order to shovel money from the pockets of some into the pockets of many, the economy has emerged in amazingly good shape. In fact, the private sector is wealthier and more prosperous than ever before—although the benefits have undoubtedly been distributed unequally and often rather crudely. The public sector, on the other hand, has rung up a tab that will take generations to cover.

Lurking in the background of this surprisingly good news, however, is inflation, which is very much alive and well and prospering.

Chart #1

The Federal Reserve today released its estimates of household balance sheets, which are summarized in Chart #1. (Nonprofit organizations are included in these numbers.) Household wealth has blossomed, thanks to strong financial markets, lots of saving, real estate appreciation, and only a modest accumulation of debt.  

Chart #2

Chart #2 converts the net worth numbers in the first chart to real (inflation-adjusted) figures. Note that the y-axis is logarithmic, which renders steady growth rates into a straight line. Note further that the real net worth of the US private sector has risen slightly more than an annualized 3.6% per year over the past 70 years. It's worthwhile comparing this chart to Chart #16 in my previous post. Both paint a similar picture: net worth and equity prices have appreciated on average by a fairly steady rate over the long haul, and the trend lines I have added to each chart do a fairly good job of dividing above- and below-trend years into equal amounts. Both suggest that valuations and net worth today are somewhat above long-term trends, but not by an egregious amount. In short, the current period does not stand out in any extraordinary way from our long-standing experience.

Chart #3

Chart #3 uses the data from Chart #2 and divides it by the population of the US to get real per capita net worth (currently, the average person's share of total wealth is about $410,000). Here again we see a fairly steady rate of growth over time, but a bit more above trend in the past year. The obvious conclusion to be drawn from all of these charts is that further wealth and equity price gains are likely to be a lot less exciting in coming years than they have been in previous years. 

Chart #4

Chart #4 shows the ratio of total household debt to total household assets, which can be likened to the average degree of leverage employed by the private sector. Here we see a rather dramatic and ongoing decline in financial leverage that began back in 2008, in the depths of the Great Recession. That recession, as you might recall, owed quite a bit to the private sector's use of excessive leverage to buy homes in previous years. We've now rolled back the clock on leverage to the levels of the early 1970s. Which, curiously, was just before the great wave of inflation that lifted housing prices. (I daresay that the recent boom in inflation and housing prices are likely two sides of the same coin.)

Chart #5

In this umpteenth appearance of Chart #5, we see that the gains in equity prices in the past year have been accompanied by a decline in the Vix "fear" index. The Vix is still a bit above the levels that seem to prevail in "normal" times, so there may be room for further gains provided we avoid unpleasant surprises.

Chart #6

Chart #6 tracks the rolling 12-month total of federal spending and tax revenues. Covid-19 provided cover for the most dramatic increase in federal spending since WW II. Things are beginning to return to normal, it would seem, thanks to May's avalanche of tax receipts (thanks in turn to the capital gains generated by a strong stock market in late 2020) and a lessening in the pace of growth of spending. Still, the federal budget is for all intents and purposes very nearly out of control. Spending MUST be reined in or there will be hell to pay at some point. The problem is not so much the amount of debt, but rather the fact that enormous levels of spending are hugely wasteful and make for fertile terrain for graft and corruption. No country has ever borrowed and spent its way to prosperity. That we are not in ruins today is testimony to the hard work and prudence of our private sector, as the charts above document. 

The most important reason to cut spending is to improve the health of the economy, since government can never spend taxpayers' money as prudently, wisely, and efficiently as taxpayers can.

Chart #7

Chart #7 shows total federal revenues on a rolling 12-month basis (blue line) and its major components. The recent surge in revenues owes a lot to a surge in individual income tax receipts, which in turn have been boosted by capital gains revenue thanks to the strong stock market. Corporate income taxes have also increased thanks to strong profits growth in the latter half of the year.

Chart #8

Chart #8 makes a repeat appearance using the latest data. It's hard to believe, but true: the burden of the federal debt (measured as total interest payments as a percent of GDP) today is about as low as it has ever been, even though total debt as a percent of GDP is higher than it has ever been (save for the WW II years). The circle is squared by the level of interest rates, which remain very near all-time historic lows. The blue line on this chart is virtually certain to start rising within the next year as market interest rates rise—as they must, given the huge rise in inflation shown in the following charts.

