re: Implications of fiscal dominance in the US and likely options going forward.

Great first post!

Current budgets would need to be cut by ~22% ( LINK) across the board just to balance (much less have a surplus with which to pay down the debt). I could probably count the amount of members of Congress who would vote for something like that with just the fingers of one hand and have fingers left over.

I get the idea of effectively shrinking debt through inflation, but without spending controls (limiting creation of new debt) it seems like it's nothing more than obfuscation with a hope that someone, somewhere in the future will come up with some way to fix things beyond accounting aesthetics. The big problem here is something I refer to as "no one goes to DC to serve only one term". What I mean by that is the cuts to spending needed just to balance the budget (much less have a surplus) would guarantee that almost anyone voting for it would lose their next election (and possibly any other election after that).

To my way of thinking, trying this in the fiscally irresponsible environment we've had in DC for over 20 years now (and for the foreseeable future) is a bit like an addict doing ever-more stronger drugs in an attempt to re-capture that feeling of their first high. It's an inevitable death spiral as the more debt we create, the more inflation is needed to effectively shrink it, causing higher servicing amounts, meaning we create more debt so that we can service it while not making cuts which would cause politicians to not get re-elected, which means more inflation is needed to effectively shrink it, etc. We're currently looking at estimated $1.3T+ annual deficits with annual debt servicing quickly approaching $1T.

Debt servicing for FY2022 was $852B, total deficit for FY2022 was $1.357T, meaning we borrowed money, largely, in order to pay the interest on borrowed money. This has been the norm since FY2008 and is expected to continue into the foreseeable future. As long as we're borrowing more than it takes to service our debt, we're essentially borrowing more in order to pay for borrowing more (read: death spiral). There's no path forward where this ends well, it's just a matter of "how" and "when" this all comes to a head.

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I don't think he'll QE again until he sees a treasury auction fail or near fail.

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The reason they started QE in 2020 was because treasuries went 0 bid in SE Asian trading.

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Great first post!

Current budgets would need to be cut by ~22% ( LINK) across the board just to balance (much less have a surplus with which to pay down the debt). I could probably count the amount of members of Congress who would vote for something like that with just the fingers of one hand and have fingers left over.

I get the idea of effectively shrinking debt through inflation, but without spending controls (limiting creation of new debt) it seems like it's nothing more than obfuscation with a hope that someone, somewhere in the future will come up with some way to fix things beyond accounting aesthetics. The big problem here is something I refer to as "no one goes to DC to serve only one term". What I mean by that is the cuts to spending needed just to balance the budget (much less have a surplus) would guarantee that almost anyone voting for it would lose their next election (and possibly any other election after that).

To my way of thinking, trying this in the fiscally irresponsible environment we've had in DC for over 20 years now (and for the foreseeable future) is a bit like an addict doing ever-more stronger drugs in an attempt to re-capture that feeling of their first high. It's an inevitable death spiral as the more debt we create, the more inflation is needed to effectively shrink it, causing higher servicing amounts, meaning we create more debt so that we can service it while not making cuts which would cause politicians to not get re-elected, which means more inflation is needed to effectively shrink it, etc. We're currently looking at estimated $1.3T+ annual deficits with annual debt servicing quickly approaching $1T.

Debt servicing for FY2022 was $852B, total deficit for FY2022 was $1.357T, meaning we borrowed money, largely, in order to pay the interest on borrowed money. This has been the norm since FY2008 and is expected to continue into the foreseeable future. As long as we're borrowing more than it takes to service our debt, we're essentially borrowing more in order to pay for borrowing more (read: death spiral). There's no path forward where this ends well, it's just a matter of "how" and "when" this all comes to a head.

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Have you read Dalio's latest book? It was helpful to me to understand the cyclical nature of debt cycles. We're at the end of the one that began just after WW2. The cliffnotes are about once every four generations, or about the same time as one long human life, debt accumulates to unsustainable levels and the entire system gets a complete reboot, a debt jubilee of sorts.

That's the 50k foot view anyway. As I said earlier, I think Powell understands this, the Triffin Dilemma and the ramifications of what these rates will eventually do to an economy with debt levels this high. But I think he knows everyone else is in worse shape and by crushing everyone else, especially Europe and Japan, that that might drive capital our way to eat some of the obscene amount of issuance Yellen will be churning out over the next few years.

But like you pointed out, it's a short term play. Without massive fiscal reform that dooms every sitting member of Congress the math morphs into a debt death spiral. I still think he'll cut and print to kick the can one more time when the treasury market gets illiquid which of course lights inflation on fire.

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I think they're hoping boomers die off before that gets too costly.

