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re: Implications of fiscal dominance in the US and likely options going forward.
Posted on 9/7/23 at 6:36 pm to Bard
Posted on 9/7/23 at 6:36 pm to Bard
quote:Interesting question. It's a bit of a double-edged sword, isn't it? On the one hand, USD as the global reserve may stave off domestic fiscal dominance. On the other hand, it severely limits devaluation making debt management more challenging.
How long do we remain there?
1
Posted on 9/7/23 at 9:56 pm to NC_Tigah
I don't think the dollar is going anywhere anytime soon. It will remain the global unit of account for the foreseeable future imo. However, the term dedollarization is a bit of a misnomer imo. The dollar isn't that important by itself. Its real value to the US the past 50 years has been as a conduit for net producer countries to accumulate treasuries. Countries that ran trade surpluses stored their excess usd in treasuries which allowed us to grow our twin deficits and export our inflation.
Early in the 2010s China started recycling their excess usd into Belt and Road instead of treasuries and that was the beginning of the end of the party. There's not another buyer out there big enough to absorb Washington's debt production. They tried regulating banks into eating it but covid blew that up. As soon as the off the run treasury market gets wobbly again, like it did in Mar of '20, the Fed will have to buy it. Eventually they'll have to buy it all.
The Chinese learned from our mistakes. They have no desire for the cny to become a reserve currency because they have no intention of exporting their industrial base like we did (for their benefit). I think they want to be able to purchase commodities in their currency and have some degree of immunity from weaponized usd--sanctions. US treasuries fading as the global reserve asset is the real dedollarization story imo.
Early in the 2010s China started recycling their excess usd into Belt and Road instead of treasuries and that was the beginning of the end of the party. There's not another buyer out there big enough to absorb Washington's debt production. They tried regulating banks into eating it but covid blew that up. As soon as the off the run treasury market gets wobbly again, like it did in Mar of '20, the Fed will have to buy it. Eventually they'll have to buy it all.
The Chinese learned from our mistakes. They have no desire for the cny to become a reserve currency because they have no intention of exporting their industrial base like we did (for their benefit). I think they want to be able to purchase commodities in their currency and have some degree of immunity from weaponized usd--sanctions. US treasuries fading as the global reserve asset is the real dedollarization story imo.
Posted on 9/8/23 at 4:40 pm to Art Blakey
quote:Nor do I. The competitors (Euro, RMB) are far too unstable
I don't think the dollar is going anywhere anytime soon
Posted on 9/12/23 at 1:20 pm to Art Blakey
quote:
With no road left for can kicking, the math is increasingly leading us into fiscal dominance. The more successful Powell is in shrinking inflation the worse off our fiscal situation gets. Debt shrinkage shenanigans are coming, likely in one, or both the forms described here. You might want to start thinking about it now.
I’m not well informed on this so pardon my ignorance, but it seems to me like inflation would only reduce the burden of foreign owned debt. Why would inflation reduce the real burden of domestically owned debt as well?
Posted on 9/12/23 at 1:25 pm to Art Blakey
quote:
Implications of fiscal dominance in the US and likely options going forward.
Posted on 9/13/23 at 7:59 am to PQuin
quote:
it seems to me like inflation would only reduce the burden of foreign owned debt. Why would inflation reduce the real burden of domestically owned debt as well?
As a stand alone function, inflation would reduce the real burden of debt but when coupled with irresponsible fiscal policies (by both sides of the aisle), we are continuing to borrow more at increasing interest rates to pay off existing debt and fund additional spend thus entering a death spiral.
Posted on 9/13/23 at 8:50 am to PQuin
quote:
I’m not well informed on this so pardon my ignorance, but it seems to me like inflation would only reduce the burden of foreign owned debt. Why would inflation reduce the real burden of domestically owned debt as well?
Let's say you locked in a 30 year mortgage at 2% before covid. Your wages might lag inflation but still increase relative to your mortgage thereby decreasing your debt burden in real terms. It works at the govt level in a similar fashion. GDP goes up in nominal terms with inflation, a second order effect is the govt's tax take goes up with GDP. As long as inflation is underreported, which has never been an issue for the BLS, entitlement COLA will lag real inflation and the net result is debt/GDP goes down.
Posted on 9/13/23 at 10:28 am to PQuin
quote:
Why would inflation reduce the real burden of domestically owned debt as well?
Because the real debt burden is a number of the amount of currency you owe, it doesn't move to continue to match the value of the currency at the time you borrowed it.