Chart #9

Chart #9 plots the level of the CPI index ex-energy on a log scale. Here we see how inflation by this measure has averaged just about exactly 2% per year over the past two decades. But note how the index jumps in the past several months above trend. The year over year rate has been boosted to a degree due to the dip in the level of the index in April and May of last year (the so-called "base effect"), but that dip was fully reversed by August last year. What we've seen in recent months is a mini-boom in the index above and beyond its long-term trend growth rate. This makes me think that rising inflation is not just transient. But tell that to the Fed, whose members are inordinately afraid to pull the punchbowl this time around, after doing so prematurely too many times in the past.

Chart #10

Chart #10 looks at the 6-mo. annualized change in the CPI (both with and without energy) to get a better idea of what has happened since the very weak CPI data in the first half of last year. By this measure inflation is running at a 4-6% annualized rate. And even higher—prices are up at a 7-8% annualized rate over the past 3 months! All of this is very reminiscent of what happened to inflation in the mid 2000s when it gradually became obvious that the Fed had failed to tighten policy sufficiently. And when they did manage to tighten policy we ended up with the Great Recession which began in 2008. I would further note that the 10-yr Treasury yield rose from 3.5% in 2003 to a high of 5.5% in 2006. We could easily see a repeat of this in the years to come. Beware fixed income bonds.

It's hard to believe, but today the 10-yr Treasury yield is a mere 1.4%, which is way less than the current rate of inflation. Way less. The entire Treasury curve is well below the current rate of inflation, which means that Treasuries are generating losses in real terms that are on the order of $0.5-0.7 trillion per year (and possibly more). Uncle Sam doesn't mind, though, since he is the world's biggest debtor. (The debt holder's loss is the debt issuer's gain.) Uncle Sam is currently benefiting from a "stealth" tax which is otherwise known as an inflation tax, and it's generating a not insignificant amount of money—much more than all corporate income tax receipts.


Carl said...
This comment has been removed by the author.
Carl said...

When inclusive and more equally balanced (and more impressive) real growth happened in the thirty glorious years after WW2, the private net worth to GDP ratio remained stable.
More recently, net worth has been disconnecting with underlying growth.

Benjamin Cole said...

Another great wrap-up from Scott Grannis.

VIX is now below 20 in Europe.

Inflation? Maybe so.

JDonley said...

thanks Scott, love your charts. you've found the way to present the information simply, with no confusion. keep up the good work.

The Cliff Claven of Finance said...

History’s most spectacular monetary inflation
and asset bubble will not end well.

The next 50% move of the stock market
will be down, not up.

The Financial Asset Bubble.
from the Fed's Z1 report:

Total Equities-to-GDP
ended March 2021
at a record 317%,
up from previous
cycle peaks of
188% (Q3 2007) and
210% (Q1 2000).

Total stock and bond
ended March 2021
at a record 565%,
up from previous
cycle peaks of
387% (Q3 2007) and
368% (Q1 2000).

Household Real Estate-to-GDP
ended March 2021
at 170%, not that far
from the record peak of
190% in Q3 2006.

The ratio of Household
Financial Assets-to-GDP
ended March 2021 at a
record 497% of GDP.

That compares to
previous cycle peaks of
374% (Q3 2007) and
354% (Q1 2000).

Carl said...

"History’s most spectacular monetary inflation and asset bubble will not end well."
Well, bu**les by definition are defined in hindsight and timing is an issue but if it walks and quacks like a huge bu**ble then...

An interesting aspect is the building disconnect between asset prices and real underlying economic activity. Mr. Grannis shows the trend line for household net worth growth (3.6%). In the last 20 years, the difference between this growth and GDP growth has been 2.0% per year. It does not sound like much but over twenty years this potentially means 50% gain from the future baked in present numbers. In his 1999 rare comment about the general levels of the stock market, Mr. Buffett had sort of said that these types disconnect should not be expected forever and then, he had suggested to moderate expectations. So...

