On June 1, 2022, the Jay Powell Chaired Federal Reserve formally commenced Quantitative Tightening (QT).  The Fed’s balance sheet had topped $8.9 trillion.  Consumer price inflation was rocketing towards a 40 year high.

“Brace yourself,” advised JPMorgan Chase CEO Jamie Dimon at the time.

The master plan was for the Fed to reduce its holdings of Treasuries and mortgage-backed securities by a combined $47.5 billion per month for the first three months.  Then, in September 2022, this monthly reduction was increased to $95 billion (i.e. $60 billion in Treasuries and $35 billion in mortgage-backed securities).

Aside from the abrupt $400 billion spike in March of 2023, when Silicon Valley Bank, Signature Bank, First Republic Bank all failed in rapid succession, QT has continued according to plan.  Today, the Fed’s balance sheet stands at just under $7.7 trillion.

The next FOMC meeting is on January 30 and 31.  And the scuttlebutt from the Wall Street Journal is that the Fed’s now considering a change of plans:

“Fed officials are to start deliberations on slowing, though not ending, that so-called quantitative tightening as soon as their policy meeting this month.  It could have important implications for financial markets.

“The Fed can shrink its holdings by selling bonds or, as it has preferred, allowing bonds to mature and ‘run off’ its balance sheet without buying new ones.  Runoff increases the supply of bonds that investors must absorb, putting upward pressure on long-term interest rates.  Slowing runoff reduces that upward pressure.”

At this point, the Fed has made a small $1.2 trillion dent in getting its funny money financed assets off its books.  But it is nowhere close to returning to pre-covid levels of $4 trillion or pre-Great Recession levels of $900 billion.

And given the Fed will likely move to taper the rate of QT over the next few months, it will be near impossible to ever shrink its balance sheet to where it stood in January 2020.

What to make of it…

Unconscious Biases

Undoing the radical and extreme money printing gala that took place from 2020-22 was never a realistic proposition.  The failure to remove the massive pile of reserves added to the Fed’s balance sheet during the 2008-13 money printing episode had already demonstrated this.

John Maynard Keynes, Fabian socialist and the godfather of modern day economic planning, in his 1935 work, The General Theory of Employment, Interest and Money, wrote:

“Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

If you recall, in late November 2008, Fed Chair Ben Bernanke permanently sold American savers and workers down the river.  He couldn’t resist.  He was compelled by his unconscious biases.

Bernanke, a self-satisfied Great Depression history buff of the highest academic lineage, peered back 80-years.  What he thought he saw scared the heebie-jeebies out of him.  To his attuned eye, he observed several credit market parallels to the early-1930s.  He then made a preconceived diagnosis.

After that, he dusted off his desktop copy of A Monetary History of the United States, by Milton Friedman and Anna Schwartrz, turned to the chapter on the Great Depression, and got to work inflating the money supply.  In doing so, he permanently disfigured the world.

Bernanke first let the quantitative easing (QE) cat out of the bag with the purchase of $600 billion in mortgage-backed securities and Treasuries.  He bought them with digital monetary credits created out of thin air.  The intent was to bailout the big banks on Wall Street.

Pro-QE, Anti-QT

By March 2009, Bernanke had jumped the Fed’s balance sheet from $900 billion to $1.75 trillion.  Then, over the next five years, he ballooned it out to $4.5 trillion.  All the while, he stroked his ego with claims he was preventing a repeat of the Great Depression.

Did it never occur to Bernanke that his market intervention, like Benjamin Strong’s coup de whisky in the 1920s, was preventing a much-needed financial liquidation and asset price rebalancing?  Or that his actions were further distorting the economy and setting it up for an even greater crisis?

More than likely, Bernanke knew exactly what he was doing.  Remember, the Fed works for the big banks and big money interests on Wall Street.  Not the little guy on Main Street.

And when the day came to straighten things out Bernanke had left the building.  Janet Yellen, now Treasury Secretary, formerly Fed Chair from 2014 to 2018, was tasked with contracting the Fed’s $4.5 trillion balance sheet eight years after the Great Recession officially ended.

Jamie Dimon is fearful of QT.  He’s a big banker.  He’s pro-QE and anti-QT.  Similar to his 2022 recommendation to “brace yourself,” Dimon, in 2017, advised caution.  Speaking at a conference in Paris on Tuesday, July 11, 2017, Dimon remarked that:

“We’ve never had QE like this before, we’ve never had unwinding like this before.  Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before.

“When that (QT) happens of size or substance, it could be a little more disruptive than people think.  We act like we know exactly how it’s going to happen and we don’t.”

But not to fear.  Yellen had her master plan…

Yellen’s Epic Fail

On Wednesday, September 20, 2017, as the Fed was gearing up for QT, Fed Chair Janet Yellen attempted to clarify how the Fed was going to go about it.  Following the two day FOMC meeting, the Fed issued its customary statement.

Therein, it mentioned that balance sheet normalization would be initiated in October of that year.  The referenced implementation note outlined how the Fed would contract its balance sheet:

“Effective in October 2017, the Committee directs the [Open Market] Desk to roll over at auction the amount of principal payments from the Federal Reserve’s holdings of Treasury securities maturing during each calendar month that exceeds $6 billion, and to reinvest in agency mortgage-backed securities the amount of principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month that exceeds $4 billion.”

Moreover, in the Fed’s June 2017 Addendum to the Policy Normalization Principles and Plans, it identified plans to increase this initial $10 billion balance sheet contraction (i.e. $6 billion in Treasury notes and $4 billion in mortgage-backed securities) every three months by increments of $10 billion until they reach $50 billion per month.  Then it planned to let it ride until back to normal; though, it was never clear what normal was.

By our back of the napkin calculation at the time, starting with the initial October 2017 $10 billion reduction then incrementally increasing the reduction by $10 billion each quarter until hitting $50 billion per month, and then contracting by $50 billion a month from there, it would have taken 78-months for the Fed to get its balance sheet back to $900 billion (i.e. roughly where it was before Bernanke’s dirty deed).  Thus, in March 2024, monetary policy would have been back to normal.

That was Yellen’s master plan, at least.  But Yellen’s master plan was an epic fail.

Today the Fed’s balance sheet is at about $7.7 trillion – not $900 billion.  And we’re all living with the havoc this has wreaked.

Fed’s QT Taper Talks Are Already Behind The Eight Ball

QT was abruptly terminated and reversed in September 2019 – after just 24 months – with the Fed’s balance sheet at $3.7 trillion.  Initially, the Fed’s reversal was triggered to provide the liquidity needed to cover repo-madness.

If you recall, sometime between the night of September 16 and the morning of September 17, 2019, the overnight repurchase agreement (repo) rate hit 10 percent.  Short-term liquidity markets essentially broke.  Before long, the Fed was supplying hundreds of billions in credit every night to keep credit flowing.

Soon after, this situation was bailed out by coronavirus panic QE.  Where the Fed went balls to the wall and expanded its balance sheet by $5 trillion.  A good part of this took place between March and June 2020.

Fed Chair Powell, however, is much, much smarter than Yellen.  He engages his sixth sense to anticipate ample reserves, or lack thereof.  Preventing a repeat of repo-madness is what’s compelling the Fed to taper and ultimately terminate QT.  Here we return to the Wall Street Journal:

“Whereas the Fed expects to cut short-term interest rates this year because inflation has fallen, its rationale for tapering bond runoff is different: to prevent disruption to an obscure yet critical corner of the financial markets.

“Five years ago, balance-sheet runoff sparked upheaval in those markets, forcing a messy U-turn. Officials are determined not to do that again.”

In other words, the Fed intends to reverse course before a financial panic forces it to…such as what happened in September 2019.  But is the Fed misreading the timing of the upcoming liquidity crisis?

“Generals are always prepared to fight the last war,” says the enduring axiom of conflicting attribution.