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Inb4 vaxxed

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Have you read Dalio's latest book? It was helpful to me to understand the cyclical nature of debt cycles. We're at the end of the one that began just after WW2. The cliffnotes are about once every four generations, or about the same time as one long human life, debt accumulates to unsustainable levels and the entire system gets a complete reboot, a debt jubilee of sorts.

That's the 50k foot view anyway. As I said earlier, I think Powell understands this, the Triffin Dilemma and the ramifications of what these rates will eventually do to an economy with debt levels this high. But I think he knows everyone else is in worse shape and by crushing everyone else, especially Europe and Japan, that that might drive capital our way to eat some of the obscene amount of issuance Yellen will be churning out over the next few years.

But like you pointed out, it's a short term play. Without massive fiscal reform that dooms every sitting member of Congress the math morphs into a debt death spiral. I still think he'll cut and print to kick the can one more time when the treasury market gets illiquid which of course lights inflation on fire.

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I think the common flaw with an economics-only approach to analyzing the problem is that it has to assume everything else is just a linear projection on the supply side - GDP, etc. As I noted above, technology advances can alter the inputs IF they are fundamental enough. The 1990's was not the first time we've seen it happen. It happened before in the industrial revolution and then again in the transportation revolution (cars and airplanes both became mature enough to start affecting the economy at about the same time).

If all else fails, I fall back on Churchill's wartime quote, roughly: "As for me, I am an optimist. There doesn't seem to be much use in being anything else."

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I think the common flaw with an economics-only approach to analyzing the problem is that it has to assume everything else is just a linear projection on the supply side - GDP, etc. As I noted above, technology advances can alter the inputs IF they are fundamental enough. The 1990's was not the first time we've seen it happen. It happened before in the industrial revolution and then again in the transportation revolution (cars and airplanes both became mature enough to start affecting the economy at about the same time).

If all else fails, I fall back on Churchill's wartime quote, roughly: "As for me, I am an optimist. There doesn't seem to be much use in being anything else."

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I assume you're referencing potential productivity gains from AI or similar? Imo the issue there, AI specifically, is it is just another labor arbitrage situation, not unlike bringing China into the WTO. It will be incredibly deflationary and deflation is incompatible with a debt based fiat monetary system that is already leveraged to the extreme. Deflation increases debt burdens in real terms. They will have to print even more to prevent the system from buckling.

Imo, the only tech advance with a prayer of helping gdp outrun the debt balloon is a revolution in energy production. A fusion breakthrough would probably do it. Current tech fission might have done it if we hadn't put the brakes on it in the 80s.

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One thing I've started to notice is the diminishing power of the dollar around the world. Went to Mexico a few months ago and the exchange rate kind of shocked me.

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Exchange rates are determined by interest rates I'd have thought.

Mexico's interest rate has risen pretty rapidly while US interest rates are plateauing increasing the demand for the peso against the dollar.

Since 2003, the peso has actually depreciated so it's a very short-term view of things to say that the power of the dollar has diminished I'd argue.

They said the same thing about the euro reducing the power of the dollar and that was pretty short-lived when it turned out that a single unit currency for disparate countries doesn't work very well...

I disagree with the premise of this post. The US is in a pretty damn good position compared with 'peer' countries.

So I read through this whole thing last night then pickup up Freakenomics. My question is where does the immigration population figure into the US unemployment situation, it’s indicators and the overall economy going forward.

I appreciate the response. Thank you!

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The USD remaining as the world's primary reserve currency

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How long do we remain there?

As I mentioned in an earlier post, we've essentially been borrowing to service debt since 2008. In an environment where interest on new borrowing is more than double what it was during the majority of the time back to 2008, that means we're building debt at an ever-increasing pace.

With the USD being a fiat currency, eventually that debt burden is going to scare away potential investors. Along with that, one of the big supporters of the USD being the primary world currency is its function as the petrodollar. This is why Saudi and UAE joining BRICS has me concerned.

If BRICS is successful in getting its member nations to trade oil only in their currency -even if it's just among themselves- we're suddenly looking at lot of excess petrodollars sitting in the market. BRICS represents the majority of world oil production (80%), a sizeable amount of total oil exports (~40% if all of the currently applying countries were to be approved) and a nearly equal amount of oil imports (BRICS countries account for ~33% of all oil imports).

We've already been seeing a slow but definite pattern of the world moving from the USD internationally.



This is why I am starting to take BRICS a bit more seriously. Granted, there's still a wide gulf between proposing a new currency and having it be successful once instituted, but waiting until that's the situation before acting would be economic suicide.