Another interesting aspect is the very uneven growth in household net worth. In the last 20 years, the growth in household net worth for the bottom 20% has been zero (using gross numbers, not inflation adjusted!). The growth in household net worth for the next 40% has been much much less than the 3.6% number. The growth in household net worth for the next 20% has been much less than the 3.6%. i estimate that 76% of the household net worth growth has accrued to the top 20% (with a similar pattern of unequal growth within that top 20%). i'm not complaining on a personal level; i just wonder what it means for the future.. An added concern is that the growth in household net worth of the bottom 80% has been matched by the extra debt incurred by the federal government in the last 20 years (with federal debt held by public going from 33% to 100% of GDP). For those "debt to ourselves" apostles, it can be shown that a third of the recently accumulated debt (as an asset) is held by foreigners (current-capital account) and another third, by the top 1% (this is more complicated to show but it is what it is).

From a macro perspective, this is super interesting: an aging and gradually less productive society becoming mired in secular stagnation and ever higher levels of (on and off balance sheet) debt and increasingly polarized while at the same time having an almost never seen before (similar to late 1920s though) concentrated level of net worth accumulation not because of savings or retained earnings but essentially from paper gains and financial engineering.

And the buzzword these days is inflation. LOL

Scott Hammond said...

I am intrigued and confused by 'total federal revenues' in chart #7. Admittedly I don't know how this total is compiled. However, I don't see how it can be explained by 'capital gains tax given a strong market.' True the market has been strong since last years bottom, but presumably the bulk of 'traders' did NOT all buy at the bottom and sell prior to calendar end 2020; which would have needed to happen for such an uptick in revenue (yes- I am ignoring the fact some pay taxes quarterly).

Could a more plausible explanation be unemployment taxes? These flip side of these generous unemployment benefits seems to be appearing in the unemployment tax section business owners are being charged (i.e. tax/cost per employee is up materially). Any thoughts / insights would be welcome

Carl said...

"I don't see how it can be explained by 'capital gains tax given a strong market"
"Could a more plausible explanation be unemployment taxes?"

Unemployment funds are depleted and will need to be replenished. This seems to have started in April 2021 (increase in receipts of about 16B in the last two months).
This is quite small compared to individual tax receipts which in April and May 2021 increased (versus previous 6 months) by about 225B for the two months (especially in May). Most (about 60 to 65%) of individual income taxes are related to wages and taxes tend to be withheld and sent as federal receipts incrementally along the fiscal year. Lumps in individual tax receipts tend to be associated with realized gains and tend to be sent at the tax deadline for the previous year (May this year). The stock market went up (on a net basis) in 2020. A similar phenomenon happened in 2019 (stocks went up) and there was a lump in payments in July 2020 (extended deadline due to covid-19).
If interested in numbers, see the following, especially pages 7 and 35.
Another consideration is that many investors may have decided to realize some longer term capital gains late in 2020, anticipating possibly higher capital gains taxation, given the election outcome.
Hope this helps.

steve said...

I have to agree with the Fed that the spike in prices is transitory. If you think of the reasons why the spike has happened; far greater demand for "stuff" and far lower supply due to shutdowns, it's hard to believe this will not reverse. Now that we're coming out of the other side the reasons for the increased demand will subside-not to mention high prices will discourage all the push on prices AND supply will slowly come back online. I expect a year from now inflation will look much more like long term trendline. The bond market certainly thinks so.

K T Cat said...

Carl, Another interesting aspect is the very uneven growth in household net worth. In the last 20 years, the growth in household net worth for the bottom 20% has been zero (using gross numbers, not inflation adjusted!). The growth in household net worth for the next 40% has been much much less than the 3.6% number. The growth in household net worth for the next 20% has been much less than the 3.6%. i estimate that 76% of the household net worth growth has accrued to the top 20% (with a similar pattern of unequal growth within that top 20%).

I would argue that this is a cultural change. The bottom 30% or so of the population are unmarried, mostly unmarried moms. There is no economic structure on the planet where they will succeed. I've done the dad thing married and unmarried and it simply isn't possible to keep up with married families.

It's not always about policies. Sometimes it's about culture.

K T Cat said...

Following up on that comment and looking through Janet Yellen's blathering about equality, it makes me think that her yapping is just a diversion. Please, Janet, tell us what policies the Fed will pursue that will lead to a single parent with two children keeping up with a married family? Will keeping interest rates low lead to an increase in hours in the day?