The monitory policy order has changed dramatically over the last five years.  For example, March marks the end of the Fed’s Bank Term Funding Program (BTFP).  This, coupled with the rapid draining of reserves, suggests the Fed’s plans for tapering QT are already behind the eight ball.

And another liquidity crisis of the Fed’s own making will soon be upon us.

[Editor’s note: You may not know this.  But economic recessions are the best time to get rich.  >> Here’s how.]

Sincerely,

MN Gordon
for Economic Prism

Return from Fed’s QT Taper Talks Are Already Behind The Eight Ball to Economic Prism

You may not know this.  It wasn’t widely reported.  Certainly, it is something the elites in Davos would rather not acknowledge.

In late 2023, the U.S. Energy Information Administration reported that U.S. crude oil production hit an all-time high.  Reaching 13.25 million barrels per day in September 2023.

What’s especially remarkable about this new all-time high is that as recently as 2010, monthly crude oil production in the U.S. was just 5 million barrels per day.

We all know the story of this extraordinary turnaround.  Oil extraction advancements in hydraulic fracturing and horizontal drilling have allowed U.S. oil producers to deliver an abundance of oil to consumers.

These improvements in drilling efficiency have led to record production, at competitive prices, while using fewer oil rigs.  Moreover, this record production has been attained in the face of the Biden administration’s restrictive oil and gas policies.

This abundance of U.S. oil, and the price it’s being delivered to market at, has resulted in higher exports to Europe and Asia.  In fact, rising U.S. exports of crude oil to Asia were a major factor in the decision by Saudi Arabia to cut its oil prices for Asian buyers last year.  Intense competition from U.S. oil producers forced Saudi Arabia to fight for its market share.

Given the many geopolitical challenges the U.S. is facing, including the Russo-Ukrainian war and the Israel-Hamas war, record U.S. crude oil production is a critical reason oil prices remained moderate throughout 2023.  This has, in essence, neutralized the pricing leverage of Saudi Arabia and Russia over oil markets.  OPEC+ has lost its stranglehold on global oil prices.

Now, OPEC+ could always try a repeat of the 2014 strategy of flooding the oil market, which crashed oil prices and put dozens of U.S. drillers out of business.  However, at this point, U.S. drillers have already dramatically reduced their production costs and would be much more resilient to this strategy.

In summary, record U.S. oil production in 2023 was an accommodative force for what would have been a very difficult year for the global economy.  But as the year ended a new challenge with ancient origins arose.

Supporters of God

Moses may have parted the Red Sea over 3,000 years ago so the Israelites could escape the Egyptians and wander the desert for 40 years in search of the Promised Land.  Nonetheless, the Red Sea, and the nations along its shores, remains a place of enduring conflict.

The Red Sea, as a practical matter, connects the Mediterranean Sea to the Arabian Sea.  The ultimate through point is the Suez Canal, an artificial sea-level waterway in Egypt, which links the Mediterranean Sea to the Red Sea.  More importantly, this serves as the primary trade route between Europe and Asia.

Wedged between Saudi Arabia, Egypt, and Sudan, the Red Sea is one of the world’s critical trade corridors, controlling approximately 12 percent of global trade and nearly one-third of global container traffic.  Approximately 19,000 ships cross through the Suez Canal annually.  The inlet is a strategic pressure point in the energy and commodity trade.

The Houthi movement, also known as Ansar Allah (Supporters of God), is one side of the Yemeni civil war that has raged for decades.

The God the Houthi’s support takes its lineage from Abraham’s son Ishmael who was banished to the desert.  Naturally, the great rift between Ishmael and his brother Isaac continues to the present.

The Houthis are backed by Iran, and form part of Iran’s “Axis of Resistance” – an Iran led anti-Israel and anti-Western alliance of regional militias.

As you know, in December 2023, waves of Houthi missile and drone attacks were launched against numerous container ships in the Red Sea.  This was followed with threats to target all vessels heading toward Israel, regardless of if they were Israeli-owned or operated.

To avoid suffering the same fate, major energy and shipping companies, including BP and Maersk, halted their operations through the Red Sea and Suez Canal.

If this continues for an extended period it will have significant implications for world trade, consumer price inflation, and the stability of oil and gas markets.

The Empire Strikes Back

Major shipping companies quickly diverted shipping away from the Red Sea in late December 2023.  The alternate route is a much longer course around the Cape of Good Hope.

This adds 7-to-15 days and approximately 6,500 kilometers to the journey.  It also increases demand for bunker fuel to move those shipments and reduces the availability of ships and containers, as those vessels are tied up for longer to deliver the same volume of cargo.

A large-scale rerouting of trade could break supply chain linkages in the short term.  This is already driving up shipping costs, with ramifications for consumer prices.

If you recall, the six-day blockage of the Suez Canal in 2021 demonstrated the importance of major shipping lanes.  When the Ever-Given container ship ran aground in the waterway in March of 2021, the result was delayed shipments of consumer goods from Asia to Europe and North America and an intense impairment to global supply chains.

Re-routing around the Cape of Good Hope, in addition to delays and increased shipping costs, could have secondary effects on the economy.  It all depends on how long the confrontation in the Red Sea lasts.  By this, the hope of safe passage around the cape dies hard.

The Pentagon’s initial plan to repel Houthi attacks, Operation Prosperity Guardian, did little good.  Houthi drone attacks on container ships continued.

Then, on Thursday January 11, without a declaration from Congress, President Biden launched a massive retaliatory strike against Houthis in Yemen.  The strikes targeted munitions warehouses, launching systems, production facilities and air defense radar systems.

Additional U.S. strikes against Houthi targets in Yemen have occurred this week.  In return, Houthis have continued their Red Sea drone and missile assaults.

Where this all leads is a point of conjecture.  Though it isn’t a stretch to say it will be a place of ugliness.

The Rapid Closure of America’s Technological Power Gap

Regardless of how far the war escalates and its ultimate impacts on global supply chains, the crisis in the Red Sea reveals the U.S. has limitations in its ability to project power and police vital trade routes.  Perhaps it shouldn’t be doing this in the first place.

Big picture, the use of drone attacks by Houthis has pointed the spotlight on what could be a significant closure of the technological power gap that the U.S. and Europe has enjoyed over the rest of the world for the last 250 years.  In short, any technological power gap the U.S. has today is razor thin compared to that held at the close of WWII.

The strikes on ships in the Red Sea were carried out by Houthi operated long-range drones.  These include the Samad family of drones; specifically, the Samad-1, the Samad-2, and the Samad-3.  The Houthis claim to have designed and manufactured the Samad family of drones.  It is believed that they originate in Yemen, with backing from Iran.

At roughly $20,000 to produce, Samad drones are much cheaper than the conventional $500,000 missiles used to shoot them down.  They’re dramatically cheaper than fighter jets.  Lockheed Martin’s F35A, for example, has a unit cost of $82.4 million.

After 40 years of rapid globalization, more and more U.S. adversaries – or potential adversaries – have the knowhow and resources to compete for technological dominance.  The technological power gap and the cost to fill it plunges with each iteration of Samad drones.

In effect, long-range drones, like the Colt 45 of the late-19th century, are the great equalizer.

Maybe the Red Sea crisis all quickly blows over with an Israel-Hamas peace agreement.  Irrespective, the events have revealed that the U.S. technological power gap is rapidly closing.  It’s only a matter of time before a new wave of attacks are launched against U.S. interests.

Certainly, there are investment opportunities in U.S. military contractors.  But the real opportunity presented is far more basic.  It can be found in the real source of power and might highlighted at the beginning of this missive.

You can thank us later.

[Editor’s note: No investing strategy is complete without considering geopolitical factors.  For this reason, I just put the finishing touches on a unique Special Report.  It’s called “Power Gap Cost Plunge: How to Hedge Against Geopolitical Chaos in 2024.”  You can access a copy here for less than a penny.]

Sincerely,

MN Gordon
for Economic Prism

Return from The Rapid Closure of America’s Technological Power Gap to Economic Prism

Did you see the recent government propaganda from the U.S. Bureau of Labor Statistics?

