If we attempt MMT, it will end the US dollar’s reserve currency status and produce out-of-control inflation. That will essentially destroy the Boomer generation’s ability to retire with anything like most envision today.
I can’t say it any stronger. If I really see MMT coming, I will reposition my portfolio to heavily weight gold, real estate, and a few biotech companies. I simply can’t imagine a more dire economic scenario.Many participants had read my analysis of the potential for $45 trillion worth of US debt by the end of the 2020s.
When I started talking about the potential for $20 trillion of additional quantitative easing, it was clear the question made some uncomfortable.
There was general agreement that neither political party can balance the budget. The latest “deal” between Trump and Congress raised spending $320 billion over the next two years.
The previous “sequester” deal that at least tried to limit spending is out the window. With it will go any control on the spending process. Current deficit projections will seem mild compared to what we actually get.
As I said a few weeks ago, using CBO projections from earlier this year and assuming one recession, the national debt would rise to almost $45 trillion by the end of the 2020s.
This new deal will add at least another $1.5 to $2 trillion to that amount. If there is a second recession, we would be looking at north of $50 trillion.
We don’t have $40 trillion, let alone $50 trillion, to put into federal debt. It would crowd out all funding for productive private enterprises and sharply reduce GDP growth. Which is why I expect to see massive, currently inconceivable amounts of quantitative easing.
Wile E. Coyote and the Federal Reserve share a lot of similarities. Just as Wile is always trying to catch the Road Runner, the Federal Reserve and other central banks have been trying for 10 years to trigger a self-sustaining economic expansion, i.e. an expansion based on the self-reinforcing dynamics of increasing productivity driving increasing wages which then fuel consumption and investment in productivity, and so on.
But all the central banks' intricate plans have failed, and so they are having a Wile E. Coyote moment of impending doom. The Acme Brand detonator they counted on-- negative interest rates--has failed to spark a self-sustaining expansion, and all the Fed's convoluted schemes--Operation Twist, buying a trillion dollars in sketchy home mortgages, etc.--failed to catch the prize.
And so the Fed was only able to raise rates, more or less at the last minute, by 2%-- a pathetic admission that even after a decade of central bank-dependent expansion, the Fed couldn't even raise rates into positive territory, i.e. above the official rate of inflation.
While the other central banks are falling into the abyss, the Fed is clinging to the edge of the cliff by its fingertips. Having failed to spark a self-sustaining expansion, now the Fed is left with two dismal choices: either let go and fall into the abyss of negative interest rates--doing more of what's failed miserably--or cling on and keep rates at 2% so there's some policy response left when the global recession inevitably washes up on America's shores.
Whatever the Fed chooses to do, it's already failed. The Road Runner of self-sustaining expansion got clean away, and the Fed is left holding the ominously ticking Acme Brand detonator.
...two realities.
- The market fully expects central banks to be dovish.
- And the market is relying on that fact for its investing thesis.
Yet deep down inside, investors worry, probably even know, that further monetary policy stimulus will be of dubious value in actually getting the global economy moving at a quicker pace. Expensive money is not what ails us.
Trading volumes remain, understandably, very low. Earlier in the week, that didn’t mean there weren’t things to be learned from the price action. Whatever today brings should probably be taken with a little bit more wariness. Traders have a tendency to talk themselves into all sorts of notions when the event they have been preparing for suddenly looms.
A few days ago, everyone was sure exactly what Fed Chairman Jerome Powell was going to say and what the central banks were going to do. Today will be about traders torturing themselves by questioning those assumptions. Whether they have been right or wrong in formulating their expectations, nothing in Wednesday’s Fed minutes nor this morning’s PMIs will change what ends up happening in September.
With all eyes focused squarely on Germany's dismal PMI prints, which have been in contraction for over half a year, the investing public forgot that the US economy is similarly slowing down. And moments ago it got a jarring reminder when Markit reported that the US manufacturing PMI unexpectedly tumbled into contraction territory, down from 50.4 last month, and badly missing expectations of a 50.5 rebound. This was the first print below the 50.0 expansion threshold for the first time since September 2009.
But wait, there's more, because whereas until now the US services segment appeared immune to the slowdown in US manufacturing, in August the service PMI tumbled to 50.9, down from 53.0 in July, matching the lowest print in at least 3 years, and well below the 52.8 consensus expectation. According to Markit, subdued demand conditions continued to act as a brake on growth, with the latest rise in new work the slowest since March 2016. This contributed to a decline in backlogs of work for the first time in 2019 to date.
“August’s survey data provides a clear signal that economic growth has continued to soften in the third quarter. The PMIs for manufacturing and services remain much weaker than at the beginning of 2019 and collectively point to annualized GDP growth of around 1.5%.
“The most concerning aspect of the latest data is a slowdown in new business growth to its weakest in a decade, driven by a sharp loss of momentum across the service sector. Survey respondents commented on a headwind from subdued corporate spending as softer growth expectations at home and internationally encouraged tighter budget setting.
“Business expectations for the year ahead became more gloomy in August and remain the lowest since comparable data were first available in 2012. The continued slide in corporate growth projections suggests that firms may exert greater caution in relation to spending, investment and staff hiring during the coming months.”
An interesting nuance as noted by Viraj Patel of Arkera, is that while German economic sentiment may be troughing (granting in very contractionary territory), it is now America's turn to slump into recession:
Interesting PMI day so far. Eurozone (Germany) beats... and US disappoints. Is relative tide changing? Lot of pessimism over Eurozone economy versus US Trump tax cut 'sugar high' + tariff war slowdown still very much in process with more room to go. $EURUSD cyclically higher now? pic.twitter.com/RsRZDZQuYS— Viraj Patel (@VPatelFX) August 22, 2019
A few days ago we reported that the easiest way for Trump to get the Fed to launch QE was to i) start a global economic war or ii) send the US economy into recession. Based on today's data, Trump is making great progress on the latter, and we are confident the former can't be far behind.
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