The Yellens of the world have all the same data as we do and they know the exact make up of the bottom 20-30%. This is all deliberate obfuscation.

Scott Grannis said...

K T Cat: Couldn't agree more. Families require discipline, sacrifice, hard work and responsibility. And that's what it takes to be successful at almost anything. I should know: my wife and I will be celebrating our 50th anniversary next month.

Benjamin Cole said...

(Reuters) - Wall Street's record-breaking run for stock market flotations shows no signs of slowing down.

With more than six months until the year ends, U.S. initial public offerings have already totaled $171 billion, eclipsing the 2020 record of $168 billion, according to data from Dealogic.


Well, if the economic-financial future is a bust...Wall Street doesn't know it. 10-year USTs offer 1.49%.

Personally, I think equities are overvalued, as I have felt for most of the last 40 years.

OT: Congrat to SG on the Golden Anniversary. That's real gold, not some lump of metal.

Carl said...

"It's not always about policies. Sometimes it's about culture."
It is a two-way street, indeed.
The US has found the recipe for the secret sauce and this has always, somehow, balanced efficiency with equity. However, for the last 20 to 30 years, the pie is growing more slowly and the bounty is shared much less than before and perhaps similar to the roaring twenties period.
There is the risk that people in the lower classes reach a critical mass of discontent and decide to change the recipe of the secret sauce. i guess it would be called the Great New Deal, version 2.0.

Anonyx said...

"... for the last 20 to 30 years, the pie is growing more slowly and the bounty is shared much less..."
"In the last 20 years, the growth in household net worth for the bottom 20% has been zero..."
"There is the risk that people in the lower classes..."

Wrong, wrong, and wrong.

Those are not static people in the various quintiles. People are mobile--much more so in the US than anywhere else (don't believe me--watch where people want to immigrate). Many of the people who were in the bottom quintile 20-30 years ago are now in the top, and vice versa.

The US is not made up of classes, as much as marxists and social engineers want to put us into these buckets.

Furthermore, the people who are in the lowest quintile are (economically) way, way better off than the people who were in the lowest quintile 20-30 years ago. Almost everyone in America now is better off than John D. Rockefeller or JP Morgan were (think: food quality and variety, air conditioning, medical care, transportation, communications, education access, entertainment, etc.).

It is not new people struggle economically, have financial pain and setbacks, have bad luck and misfortune--this has always been the human condition.

Envy is also not new. It's not one of the Seven Deadly Sins for nothing. If Bezos or Buffett or anyone else becomes fantastically wealthy doesn't hurt anyone (in fact, their productivity has brought massive economic benefit to billions of people).

What else is also as old as mankind? Using class/identity as ways to herd people into groups, stoke their envy, and channel that energy to claim political power.

The remedies to these things are also not new.

Anonyx said...

Just to add one note: I don't disagree that the US monetary and fiscal policies have caused distortions that certainly don't benefit and hurt people equally.

Carl said...

"1-Wrong,2-wrong, and 3-wrong."

BTW, the ingredients allowing to reach the top 1% are great (whatever they are) but all good things like greed may reach a level of diminishing and even negative returns when certain levels are reached.

1-GDP growth has been coming down (numbers show a clear secular trend). Why?
2-Are you familiar with the Great Gatsby curve? Social mobility in the US has been coming down significantly. Why? The dwindling social mobility has been associated with other basic factors of dynamism (residential and geographic mobility, new business formation) which (from the data) are also coming down in a secular way. Why? More young people stay at home (parental home) and stay for longer. Why?
3-The fact that distribution is unequal is a great attribute but the level of inequality has grown significantly and there is growing mass (including younger people) who have started noticing and who want to try something else. Is that the kind of innovation you're looking for?

Look, i'm not sure what the solutions are but there is a growing problem. Like all problems, the first step is to recognize that there is one.

HDX said...
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HDX said...
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HDX said...
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K T Cat said...

Carl, I'm always leery of population curves and graphs if they aren't related to behaviors. I would argue that with any one of a set of skills, among them network and computer security, plumbing, basic accounting, a person from any background can not just do well, but excel. For me, it's all about behavior and skills.

randy said...

HDX - fwiw, I was interested in what you wrote - but you've since deleted it.