Not the latest faulty claim that consumer prices increased at an annual rate of just 3.4 percent in December.  But rather the claim that 216,000 jobs were added in December.

Upon release, and right on cue, Treasury Secretary Janet Yellen declared that the U.S. economy had achieved a soft landing.  She also said that her “hope is that it will continue.”

What Yellen neglected to mention was that October employment was revised down by 45,000 jobs and November was revised down by 26,000 jobs.  That’s 71,000 jobs the government recently reported which didn’t exist.

How many of the 216,000 jobs reported for December will wind up being pure fantasy?

Yellen also didn’t mention that 52,000 of the reported jobs are in government, 59,000 are in health care and social assistance, and 22,000 are in food services.  These aren’t the kind of jobs that create and spread new wealth and abundance to the economy.

In addition, there are 4.2 million workers that are employed part time for economic reasons.  This represents individuals who prefer full-time employment but are working part-time because their hours have been cut or they cannot find full-time work.

There are also 8.5 million multiple job holders.  These are people who work more than one job because a single job doesn’t pay the bills.

Yellen, obviously, isn’t interested in these pesky details.  What she is interested in is that when the data is massaged and contrived, and then summed up, the government can report an unemployment rate of 3.7 percent.

Hence, she can point to this number and crow about how through her expert navigation skills she has piloted a soft landing.

What’s really going on?  Here we’ll offer an anecdote followed by some thoughts…

Burning Ambition

Your editor’s son, a junior in high school, works at a pizza joint in the mall.  There he makes and sells pizzas to hungry customers for $12.50 per hour – pre-tax.  The minimum wage in Tennessee is $7.25 per hour.

Of note, he’s the only highschooler working there.  His coworkers are all well into their dirty-30s.  Some have kids.  Some have multiple jobs.  We haven’t asked any of them.  But we suppose none would claim to be living the dream.

Reviews on Google are unflattering.  They warn of pizzas and customer service that are of dubious quality.  They tell a story of a shortage of good help.  Here are several recent examples:

“Walked up to ask when they open.  Some jerk behind the counter with a ponytail and big ear piercings goes, ‘Lights out not open!’  With a ton of attitude.  We said, ‘You don’t have to be rude, we just wanted to know what time you opened.’  And his response was, ‘Welcome to the mall.’  What an absolute jerk. Don’t go here!”

“Ever had stale crackers with cheap ketchup and paper-thin burnt pepperoni on top of a thin layer of what was once cheap cheese before?  If you’re on a quest to find the worst pizza in Knoxville, then come to the west town mall.”

“Got a slice of cheese pizza, sat down and the bottom of it was burnt.  I tried to go get a different slice and he told me that all the other pizzas would be like that too and that it was normal for them to serve burnt pizza.  He was a bit sarcastic about the situation.”

There are over one hundred reviews posted which share various tales of customer dissatisfaction.  You’ve likely had similar experiences at your own local establishments.  Burning pizzas and serving them with heapings of attitude is normal these days.  Though having a burning ambition is rare.

What’s the point…

Cherry Picking Data Durations

These low-level service jobs, filled by people with low-level skill sets, are the jobs that Yellen is so excited about.  Absolutely, these jobs are important.  If they didn’t exist there would be no option to get cheap mall pizza while simultaneously getting insulted.  Life would be less abundant.

Nonetheless, these are not the type of jobs that drive the economy forward.  They certainly don’t offer opportunities for American workers to get ahead.  They don’t provide the cutting-edge skills, or the higher wages needed to propel the American economy above its foreign competitors.

One of Yellen’s key talking points is that wage growth is outpacing inflation.  She can even point to the December jobs report for justification.

Based on the government propaganda, hourly earnings rose 4.1 percent in the year through December while consumer price inflation, as measured by the consumer price index (CPI), came in at 3.4 percent for the year.  Here’s Yellen:

“Wage increases are running over price increases now.  American workers are getting ahead and the progress for the middle-income families is very noticeable.”

Cherry picking data durations to support a false narrative is a longstanding tactic of big government statists.  The reality is that on Yellen’s watch American workers have steadily fallen behind.

When you zoom out to show from December 2020 to the present, average hourly wages and CPI tell a much different story.  As David Stockman, the former Director of the Office of Management and Budget recently detailed, “the cost of living has risen 25 percent more than the average hourly wage.”

In other words, American workers have taken a significant pay cut over the last three years.

Yellen’s Bald-Faced Lies

If you didn’t know, Yellen has held various positions with the Federal Reserve and later the Treasury over the last 30 years.  She’s participated in and advanced an era of unprecedented economic activism.

Moreover, Yellen and her colleagues at the Fed have their fingerprints all over the wage debasement that has taken place over the last several years.  As Stockman elaborated:

“A few years ago when the shortest inflation ruler available—the core PCE deflator—was running significantly below the Fed’s sacred 2.00% target, the Eccles Building was all for a catch-up of the level.  The Fed even announced a policy of targeting inflation to average 2.0% over time, which ukase did not include, conveniently, the exact span of time to be measured.

“‘The Federal Reserve now intends to implement a strategy called flexible average inflation targeting (FAIT).  Under this new strategy, the Federal Reserve will seek inflation that averages 2% over a time frame that is not formally defined.  This means that after long periods of low inflation, the Federal Reserve will not enact tighter monetary policy to prevent rates higher than 2%.  One benefit of this flexible strategy to managing the mandate of price stability is that it will impose fewer restrictions on the mandate of full employment.’

“Wouldn’t you know it?  The Fed switched to ‘averaging’ in August 2020—just months before inflation went soaring to levels not seen since the 1970s.”

The gap between reality – consumer price increases vs wage increases – and what government bureaucrats want you to believe to be true takes frequent bald-faced lies to fill.  Yellen, for her part, excels at selectively using contrived data to make assertions that are visibly false.

We don’t know if she believes the propaganda she spews or if her intent is to deceive people.  Regardless, the whole act is exceedingly wearisome.

[Editor’s note: Today, more than ever, unconventional investing ideas are needed.  Discover how to protect your wealth and financial privacy, using the Financial First Aid Kit.]

Sincerely,

MN Gordon
for Economic Prism

Return from Yellen’s Bald-Faced Lies to Economic Prism

The New Year brings both hope and optimism.  A chance to turn over a new leaf.  To pursue goals.  Work hard.  And make all your dreams come true.

The sentiment is admirable.  It is vital to attack challenges with renewed vigor.  However, the outcome, even for the most disciplined, can be a giant letdown.

January, named for the Roman god Janus, protector of gates and doorways, is depicted with two faces.  One looking into the past.  The other into the future.

The calendar year may have started anew.  But, as Janus reminds us, past actions – both good and bad – endure.  By this, there’s an abundance of wreckage from the past that still needs to be reconciled.

In the realm of money and politics there are mega amounts of leftover wreckage produced by central planners in Congress, at the U.S. Treasury, and the Federal Reserve.  Decades of deficit spending and currency debasement come with unpleasant effects.  The consequences of which dramatically impact your life and your livelihood.

The wreckage doesn’t magically disappear when the calendar hits January 1.  The slate isn’t wiped clean.  Rather, the wreckage piles up from one year to the next like rotting waste cake layers at a municipal landfill.

How will the central planners manipulate your livelihood in 2024?  How will fiscal policy from Washington influence your job, investments, and discretionary income?  How will Fed monetary policy impact credit markets?

These are some of the many questions that arise as we move from 2023 to 2024.  Today we narrow our focus to one great big pile of wreckage from the past, and a particular mishap leftover from 2023.

Stopgap Two-Step

On the last day of 2023, the U.S. national debt topped $34 trillion.  Countless officials, over many decades, thought it was a good idea to spend all this money on stuff the populous would not readily support with their tax dollars.  They also thought it was a good idea to stick future generations with the bill – including you.