Let's say 10 years ago $1 = $1 and you took out a loan for $100 (we'll forego interest for now) with the promise to pay back that $100 in ten years. When you took the loan out you were making $100/month. Over that ten years there's been 50% inflation, this means that $1 is now worth $.50 compared to 10 years ago, thus in today's dollars that $100 you borrowed is worth only about $50. You're making $50/month more than you were 10 years ago, so it's easier to pay that debt off when it comes due.
The debt the federal government incurs has a small interest rate. Over the last twenty years the federal government has paid only the interest on that debt each year while continuing to accrue more and more debt (meaning larger and larger interest payments). Interest rates on federal debt have jumped ~50%.
Meanwhile the federal government is now not only running on needing to borrow at least $1.3T this year and last year, but also each year for the foreseeable future. As that interest rate has climbed, so too has the amount needed just to pay that interest. We're likely to be over $1T in interest payments by the end of the year.
What this means is that inflation isn't reducing the real burden of domestically owned debt because the amount of Dollars owed is increasing at such an insane pace. Eventually, so much deficit spending itself causes inflation, which increases the amount the federal government needs to spend in order to keep doing everything it wants to do (as well as do even more, because that's how politicians get/keep their jobs), which means borrowing more, etc.
This post was edited on 9/13/23 at 10:37 am
Posted on 9/15/23 at 6:44 am to Bard
quote:
Meanwhile the federal government is now not only running on needing to borrow at least $1.3T this year and last year, but also each year for the foreseeable future. As that interest rate has climbed, so too has the amount needed just to pay that interest. We're likely to be over $1T in interest payments by the end of the year.
What this means is that inflation isn't reducing the real burden of domestically owned debt because the amount of Dollars owed is increasing at such an insane pace. Eventually, so much deficit spending itself causes inflation, which increases the amount the federal government needs to spend in order to keep doing everything it wants to do (as well as do even more, because that's how politicians get/keep their jobs), which means borrowing more, etc.
Great post, currently the govt is spending 32% of its tax take on interest. That number will explode if/when we have a credit event that sends markets lower. Powell will have to give up on inflation and take action to keep the govt solvent. PPI was nearly double expectations yesterday and oil broke $90. He's already lost the inflation fight. He just hasn't admitted it yet. He showed his hand in March with SVB. He could have ended inflation in ten minutes by simply saying "sorry Oprah, he's $250k, sorry Megan and Harry, here's $250k..." Instead they put in an implicit backstop to all uninsured bank deposits (worth 17T) despite the fact that the FDIC insurance pool holds a fraction of 1% of that number.
Posted on 9/15/23 at 7:48 am to Art Blakey
I agree
When we extended the quarter million safety net, all bets were off.
Imagine if the SVB was in the boothill of Missouri with a board of god fearing men and had a senior management team of ag bankers. The feds would have allowed it to die and not a penny more than 250 would have been paid.
When we extended the quarter million safety net, all bets were off.
Imagine if the SVB was in the boothill of Missouri with a board of god fearing men and had a senior management team of ag bankers. The feds would have allowed it to die and not a penny more than 250 would have been paid.
Posted on 9/15/23 at 3:16 pm to Art Blakey
quote:
currently the govt is spending 32% of its tax take on interest. That number will explode if/when we have a credit event that sends markets lower. Powell will have to give up on inflation and take action to keep the govt solvent. PPI was nearly double expectations yesterday and oil broke $90. He's already lost the inflation fight. He just hasn't admitted it yet.
I just did some number-crunching in a thread on Poli, annual Medicare/Medicaid and debt servicing payments have each grown by a little over 50% since just 2017 (ie: FY2017-FY2022, so not even including FY2023 yet even though 23's debt servicing has already passed FY2022's). Not far behind that was Social Security at just over 35%.
These represent a big part of where the problem lies. As boomers age out of the work force and into care facilities at faster rates, Medicare/Medicaid and Social Security payments are going to rise. Increasing costs while having less funding means borrowing more to shore it up.
Debt servicing is now costing more than Social Security and Defense spending and it can only go up as more and more money will need to be borrowed in order to pay for these social program shortfalls and service ever-increasing debt. Once it eclipses Medicare/Medicaid spending, I don't see any way in which we aren't crushed by the federal government's debt.
PPI having shot up the last couple of months makes at least one more rate increase before the end of the year more likely (fedwatch is still bullish on rates staying static the rest of the year). If September numbers look anything like the numbers from the last two months, I don't see how they don't to at least another .25 at the end of October.
A long time ago I said we would be lucky to get through this with just stagflation. I may have been a bit too optimistic.