On the rest of it, of course KT Cat is right - that a lot of social problems are self inflicted. And there are many social policies that have the wrong incentives that make it more likely for people to make bad choices. My problem with democrats is the need to catastrophize and then pursue policy change that is mostly performative, but almost always makes things worse. As an example, I think we can fully expect a generation of black lives to be worse as a direct result of the Black Lives Matter movement. More will die from violence, more will fail in education, more will become dependent and despondent. One of the nice things about republicans and the limited government argument - is that doing nothing at least doesn't make things worse.

But two things can be true at once. The democrats can be making things much worse. But excessive income inequality can be (and is) something that is in need of moderation. Republicans would be better off if as a party, they were more aware and pursued policy changes. Corporate tax cuts are too far removed from the basic problems. Such as - reduced zoning so that good school systems don't get zoned off to wealthy families. Much reduced licensing and regulation so small businesses have a chance. Tax changes that reward work at lower incomes. Sane immigration. And maybe the biggest along with education - health care. ObamaCare isn't the answer, but lower income strata families need access to health care stability.

randy said...

Another note - the only place I can sometimes see Eliz Warren has a point is in consumer protection and finance. Unsophisticated lower income people generally get screwed - and often by sophisticated financial and consumer service companies that target them.

Anonyx said...

Carl, a few thoughts:

1. GDP growth, why? I look at it this way: what creates the conditions for growth? Stable money, low taxes, low government spending, low regulation, and rule of law consistently applied to all. Low growth is signaling that the US has work to do on these points. The answers aren't hard, but the political will and ability to move them forward are.
2. Gatsby Curve. I haven't heard of that specifically--thanks for calling it out and I'll do some reading. I am passingly familiar with some of the underlying issues you mention. "Why" is a very interesting question. I feel like this is one with multiple causes, and it may be difficult to quantify/prove. I certainly have my priors on this point. I suspect it's a combination of: a) growing entitlements. People are comfortable where they are. b) Growing wealth. Everyone is richer and less compelled to move. c) Reduction in nuclear families. d) Some traditional American beliefs--anyone can succeed, Horatio Alger, optimism, risk taking, celebrating the entrepreneur, personal responsibility, our kids will be better than our generation, etc.--have been somewhat replaced with less productive notions--the system is rigged against you, your lack of success is someone else's fault, your skin color determines your outcome in life, your energy should be spent nursing grievances, government is required to improve your life, safety and risk aversion, etc. Mobility by be down in total, but the potential for mobility is still there for people willing to seize it. Curious to get your and others' thoughts.
3. I'm not sure I catch your point on this. Are you saying that growing inequality is making young people open to try things like socialism/marxism/statism in order to change things, and that this "innovation" may not be a blessing? That's what I'm reading, but I don't want to infer something you didn't intend to say.

Thanks for the thoughtful dialogue. As I read my earlier comment, I realize my tone was probably a little harsh (Wrong! reminds me now of Dana Carvey doing John McGlaughlin).

Carl said...

The potential to "succeed" is still there but it's become harder to succeed and perhaps there are unnecessary barriers. A clear trend though is that the younger generation shows higher support and higher enthusiasm for alternative models which are more socialistic (and more authoritarian!?) in nature. i know it's wrong but the idea then is to propose a more constructive alternative, not necessarily built on resentment, some kind of reformed capitalism, a more sustainable kind?
Maybe our 'advanced' societies have simply become more mature and 'we' will somehow muddle through over time. Still, looking at Japan and 'Abenomics', they describe three arrows: easy monetary policy, easy fiscal policy AND structural reforms and they keep extending and pretending and don't seem to be able to reach the third arrow. i'm afraid the US is following a similar path. Collectively, somehow, 'we' have to define a more sustainable path: debt, entitlements, education and healthcare are the large tapeworms.
Obviously, this won't get resolved by online discussions, as thoughtful as may be, but at least it's a start.

K T Cat said...

Carl and Randy, I'd suggest that political things only mask reality and temporarily at that. Abenomics / Trumponomics / Bidenomics - borrowing endlessly - or the lack of married families will, in the end, take their toll.

Genius that he was, Kipling was right all along.

Carl said...