When problems are put off long enough, they become someone else’s problem.  This has been the modus operandi in Congress for nearly 100 years.  And if you’re of a certain vintage – that is to say you were born after 1960 – the U.S. national debt is your problem.

On the immediate horizon, there’s a fabulous gift that Congress left itself from 2023.  If you recall, last November Washington failed – again – to get a handle on its spending problem.

Rather than make tough decisions, Congress opted to put them off until 2024.  They did this by passing something called a stopgap bill.

The purpose of the stopgap bill was to float enough debt to keep the lights on at every federal building through the holiday break.  That way Senators and Representatives were able to suckle candy canes and exalt their greatness on Christmas Day without any petty distractions.

The stopgap bill included an unusual two-step plan.  The first step extended funding until January 19 for priorities like military, veterans’ affairs, transportation, housing, and energy.  The rest of the government – spending not covered by step one – was funded until February 2.

In just several weeks, if Congress doesn’t come to a budget agreement, there could be another government shutdown.  Federal agency staff would go on furlough, with the promise of retroactive payment after the shutdown ends.

Political Fodder

In reality, permanent agency furloughs are needed to return the federal government to a nimbler state.  One that doesn’t stick its nose in everyone’s business while demanding tribute for its services.

Indeed, there are armies of meddlers with bloated salaries and bloated property values in Georgetown, Dupont Circle, and the surrounding Virginia suburbs.  Shouldn’t they be freed from their agency jobs so they can get on with their lives?

Here at the Economic Prism, we don’t expect this will happen in 2024.  Rather, we anticipate some deal will be reached to reduce deficit spending by $1 trillion over the next decade.

This all makes great newspaper headlines.  But what it really means is that by 2034, instead of piling up an additional $20 trillion in new debt, the U.S. government will only pile up an additional $19 trillion.  As part of this, the politicians in Congress will most certainly give themselves another raise.

In the meantime, the negotiations deliver plenty of political fodder.  For example, on Wednesday Senate Majority Leader Chuck Schumer told reporters he sees new hope for a spending deal to prevent a shutdown.

“We’ve made real good, good progress.  And we’re getting quite close.  I’m hopeful that we can get a budget agreement soon.  And I’m hopeful that we could avoid a shutdown, given the progress — that is certainly not out of the question, as some people have said it would be.”

Maybe so.  But whatever deal is reached won’t be any good.  We can guarantee you the budget agreement will be lacking on one very fundamental item.  It will not be balanced.  It will rely on debt to pay for its many obligations.

Hence, 2024 will further emphasize just how dead broke the U.S. government really is.

Facing Up to the Wreckage from the Past

Remember, about the time the stopgap bill was passed, Moody’s Investor Service lowered its U.S. credit outlook from ‘stable’ to ‘negative.’  Still, Moody’s kept the U.S. at AAA, its highest rating.

This came several months after Fitch downgraded its U.S. credit rating from AAA to AA+.  S&P Global Ratings downgraded U.S. credit all the way back in 2011.  Does Moody’s really believe U.S. credit is ultra-safe?

Without question, the U.S. government’s financial condition has changed dramatically for the worst over the last 50 years.  Yet Moody’s rates its credit as if the nation’s debt profile is still sound and sober.  What gives?

By lowering its U.S. credit outlook in November Moody’s set the stage for an actual downgrade in early-2024.  How swiftly Congress acts to get a new spending resolution in place will likely drive Moody’s decision.  Any delay and Moody’s will proceed with the downgrade.

Regardless, any downgrade would come much too late for anyone to really care about.  It won’t compel Washington to balance the budget.

In fact, the rate of deficit spending is accelerating.  As noted above, the U.S. national debt topped $34 trillion in the last day of 2023.  This comes on the heels of the debt exceeding $33 trillion in September.  So, in less than four months, Washington spent $1 trillion of borrowed money.

Here’s the point…

If you’re someone who works hard and is self-supporting through your own deeds, you will find that you reap less and less of the fruits of your labors with each passing year.  Higher taxes will consume a greater and greater share.  And what remains, will be consumed by the inflation tax as a result of deficit spending.

Facing up to the wreckage from the past is the renewed challenge with the start of each new year.  And, in 2024, the starting slate is as dirty as ever.

[Editor’s note: Today, more than ever, unconventional investing ideas are needed.  Discover how to protect your wealth and financial privacy, using the Financial First Aid Kit.]

Sincerely,

MN Gordon
for Economic Prism

Return from Facing Up to the Wreckage from the Past to Economic Prism

“Sometimes nothin’ can be a real cool hand.”

– Lucas “Luke” Jackson, Cool Hand Luke

Very Good News?

Following the federal open market committee (FOMC) meeting on December 12 and 13, 2023, the Federal Reserve announced it would be holding the federal funds rate within a range of 5.25 to 5.5 percent.  The Fed, by way of its dot plot, also signaled there would be three 25-basis point rate cuts in 2024.

The Fed believes it has conquered the rampant consumer price inflation of its making.  Fed Chair Jerome Powell even took the opportunity at a news conference to toot his own horn:

“Inflation has eased from its highs, and this has come without a significant increase in unemployment.  That’s very good news.”

Wall Street celebrated the prospect of future rate cuts by boosting the S&P 500 by 3.6 percent over the following week.

Interest rate cuts are commonly recognized as being bullish for stocks and stimulative for the economy.  The rationale is that the burst of cheaper credit produces a borrowing and spending binge that drives stock market speculation and gross domestic product (GDP) growth.

Here at the Economic Prism, we have some reservations with this thinking.  Certainly, low interest rates drive speculation and malinvestment.  And asset prices bubble up in strange and unexpected places.

Those who discern where and get in early to the next asset bubbles can do well.  However, for general stock market participants – buyers of S&P 500 index funds – things often get worse before they get better, following the commencement of Fed rate cuts.

By this, we expect there will be a great stock market purge in 2024 and 2025 that will take the major indexes to unimaginable lows.  We also expect this will coincide with the slashing and burning of interest rates.  Here’s why…

Latent Effects

The last time a Fed rate hiking cycle peaked out was at a federal funds rate of 5.25 percent.  This was attained on June 29, 2006.  If you recall, the Fed then paused and held rates at 5.25 percent for roughly 15 months.  Then on September 18, 2007, the Fed cut rates 50 basis points.

A lot happened beneath the surface over these 15 months while the federal funds rate was held at 5.25 percent.  Massive stressors were formed, as this rate was relatively higher than the preceding years.  In June 2003, for example, the federal funds rate touched 1.00 percent, and remained there until June of 2004.

When credit is cheap, opportunities to borrow and spend money are much more manageable.  When interest rates are ultra-low, consumers, businesses, and governments have the cash flow to cover purchases that would otherwise be extravagant.  Bad decisions are subsidized.

But when the federal funds rate is 5.25 percent, and credit markets are tighter, the cash flow comes up short.  Debts go unpaid and slip into arrears.  Defaults occur.

The consequences of relatively higher interest rates are not always immediate.  The latent effects of cheap credit producing bad debt take time to filter their way through the economy.

Sectors that largely rely on financing to move products – such as real estate and automobiles – are generally hit first.  While demand for potted meat, which even with today’s inflation can still be bought with pocket change, remains even.

When the Fed brought the federal funds rate to 5.25 percent in June 2006, and then signaled a pause, there was a sense of relief.  Professional economists thought the worst of it had come and gone.  They believed the stress of higher interest rates had already been realized.

In reality, the experts had been bamboozled by their own bosh.  And, as the magnitude of bad debt became fully apparent, the major stock market indexes crashed in tandem.

Dead Wrong

Between September 2007 and December 2008, Fed Chair Bernanke slashed the federal funds rate from 5.25 percent to a range of 0.00 to 0.25.  Perhaps he thought this would buoy the economy and float stocks higher.

In late November 2008, Bernanke crossed the Rubicon with the commencement of quantitative easing (QE).  In doing so, he corrupted financial markets and the economy without end…and sowed the seeds of today’s financial and economic chaos.