Posted on 9/20/23 at 6:31 pm to Bard
quote:
I just did some number-crunching in a thread on Poli, annual Medicare/Medicaid and debt servicing payments have each grown by a little over 50% since just 2017 (ie: FY2017-FY2022, so not even including FY2023 yet even though 23's debt servicing has already passed FY2022's). Not far behind that was Social Security at just over 35%.
These represent a big part of where the problem lies. As boomers age out of the work force and into care facilities at faster rates, Medicare/Medicaid and Social Security payments are going to rise. Increasing costs while having less funding means borrowing more to shore it up.
Debt servicing is now costing more than Social Security and Defense spending and it can only go up as more and more money will need to be borrowed in order to pay for these social program shortfalls and service ever-increasing debt. Once it eclipses Medicare/Medicaid spending, I don't see any way in which we aren't crushed by the federal government's debt.
PPI having shot up the last couple of months makes at least one more rate increase before the end of the year more likely (fedwatch is still bullish on rates staying static the rest of the year). If September numbers look anything like the numbers from the last two months, I don't see how they don't to at least another .25 at the end of October.
A long time ago I said we would be lucky to get through this with just stagflation. I may have been a bit too optimistic.
Volcker was dealing with 30% debt/gdp, Powell's in a different...uh...bracket. I'm with Luke Gromen on entitlements--they're basically debt/interest expenses for practical purposes--promises made in the past to be paid in the future. The demographics were already poor for the way entitlements were structured. They are ponzi schemes that need an ever increasing number of people paying in to service the people receiving. It worked fine when boomers were paying in and the WW2 gen was receiving. Now, not only is the demographic math broken but we pivoted to a consumer/service/gig economy and younger people can't even afford houses, much less care houses for the boomer gen.
Posted on 10/16/23 at 3:46 pm to Art Blakey
Since I last posted in this thread the national debt has increased by over half a trillion.
Fed Chair Yellen: Our debt is unsustainable.
Treasury Sec Yellen: We can afford two wars at the same time.
Fed Chair Yellen: Our debt is unsustainable.
Treasury Sec Yellen: We can afford two wars at the same time.
Posted on 10/17/23 at 8:38 am to Art Blakey
quote:
Now, not only is the demographic math broken
It's not just the math. We probably won't physically be able to deliver the services promised without huge increases in healthcare productivity.
Posted on 10/17/23 at 12:23 pm to Art Blakey
quote:
Fed Chair Yellen: Our debt is unsustainable.
Treasury Sec Yellen: We can afford two wars at the same time.
Fed Chair Yellen in 2007: we can expect a soft landing.
Treasury Sec Yellen in 2023: we can expect a soft landing.
Posted on 10/19/23 at 7:55 pm to wutangfinancial
quote:
It's not just the math. We probably won't physically be able to deliver the services promised without huge increases in healthcare productivity.
It's the equivalent of a massive loan in a foreign currency with an expanding exchange rate. Health care goods and services can't be printed.
Posted on 3/2/24 at 7:47 am to Art Blakey
A few updates, US sovereign debt is growing at around $1T every 100 days. Waller said yesterday he wants more short term debt on the balance sheet.
LINK
Yellen shifted issuance to the short end with the Q3 quarterly refunding announcement catching the market off guard and stimulating another big rally in equities. She rebalanced it a bit in the following quarter but that will likely be temporary. Lost in the chaos of Nvidia's most recent earnings was a 20 year auction with the largest tail on record.
Powell is now subservient to the treasury. Inflation is headed back up behind the wall of fiscal largesse and there's nothing he can do about it. Cutting here pours gasoline on inflation and raising here pours gasoline on the CRE dumpster fire and what is looking like another wave of bank consolidation. There's never just one cockroach (New York Community Bank).
BTFP ends this month and in preparation for that he is now requiring everyone to approach the discount window once a year in a bid to erase the stigma attached to doing so. March is going to be interesting.
LINK
Yellen shifted issuance to the short end with the Q3 quarterly refunding announcement catching the market off guard and stimulating another big rally in equities. She rebalanced it a bit in the following quarter but that will likely be temporary. Lost in the chaos of Nvidia's most recent earnings was a 20 year auction with the largest tail on record.
Powell is now subservient to the treasury. Inflation is headed back up behind the wall of fiscal largesse and there's nothing he can do about it. Cutting here pours gasoline on inflation and raising here pours gasoline on the CRE dumpster fire and what is looking like another wave of bank consolidation. There's never just one cockroach (New York Community Bank).
BTFP ends this month and in preparation for that he is now requiring everyone to approach the discount window once a year in a bid to erase the stigma attached to doing so. March is going to be interesting.
This post was edited on 3/2/24 at 2:25 pm
Posted on 5/14/24 at 11:19 am to Art Blakey
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