^Kipling's poem came as herd immunity had been achieved and as the roaring 20s were coming to life with the prostrations to the Market-Place. And many people suggest that we are about to go through our own new modern version of a roaring 20s decade.
In the early part of 1920s, the government debt to GDP was 10%, there was huge potential for tax cuts, the median age was 29, seeds had been planted for great and revolutionary productivity growth in a pro-growth environment. In the early 1920s, financial engineering was not the order of the day and valuations (compared to today) were 'different' that time.

This is a bullish poem as this too shall pass

Always the dilemma between efficiency
And now the worshipped gods of equity
'We' have matured and have become lazy
And the transition will be messy, tricky

At the gates? the Barbarians,
No, we have met the enemy, us, the civilians
A collapse, needed, a real roaring
May look like the entire country, burning
For a new brave world to churn
As water is wet and fires burn

K T Cat said...

That was great, Carl.

I'm Scott's age or perhaps a bit older. I'm learning to shrug and get on with life, trying to impart that on our children. My advice is to stay aware of what's happening so you can protect what you've earned and continue to learn. Me, I'm working on getting better at fixing old cars, programming in Node JS, becoming a better Catholic and figuring out marketing and sales. It keeps me busy and grounded in what is real.

Yeah, there's a bumpy road ahead and the debt - GDP ratio is key. The Roaring 20's are not coming next.

Scott's blog is my rock when it comes to financial matters. Since 2008, I've sampled many, but his is the gold standard as far as I'm concerned. Sane, measured and useful. Thanks, Scott!

Carl said...

@K T Cat
Interesting. Our 'kids' (most are young adults now) call us "boomers" sometimes these days (lovingly?) and i tend to not respond, thinking that they may eventually experience the wrong side of social mobility.
We're all doing our best, i guess, and trying to alleviate the woes of creative destruction.
Speaking of doing our best, kudos to Mr. Grannis for this site which i've tended to follow over the years. It can be an excellent source of inputs for independent thought (and critical thinking). :)
Having an unusual memory can be a pain but the "debt - GDP ratio is key" aspect is a fundamental problem. In 2010, there was the following:
Shortly after, there was this humorous take on the debt limit:
Over the years, i've found this video progressively less funny.

Scott Grannis said...

My thanks to all those who contributed thoughtful and reasoned comments here.

HDX said...

@randy -- thanks for the kind words, but I've decided not to promote goolge or their products. I've also decided that California is just too unpleasant a place to bother with right now (and the name of the blog is...).

Perhaps these extremists will tone down their rhetoric.

Perhaps illegal immigrants (who are literally risking their lives to escape socialism) will teach California a few facts of life.

Perhaps the homeless (veterans and former participants of CA economy) will pound some sense into California politics.

Or maybe, the myriad of earthquake faults will do some much needed purging.

People are fleeing California for a reason, and its not that California politics have any merit what-so-ever. I will remind unknown CANADIAN and others that Kamila Harris failed to get 2% of the democrat primary vote, and she's even less popular among centrists and right wing American taxpayers. When the first dementia patient goes, the lady who can't get support from her own party takes over.

All you need to know is that progressives in California have repeatedly voted *NOT* to pay the taxes necessary for their glorious revolution in their own state.

Scott Grannis provides a lot of cheerleading, which is a nice counter-balances to the sky is falling rhetoric on TV. But since he lives in California and seems oblivious to the disaster that is his own state, his cheerleading is coming across as uninformed instead of optimistic.

So I decided to delete my earlier comments. I want to read other INFORMED opinions, but the arguments from unnamed Canadian and Ben Cole and others don't benefit me at all. I'm a happier person when I tune the California thinking out.

HDX said...

PS -- if my previous comment comes across as mean, or if it threatens your "safe space" or makes you question your birth assigned gender... quite bluntly that is your problem

Unknown said...

Scott, what do you make of the tighter yield curve since last week’s Fed announcement? Seems to anticipate a slowing economy in the next 12 months, which I’m just not seeing in the data (despite Biden’s best efforts to screw up the economy). Your thoughts?

HDX said...

@unknown -- the Treasury market is completely broken. The marginal "buyer" (with other people's money) is the Fed. The yield curve isn't signalling anything, its not a market price.