Over this time, as the federal funds rate was being slashed and QE began flooding the financial markets with liquidity, something unexpected happened.  The stock market didn’t go up.  Instead, it went down.

The S&P 500, for example, peaked out at about 1,586 in October 2007 – one month after the onset of Fed rate cuts.  It then slowly slid down to about 1,200 in August 2008.  Over this time, investors thought they were buying the dip.  That the Fed had engineered a soft landing.  They were dead wrong.

By September 2008, the S&P 500 was freefalling like common ravens descending upon fresh roadkill.  Taking it down to a bottom of 666 on March 6, 2009.  This amounted to a top to bottom decline of 58 percent.  It was brutal.  Yet, for those holding cash it offered the buying opportunity of a lifetime.

As we’ve just documented, the Fed stopped hiking rates in June 2006.  The S&P 500 continued to inflate until October 2007.  The Fed then began cutting rates in September 2007.  The stock market didn’t bottom out until March 2009 – 18 months after rate cuts were first initiated.

What’s the point?

How to Outperform the Stock Market in 2024

The stresses that have built in financial markets and the economy as we enter 2024 are certainly different than those that existed in 2008.  The world has dramatically changed over these 15 years.  But if you listen with a trained ear, there are similar rhymes.

Massive amounts of bad debt are out there lying in wait.  A rapid succession of Fed rate cuts will not be enough to engineer a bailout.

The commercial real estate market, for example, is burnt to a crisp.  Similarly, pension funds, having stretched for yield, are holding a bag of assets that are backed by eroding collateral.  At the same time, the S&P 500 is still well overvalued relative to its historical mean.

Moreover, the prospect of Fed rate cuts in 2024 doesn’t mean the stock market will immediately buoy higher on a rising tide of cheaper and cheaper credit.  First it will have to drown in a sea of bad debt.

Assuming the Fed starts cutting rates in March of 2024, the S&P 500 may not bottom out until September of 2025.  Hence, if you want to outperform the stock market in 2024, as measured by the S&P 500, please consider the following recitals:

Whereas history doesn’t repeat.  Whereas history often rhymes.  Whereas it is expected the Fed will begin slashing interest rates in 2024.  Whereas the commencement of Fed rate cuts has coincided with the commencement of bear markets.  Whereas a decline in equity prices is commensurate with a relative increase in the number of shares that can be purchased in dollars.  Whereas to make money in the stock market one should buy low and sell high.

Now, therefore, in consideration of the facts recited above, and pursuant to the laws of financial markets, and despite Fed intervention, to outperform the stock market in 2024 one should simply do one thing and one thing only: hold cash.

This may be uncool.  Holding cash may be considered a portfolio of nothing.  Your broker certainly wouldn’t recommend it.

Nonetheless, cash is a position.  In fact, it’s a position that sometimes outperforms the stock market.  Most recently cash outperformed the stock market in 2022 and in 2018.  We believe cash will outperform the stock market again in 2024.

Remember, holding cash provides you with a valuable option.  Specifically, it represents the stocks you’ll be able to scoop up at an extreme discount at the bottom of the bear market – where you can be greedy when others are fearful.

Incidentally, Berkshire Hathaway, the business run by Warren Buffett, one of the best capital allocators of the last 70 years, closed out Q3 2023 holding a record $157.2 billion pile of cash.

He’s likely saving up for the next ‘blood in the streets’ buying opportunity.  Perhaps you should too.

Happy New Year!

[Editor’s note: Today, more than ever, unconventional investing ideas are needed.  Discover how to protect your wealth and financial privacy, using the Financial First Aid Kit.]

Sincerely,

MN Gordon
for Economic Prism

Return from How to Outperform the Stock Market in 2024 to Economic Prism

American bank depositors sincerely trust the Federal Deposit Insurance Corporation (FDIC).  They are as certain as the sky is blue, that the FDIC will protect the money in their bank accounts.  Thus, they do not withdraw dollars from their accounts in a banking crisis.

This confidence has minimized the outbreak of full-blown bank runs at American banks since the FDIC was established in 1934.  But that doesn’t mean fractional reserve banking isn’t fundamentally flawed.

When you have an interest-bearing savings account at a bank, you’re the bank’s customer.  But you also supply the product.

In fact, the modern banking system is built on the lie that the bank will pay you interest by lending out your deposit, but that you can also get your money back at any time – wink, wink.  The FDIC serves to make this lie true.

The most common reason for a bank failure is that the bank has loaned money to purchasers of longer-term assets, such as real estate, which isn’t paid back for years, yet depositors have the right to withdraw money at any time.  The banks borrow short and lend long.

This works mostly well most of the time.  Say the bank earns 7 percent on a home loan while paying depositors 2 percent.  The bank pockets the spread, the net interest margin.  Easy money.

All banks do it.  Every single one of them.  The ones that fail have merely indulged in long-term lending more than the average bank.  In these instances, the FDIC acts quickly to sweep the mess under the rug.

Community Service

To document the success of the unique community service it provides, the FDIC publishes a running list of every U.S. bank that has failed since October 1, 2000.  At the time of this writing, this FDIC list includes 568 bank failures.

On average, this comes to about 24.7 bank failures per year.  Of course, some years are worse than others.  While other years are better than some.

For example, no banks failed between October 24, 2020, and March 11, 2023 – a stretch of roughly 28 months.  But in 2010, there were 157 bank failures.  Hence, a bank failure occurred every 2.3 days, including weekends and holidays, for the entire year.

By comparison, the number of bank failures in 2023, while a six year high, has been relatively moderate.  With just 11 days remaining in the year, that number stands at five.  These include Silicon Valley Bank, Signature Bank, First Republic Bank, Heartland Tri-State Bank, and Citizens Bank.

There was also the demise of Silvergate Bank.  Though it met its end through voluntary self-liquidation rather than overt failure.  So, it did not make the FDIC’s list.

What’s notable about the FDIC’s list of 2023 bank failures is not so much the number, but the magnitude.

The largest bank failure in U.S. history was Washington Mutual Bank.  It bit the dust on September 25, 2008, with $307 billion in assets on the books.

After that comes First Republic, Silicon Valley Bank, and Signature Bank.  These banks, having had respective assets of $212 billion, $209 billion, and $110 billion, all disappeared from the face of the earth in 2023.

As the year approaches its close it’s important to revisit what precipitated these mega bank failures, how the Federal Reserve responded, and how bankers are now exploiting the response to line their pockets at your expense.

The Era of Digital Bank Runs

To understand what went wrong for these banks in 2023 you must understand what happened in the preceding years.  When federal, state, and local governments shutdown the economy as part of the coronavirus fiasco the Fed answered the call with extreme credit market intervention.

In short, the Fed pressed the federal funds rate to zero and held it there for 2 years (March 2020 to March 2022) while pumping $5 trillion of credit created from thin air into Treasuries and mortgage-backed securities.  This drove yields across the range of maturities to 5,000-year lows.  And by 2022 consumer price inflation was raging at a 40-year high.

To combat the consumer price inflation of its making, the Fed jacked up the federal funds rate starting in March 2022, inverting the yield curve.  Short term yields went higher than long term yields.  And banks, having borrowed short to lend long, had negative carry.

Perhaps it would have all worked out for the banks if depositors stayed put.  But in a world where you can score nearly 5 percent from Treasury Direct – with no brokerage fees – why keep excess deposits in the bank when you only get a fraction of a percent?

This insight simultaneously dawned on customers at Silicon Valley Bank on March 9, 2023.  On that day, SVB customers withdrew more than $1 million per second for 10 hours straight – totaling $42 billion – before the FDIC seized the bank and declared it insolvent.

This, in essence, was an old-fashioned bank run with a twist.  The digital age pushed the bank run into hyperdrive.

Fake Insurance

SVB isn’t the first bank to go bust borrowing short and lending long.  It also isn’t the last.  There already have been several others.  Citizens Bank, on November 3, being the most recent.  Certainly, there will be many, many more.

Quite frankly, we don’t care what banks go bust.  What we’re really interested in is what happens after these banks go bust.

In theory, if you have deposits under $250,000 in a bank that fails you are protected by the FDIC.  But how safe is your money, really?

Several weeks ago the FDIC reported its Deposit Insurance Fund had a balance of $117 billion.  This comes to a reserve ratio of 1.10 percent of the total insured deposits.

By our estimation, insurance reserves of 1.10 percent of potential obligations are not real insurance.  Rather, these reserves are fake insurance that pays for an extremely fragile trust which says, ‘if you don’t pull your deposits, I won’t pull mine.’

In a real panic, FDIC reserves would be vaporized in less than a day.  Still, confidence remains the name of the game.  And when the majority of depositors have balances greater than $250,000, as was the case at SVB and Signature Bank, the FDIC’s fake insurance doesn’t cut it.

In a fiat money system, the supply of credit is without limit.  The question, however, is a question of quality.  As excess credit is issued, repeatedly, to bailout the banking system, the quality of that credit ultimately turns to bird cage liner.  The actual break point, however, is unknown.

After the rash of big bank failures in March, the Fed rolled out something called the Bank Term Funding Program (BTFP) to fill the void of FDIC’s coverage limitations.  What you need to know about the BTFP is that it’s code for socializing losses.

And like any ‘heads I win, tails you lose’ government program for the big banks, it is ripe for exploitation.

How Bankers are Exploiting the Fed’s BTFP at Your Expense

The BTFP offers loans up to one year to banks that pledge U.S. Treasuries and agency debt as collateral valued at par.  The rate for these loans is the one-year overnight index swap rate plus 10 basis points.

To be clear, the BTFP has nothing to do with free market capitalism.  It is an instrument of central planning, instituted by the Fed, to bail out the reckless decisions of its cohorts in the banking sector.

Yet rather than graciously accepting their gift, and the gift of forthcoming rate cuts, bankers are now exploiting the spread between the Fed’s overnight rate and the BTFP rate to line their pockets.

Expectations of a Powell pivot, and the recent decline in Treasury yields, have inadvertently delivered a unique arbitrage opportunity.  Lou Crandall, of Wrightson ICAP, recently detailed the scam in a note to clients:

“At first glance, that 10 basis point markup might appear to qualify as the kind of penalty rate typically associated with ‘lender of last resort’ facilities.  In practice, however, the BTFP pricing formula turns it into a subsidy rate when the yield curve is downward sloping.

“The drop in BTFP borrowing costs means that there’s a larger arbitrage for banks to take advantage of, where institutions borrow from the facility [BTFP] and then park the proceeds in their account at the Fed to earn interest on reserve balances — currently 5.40 percent.  That spread is currently 44 basis points after jumping to 51 basis points on Dec. 14.”

This rate-arbitrage subsidy for banks, made possible by playing Fed policy and Fed programs off of each other, is free money for bankers.

The deadline for new BTFP loans expires on March 11, 2024.  But, alas, like the advent of quantitative easing in 2008, these programs – and the moral hazards they provoke – never go away.

The Fed’s future playbook has been revealed.  When the next liquidity crisis arrives in 2024, perhaps from the impending commercial real estate apocalypse, the Fed will be poised to deliver its next iteration of the BTFP.

And, once again, bankers will line their pockets at your expense.

Merry Christmas!

[Editor’s note: Today, more than ever, unconventional investing ideas are needed.  Discover how to protect your wealth and financial privacy, using the Financial First Aid Kit.]

Sincerely,

MN Gordon
for Economic Prism

Return from How Bankers are Exploiting the Fed’s BTFP at Your Expense to Economic Prism

“I go with the word ‘serious.’  A serious budget problem.  I would stop short of calling it a crisis.”

– Legislative Analyst Gabriel Petek, on California’s $68 billion deficit

What Was It Like?

California, without question, is a great state to be from.  We lived there for nearly 45 years.  We made our California exodus in July 2022.  No regrets.

In fact, not living in California becomes a greater blessing with each passing day.  Moreover, depending on the time lived there, and the decades encompassed, plenty of insight can be found in the answers to three simple questions.

What was it like?  What happened?  What is it like now?

The answer to the first question comes with warm reminiscence.  A fond nostalgia for a California that long ago faded from existence.

In the early 20th century, before the mania to splatter every square foot of the LA Basin’s surface with concrete took hold of the local spirits, the place was a magnet for eccentrics and madmen.  On any average day, Howard Hughes, a total lunatic, would crash test his latest flying machine into Beverly Hills.

Italian immigrant Simon Rodia, however, was the real archetypical California oddball.  For reasons unknown, and between swigs of malt liquor, he worked nearly every day from 1921 to 1955 chicken wiring steel pipes and rods together, erecting numerous towering eyesores in his backyard in the Watts district of Los Angeles.

Then, after 34 years of this madness, Rodia, on a whim, deeded the property to his neighbor and hopped a bus to the East Bay.  No one in Watts ever heard from him again.  But his monstrosities, known as the Watts Towers, are now a National Historic Landmark.  Go figure?

There was also Griffith J. Griffith, who amassed a fortune in the mining industry.  That was before he shot his wife in the eye while staying in the presidential suite of Santa Monica’s Arcadia Hotel.

To make good for his transgressions – and to commute his time in San Quentin to just two years – Griffith donated the land for Griffith Park to Los Angeles and funded the City’s observatory.  Without Griffith’s private act of preservation, the city wouldn’t have any remaining land that’s not covered with concrete.

What Happened?

These were the sorts of wacky and wild characters that roamed about when state and local governments were small and feeble.  When crime was low, and optimism was high.  And the only direction the economy could go was up.

This was back when the infrastructure shined.  And Hollywood made descent movies.  It was also the beginning of a long property boom…where, for the next 50-years, property values went up without interruption.

Even the most harebrained business ventures were almost guaranteed to succeed.  For example, you could buy an old mail service boat – like John Clearman did – tow it from the Long Beach Harbor up to a wide open corner lot on Huntington Drive in the San Gabriel Valley, plop it down, and get rich selling cheese toast and red cabbage salad out of it.

This was before zoning codes, land use master plans, and city permits spoiled all the fun.  Was the world a better place?  It was certainly freer.

Private eccentricity in California these days has been regulated away like the free-flowing carburetor.  In its place, there’s now state-sponsored Transgender History Month – the nation’s first of its kind – and countless other acts of public madness.  The cutting edge of public policy, guided by academic retards, slices through the land.

Over several decades, state and local governments were taken over by control freak sociopaths.  Moreover, their socialist policies transformed many of the urban areas into unlivable hellholes.

Shelling out for all the waste championed in Sacramento and various City Halls made it impossible for the average guy, who just wanted to work hard and pay his way, to get ahead.

What Is It Like Now?

Today, California persists as a place of sky-high taxes, crumbling infrastructure, woke idiocy, and mass homeless encampments.  Where grifters and freeloaders hold hands in symbiotic disharmony.  Together, they exercise the malady of a mega homeless industrial complex in return for government lard.

In the City of Los Angeles, over 46,000 homeless people thrash about on the concrete each night, setting fires and burning down bridges.  If you broaden the envelope to include Los Angeles County, that number jumps to over 75,000.

Despite hundreds of millions of dollars being spent to fight homelessness these numbers keep going up.  This doesn’t make sense until you understand how it all works.

The primary objective of the homeless industrial complex has nothing to do with getting people off the streets.  Rather, dollars alone equal victory.  And more money is the ultimate aim.

Unfortunately for taxpayers, more money isn’t limited to securing private funds.  It involves appropriating public funds and directing them towards the technocratic vision of forced philanthropy.

According to a 2022 city audit, in the City of Los Angeles it costs $837,000 to build a single housing unit for one homeless person.  In another instance, because of self-imposed regulatory knots, it took 17 years to build 49 affordable housing units in Boyle Heights.