When the Bank of Japan broke the JGB market (ten years before bumbling Bernanke found his Zimbabwe printing press), many market pundits thought they could read something into Japan's yield curve. They could not. JGBs were completely broken. Mrs Wantanabe (Japanese housewives) were dumping JGBs to the BoJ as fast as they could, putting money overseas where they could earn interest.

Decades later, the JGB market is still broken. Japan's economy is still nowhere. Pundits are saying for the umpteenth time that this is Japan's year, just wait you'll see.

We saw. Japan is about to finish its third lost decade. The zero interest rate, unending fiscal deficit spending rubbish that describes Japan and US policy has achieved nothing but endless debt.

In the USA, we have two 80 year old fossils (Pelosi and McConnel) drooling next to a 78 year old dementia patient. They are unlikely to live long enough to see balanced spending, never mind repaying any of their debt. Biden isn't really mentally coherent as it is; he has his good days and bad days, but dementia isn't going to get better. He will have more and more bad days.

None of the people taking out more Treasury debt are going to help repay it. Its fraud to call Treasuries debt; its old farts stealing from miseducated young.

US debt off balance sheet is much higher than the on balance sheet debt. The US education system that was once the envy of the world is trash now. Highways and bridges are crumbling. Social security is not funded, medicare even worse.

The $1.9 trillion theft early this year was spent on frivolous nonsense, political pork and outright fraud. Little if any will help future generations repay the fossil's debts.

That is what the yield curve is telling us -- nothing. Scott's view from 30,000 feet was the view of a man who is in retirement. He spent his career looking at only one side of the balance sheet -- he never looked and never considered the liability side.

The fossils are babbling about more "stimulus" spending, stealing money from the young. It will not stimulate anything, it won't even help repay the money they already stole.

The economy is not recovering from the lockdown. It is suffocating under too much debt, and more debt will only make things worse. More taxes will crush the economy for good (Japan tried that too, didn't work).

Its a disaster, and retirees like Mr Grannis need to put down their pom-poms and get serious about the nightmare they are handing off to their grand-kids / debt slaves.

HDX said...

With temps in California today hitting 100, California's electrical grid is once again on the verge of total failure. It seems like only last summer they were in the same situation, and the summer before that, and the summer before that... none of the eco-terrorists in California want to have a electrical generation plant anywhere within a 100 miles of their home, and preferably in another state.

So the eco-terrorists are hoping to use central planning to force common folk to buy overpriced electric vehicles. Millionaire hollywood stars get the EVs for free in promotions, and use them to commute to their private jets which run on-- oops, not supposed to mention that. Anyway, run out and buy yourself an EV that costs twice as much, because the collective said so.

California's electrical grid is already over-taxed, for the umpteenth year in a row. None of the eco-terrorists have thought to build a power plant or run new transmission lines. But California did pass a law banning gasoline vehicles starting 2030.

If even 5% of California gasoline cars actually convert, the electrical grid will start having trouble in the spring and fall and will completely burn up in the summer.

For extra credit, how many Berkley and UCLA "grads" will it take to figure out California needs to strip mine millions of pounds of copper and kill thousands of Chinese lithium miners to achieve even a fraction of their EV fantasy?

Never mind how California will pay for all that copper and batteries -- Californians don't pay their bills now, so no reason to think they will later.

Lets just focus on all the dead Chileans mining copper, and the dead Chinese mining lithium. Chile and China are out of sight, out of mind -- like most of California's electricity generation.

Almost makes you want to put a California politician in charge of Congress! Oh wait... I think see the problem

Carl said...

"Scott, what do you make of the tighter yield curve since last week’s Fed announcement? Seems to anticipate a slowing economy in the next 12 months, which I’m just not seeing in the data (despite Biden’s best efforts to screw up the economy). Your thoughts?"

This is a fascinating question.
In 2019, the inverted curve (along several other economic markers) was suggesting potential intrinsic and potential economic weakness going into 2020.
Then came the virus (an extrinsic and supply-side event) and then came a VERY unusual and pre-emptive monetary and fiscal response.

Was the covid episode a typical recession?
Did the response temporarily suspend the underlying fundamental economic evolution?