Yet, this madness extends statewide.  In San Jose, for example, it costs $938,700 to build a single unit of affordable housing.  Certainly, there’s plenty of grift built into California’s homeless industrial complex.  Did you get your cut?

California Circles the Toilet Bowl

Alas, countless other examples of government insanity extend up and down the entire state.  Take the California Teachers Association.  Rather than teaching reading, writing, and arithmetic, the massive state teachers union hides student gender identities from parents as a matter of legal policy.

There’s also Ebony Alert – a faux-liberal twist on Amber Alert.  And for reasons unclear, there are state-mandated gender-neutral toy aisles, which include escalating fines for noncompliance.

So, now, with all these displays of public madness, California is circling the toilet bowl.

Quite frankly, the golden state has run out of money to finance all the bloat, grift, incompetence, and stoopid diktats.  This was the conclusion that was recently provided by the Legislative Analyst’s Office.  From the Executive Summary of California’s 2024-25 Fiscal Outlook:

“California Faces a $68 Billion Deficit.  Largely as a result of a severe revenue decline in 2022?23, the state faces a serious budget deficit.  Specifically, under the state’s current law and policy, we estimate the Legislature will need to solve a budget problem of $68 billion in the upcoming budget process.”

If you didn’t know, in California the top 1 percent of taxpayers pay 50 percent of state income tax.  The top 0.1 percent pays a third.  Politicians exploit this progressive tax system by making outrageous promises to the non-taxpaying masses.

As CalMatters notes, Governor Newsom will likely close the record deficit by dipping into $24 billion of emergency funds and by commandeering $10 billion previously allocated for transportation, environmental and education programs.

By our rough calculation that cuts the $68 billion deficit in half.  Where will the other $34 billion come from?  Will the top 1 percent pay it?

Come January 1, the top income tax rate spikes to 14.4 percent, up from 13.3 percent.  Moreover, workers making over $61,214 will pay 10.4 percent of their income to the state, which is up from the current 9.3 percent.

This is in addition to federal income tax, social security tax, medicare tax, sales tax, property tax, and numerous other licensing fees and exactions.  There’s also the inflation tax.  This is why in many parts of California a pre-tax income of $61,214 won’t get you very far.

Indeed, California’s a great state to be from.  Thus as California circles the toilet bowl the state exodus goes on.

[Editor’s note: Today, more than ever, unconventional investing ideas are needed.  Discover how to protect your wealth and financial privacy, using the Financial First Aid Kit.]

Sincerely,

MN Gordon
for Economic Prism

Return from California Circles the Toilet Bowl to Economic Prism

Government intervention into a nation’s economy is both foolish and destructive.  But that doesn’t mean governments don’t meddle each and every day with the best – and worst – of intentions.

Taxes.  Transfer payments.  Subsidies.  Tariffs.  Deficit spending.  Defense.  Social programs.  Vax mandates.  Emission targets.  You name it.  The opportunities to intervene are vaster than the Pacific Ocean.

The United States government, like most governments in the 21st century, pursues them with relentless enthusiasm.  But that’s not all.  Many state and local governments also have a highly visible hand in the mix.

Over the years, layers and layers of interference by various federal, state, and local agencies have built up like grime on a kitchen window.  The grease shines and smells of corruption and waste.  The layers of government grime also ooze into every crack and crevice of the economy.

These days, for example, it’s impossible to carry out a simple private transaction with your barber or barista without some form of government interference.  Has your barber obtained the required license and paid the obligatory fees to legally taper your neckline?  Has your barista’s espresso bean grinder passed the state or county health inspection?

Is the hot cup of joe served in a paper cup of appropriate recycled material composition?  Did the hot beverage exceed the legally accepted temperature standard?  Did state and local governments receive their tax exaction upon payment?

When it comes to more complicated matters, where greater opportunities for grift are available, government interference has pushed costs to an extreme.  Did you know that it costs over 5 times more to have cardiac bypass surgery in the United States than in Mexico?  Is the procedure really 5 times better in Los Estados Unidos?

Bucks without Bang

Certainly, we’re not telling you something you don’t already know.  Governments have been regulating and impressing their fingerprints all over commerce since civilization first granted its leaders the authority.

People are so accustomed to it that they accept government intervention as necessary to better living.  There’s a wide belief that without all the erected guard rails in place the entire economy would suddenly crash into a ditch and explode.

When it comes to price fixing, wage controls, and dictating resource production, things get exceptionally messy.  This is because prices, wages, and resources have their own independent relationships beyond what can be legislated.

When the price of a certain good or commodity is artificially fixed below its free market cost, scarcity and shortages follow.  In other words, when the price of a loaf of bread is decreed below the cost of the wheat that goes into it, bakers go fishing.

There’s also intervention through fiscal stimulus. In fact, fiscal stimulus via infrastructure and defense spending is something both Democrats and Republicans can agree on.  It’s only how the money is spent that is questioned, not that it should be spent in the first place.

Democrats want green subsidies and commuter rail.  Republicans want interstate oil and gas pipelines and highways.  They both want more weapons.

In the 2023 fiscal year, the U.S. government spent $821 billion on national defense.  This, without question, factored into the $1.7 trillion deficit.  Did Washington get much bang for its buck?

In terms of a productivity bang, the promises of fiscal spending are a giant dud.  Deficit based fiscal spending succeeds in accelerating malinvestment.  This is ultimately a program of capital destruction.  Money poured down the rathole.

Blundering Along

Perhaps our focus is too narrow.  Maybe some economic interventions are better than others.  As opposed to direct transfer payments, like stimmy checks, doesn’t infrastructure and defense spending at least produce something of some value?

Having tanks and bridges to show for the spending makes it worthwhile, doesn’t it?

In many instances, the only things fiscal spending produces are big fat boondoggles.  The late economist and author Murray N. Rothbard explains:

“Deprived of a free price system and profit and-loss criteria, the government can only blunder along, blindly “investing” without being able to invest properly in the right fields, the right products, or the right places.  A beautiful subway will be built, but no wheels will be available for the trains; a giant dam, but no copper for transmission lines, etc.  These sudden surpluses and shortages, so characteristic of government planning, are the result of massive malinvestment by the government.”

Even a blind squirrel finds an acorn now and again.  But by and large, without the clear guidance that only free market prices can provide, capital is deployed using guesswork and ego.  The best central planners are rewarded with train stations or airports in their name.

Any perceived economic growth from government directed fiscal stimulus flames out like a cardboard matchstick.  More and more debt and deficit-based spending is needed to keep the illusion of prosperity alive.

Save the political class and the connected elites, the average man or woman sees little benefit.  Any jobs that are created are a distraction from more useful pursuits.  What growth the deficit spending provokes, the corresponding inflation cancels out.  The debt, on the other hand, remains.

The Hollow Returns of Government Intervention

At best, spending more than one makes, like smoking or swearing, is a bad habit.  But when governments spend more than they tax with no intention to pay it back they’re stealing from the future.

What’s more, running up untenable levels of government debt with the implied intent of inflating it away at the expense of the citizenry is downright evil.  Not only does it rob people of their money.  It robs them of the time they spent to earn it.  By design, it robs people of their life.

According to the U.S. government’s own inflation calculator, the dollar has lost 88 percent of its value since Neil Armstrong first stepped foot on the moon.  In other words, it takes $1 today to buy what you could get with $0.12 in 1969.  No doubt, incomes have failed to keep pace with inflation.  And this has many unpleasant consequences.

Through policies of mass money debasement, not only has the government successfully debased the dollar.  It has also successfully debased the middle class.  You can witness its disappearance and disfigured replacement in the crumbling concrete and broken glass of cities and towns across the nation.

The soaring graffiti index is one important measurement of a declining middle class.  The vast expanse of urban blight is another.  Burgeoning suicide rates.  A brutal epidemic of licit and illicit drug overdoses.