Inflationary pressures seem to be peaking.
The Fed "tightened" the reverse repo window by 5 basis points and people already suspect a building market tantrum.
The only tools left for the Fed are highly unconventional and any material economic weakness means negative interest rates. Of course, this now seems impossible.

K T Cat said...

HDX, as a Californian who can't get his wife to move to Dixie, I agree with all you've said, but I'm past the waving my arms and yelling stage. Whatever gaps in data this blog might have, it seems to give a decent view of the world.

Carl, that YouTube video on debt was crazy. Chilling, too.

HDX said...

@K T Cat -- on behalf of everyone in Dixie (and the rest of the country), you are not welcome. Stay in California, and DEFINITELY keep your crazy wife in California.

There are signs all over the south -- FL and TX have made the news but the feeling is widespread -- stupid Californians who voted to wreck their state, then move to another state and vote the same moronic way!

Stay in California and enjoy the fruits of how you voted. No one wants you ruining other states. Enjoy your taxes and crime and municipal corruption and homelessness and downright obnoxious attitude about everyone and everything. You are truly miserable people. Stay in California.

The same sentiment applies to NYC residents, who voted for Cuomo and DeBlasio, and then want to go wreck other states. Stay in NYC. Yes, NYC has a long list of terrible problems that you all voted for. You yourselves are to blame.

Californians and NYC'ers need to stop their arrogance and accept that you just aren't very smart people. You can't run your own states, and yet you think you are qualified to tell everyone else what to do.

Florida man might have no teeth and might stick his head in an aligator's mouth -- but even he isn't dumb enough to vote for Pelosi and Newsome and Waters. Californians are a whole new breed of stupid. Don't infect the entire human race with whatever dumb pills you take.

Stay in California and enjoy the paradise your voting created.

Carl said...

@K T Cat
"...that YouTube video on debt was crazy. Chilling, too."
Yes, the topic (sustainability of debt levels {on- and off- balance sheet}) has become what it is, in large part, because of a bipartisan and increasingly bipolarized situation where both ends of the spectrum do not see building (ideological) bridges as a potentially constructive option.
'We' will get there, eventually.

K T Cat said...

Thanks for the advice, HDX.

By the way, if you want to see crazy, just click on my profile and then go to my blog. I've been writing a daily post for 15 years from my cell here in the asylum, right after they give me my morning gruel.

Sincerely, I hope you have a nice day!

K T Cat said...

Carl, I've been mentally exploring what it means to society to be able to wish for things like Aladdin with his lamp. In effect, that's what it means to live in a place like America and print money. I argue in my blog rantings that our pricing structure for life is broken. We can be as generous as we want and we don't have to pay for it. It's self-esteem porn. We feel really good after handing out the cash, but nine months later, we haven't really done anything.

Carl said...

"I've been mentally exploring what it means to society to [have free lunches].
Me too.

Anecdote #1
A few days ago, my wife and i accompanied our youngest one (age 14) to her tennis class; it was relatively hot. There was one court left and my wife and i (aged early and mid 50s) played as usual, real hard for a full hour with no break. Kind of brutal but so much satisfying. For the class, we noticed that there were compulsory water breaks every 10-15 minutes (to 'protect' the young from heat).

Anecdote #2
This morning in the news: "Fed's Rosengren says U.S. can't afford housing market 'boom and bust'." In other words, the US needs protection through low interest rates.

And the following: "Since January 2020, real GDP grew by $114 billion. Meanwhile, during the same time, government debt increased 43x that amount. This was perhaps the most unproductive use of capital that we have seen in history."

The mental exploration suggests that all the above are connected, somehow.

A small technical detail on money printing for you. The Fed is playing a subterfuge to the American people but, in reality, the money printed is in exchange for an issued bond, which means that the bond (as an asset to someone) existed before the swap in the system as an offset and that someone instead of allocating this cash to consuming, investing or whatever, instead committed this cash to the government for somebody else to consume, invest or whatever.
It's a subterfuge because, fundamentally, and still true at this point, there is a critical mass of people who still assume that the future taxation of the US will compensate for present day deficits. In other words, the Rubicon has not yet been crossed and that may be a reason for an interesting interim period. If the Rubicon is crossed however, i agree that it will become easy to have a miserable life, modern-day style.

BTW, your blog is interesting.