Of course, these are just several data points – among many – signifying the great middle-class debasement into an uglier, more barbaric, world.  These also demonstrate the hollow returns of decades upon decades of extreme intervention, with a $33.9 trillion national debt to boot.

Government issued economic intervention – including fiscal stimulus – isn’t the solution.  It’s the problem.  And, alas, there’s much, much more of it on the way…courtesy of your representatives in Washington.

[Editor’s note: Today, more than ever, unconventional investing ideas are needed.  Discover how to protect your wealth and financial privacy, using the Financial First Aid Kit.]

Sincerely,

MN Gordon
for Economic Prism

Return from The Hollow Returns of Government Intervention to Economic Prism

Did you know that the U.S. government has run a budget deficit in the month of October 70 times out of the past 70 fiscal years?

This notable fact was listed under the “Highlight” section of the Monthly Treasury Statement for receipts and outlays through October 31, 2023.  This month also happens to be the first month of the 2024 fiscal year.

Consistency is a virtue in many facets of life.  It is representative of reliability and integrity.  Dependable employees show up to work on time, rain or shine.  Reliable tenants always pay their rent on the first of the month, without fail.

Consistency can also be a serious defect.  For example, Richard Ramirez – the Night Stalker – was a consistent serial killer.  His reliability was deadly.

In this regard, running deficits in October 70 times out of 70 years is representative of extreme government failure.  That this ugly defect was listed as a highlight in the Treasury Statement is commendable.

For the month of October 2023, the government raked in $403 billion.  Over half of this was from individual income taxes ($220 billion).  Social Security taxes, which are also withheld from incomes, amounted to $114 billion.  Corporate income taxes came in at $48 billion.  Excise taxes, custom duties, estate and gift taxes, and miscellaneous, rounded out the haul.

Total receipts of $403 billion over a 31-day month is a significant sum.  Most governments would be overwhelmed by such plenty and abundance.  But in the USA, with both welfare and warfare running at full tilt, too much is never enough.

Social Security Shortfall

Regrettably, $403 billion was not nearly enough.  On the debits side of the ledger, outlays in October came in at $470 billion.

The difference between outlays and receipts resulted in a monthly deficit of $67 billion.  Once again, the U.S. government succeeded in achieving a 70-year tradition of spending more than it takes in October.

The difference, of course, was made up with debt.  Moreover, via rack and stack, the $67 billion deficit racked up in October was stacked on top of the $33.8 trillion national debt.

Yet it could have been much, much worse.  For the U.S. government, a monthly deficit of $67 billion is small potatoes.  For the 2023 fiscal year, the total budget deficit was $1.7 trillion.  That comes to a monthly average deficit of nearly $142 billion.

So, did Washington somehow turn over a new leaf of relative fiscal prudence to start off the new fiscal year?

Not according to Maya MacGuineas, president of the Committee for a Responsible Federal Budget, who offered the following insight:

“We’re a month into the fiscal year and we’ve already borrowed $67 billion.  This is despite an infusion of revenue from delayed tax collection from California and other areas of the country that had tax payments pushed due to natural disasters.  Our debt is rising out of control, and with interest rates this high it is only getting worse.”

What’s more, even with the infusion of revenue from California, the October deficit was troubling.  Social Security, for example, paid out more than it took in.  Receipts totaled $114 billion.  Outlays totaled $117 billion.

Is this monthly deficit for Social Security an anomaly?  Or is a structural breakdown occurring?

Socialized Insecurity

If you recall, the 2023 cost of living adjustment (COLA) was a 40 year high of 8.7 percent.  The record COLA was needed to keep retiree’s level.

With consumer price inflation at a 40 year high because of mega issuances of confetti money in 2020-22, retirees were getting pinched.  The record COLA didn’t make anyone wealthier.  The extra money that has shown up in Social Security checks is more than consumed by higher prices.

Of course, the 8.7 percent COLA has to be accounted for.  By this, it triggered a $134 billion increase in Social Security checks.  In addition, the COLA for 2024 is another 3.2 percent.

To cover the gap, in 2024, the taxable maximum earnings subject to Social Security tax is being jacked up from $160,200 to $168,600.  Perhaps this will keep Social Security in the black for another year or two.

Tactics like increasing the taxable maximum to capitalize on wage inflation don’t solve the program’s structural problems.  Rather, they’re just temporary tricks so the government can continue to rob Peter to pay Paul.

At some point over the next decade, serious reform will be needed.  The terms and conditions of the social contract will have to be modified.

Retirement age will have to be pushed back to 70 or higher.  COLAs will have to be significantly moderated when compared to the rate of consumer price inflation.  Social Security taxes will have to rise further.

Workers will have to pay more.  Retirees will have to get less.  In short, both workers and retirees will get the shaft.

Ultimately, this is how all government entitlement programs go that are based on Ponzi finance.  Big promises are made when an economy is young and growing, and when the age demographic is represented by an equilateral pyramid.

Has Social Security Run Out of Suckers?

Over many decades Social Security recipients have been able to get out far more than they put it.  Ida May Fuller, for example, was the first recipient of a Social Security check, drawing her first check on January 31, 1940.  Here, at an official website of the United States government, the Social Security Administration elaborates on the advantages of being first into a new Ponzi scheme:

“Ida May Fuller worked for three years under the Social Security program.  The accumulated taxes on her salary during those three years was a total of $24.75.  Her initial monthly check was $22.54.  During her lifetime she collected a total of $22,888.92 in Social Security benefits.”

Good for Ms. Fuller, and her 92,380 percent return on investment!  And good for the millions of other Americans who reaped the accidental benefits of being born at a certain time and place.  They lived a magical life.

Alas, all Ponzi schemes – even coercive ones like Social Security – are doomed to fail.  Over time, as the demographic ages and the pyramid becomes top heavy, more has to be paid out than can be taken in.

To keep the ruse going, more young suckers are needed.  Rapid immigration may help for several decades.  But this also compounds the problem and adds new problems.  At this point, there’s no easy way out.

The best way to avoid the disasters of government sponsored Ponzi schemes is to never commence them in the first place.  This was all predictable from the get-go.

In an article titled, “The Social Security ‘Reserve’ Swindle,” published in 1939 in Harper’s Magazine, before the first Social Security check was cut, journalist John T. Flynn predicted the program would be underwater by 1970 and insolvent by 1980.

Flynn was generally right.  Reforms by The Greenspan Commission in the early 1980s successfully kicked the can of Social Security’s financing crisis down the road for several more decades.  But it didn’t solve the problem.

Insolvency, as predicted by Flynn, is Social Security’s fate.  There’s no way around it; this will come to a head before the decade concludes.

As Flynn discovered, no good deed goes unpunished.  In return for warning of Social Security’s demise, and for opposing the massive growth of the state in the 1930s and 1940s, he was cancelled.

[Editor’s note: Today, more than ever, unconventional investing ideas are needed.  Discover how to protect your wealth and financial privacy, using the Financial First Aid Kit.]

Sincerely,

MN Gordon
for Economic Prism

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Wish that I was on ol’ Rocky Top
Down in the Tennessee hills
Ain’t no smoggy smoke on Rocky Top
Ain’t no telephone bills

Once I had a girl on Rocky Top
Half bear, other half cat
Wild as a mink, but sweet as soda pop
I still dream about that

– Rocky Top, As performed by the Osborne Brothers

Rise and Fall

This is a story that dates back over a billion years.  To the Proterozoic Era.  If you can stretch your mind to consider how long ago that was you can understand how sedimentary rock is formed and how it bonds you over eons to the natural world.

Over hundreds of millions of years, clay, silt, sand, and gravel, with some calcium carbonate, collected in deposits on the ocean bottom along the ancient margin of the North American continent.  Over time, these sediments cemented together and formed into layers of sedimentary rock over nine miles thick.

As the African tectonic plate pushed against the edge of the North American plate, the original horizontal layers of rocks were bent and folded upward.  This cycle of force created the Appalachian Mountain chain from Newfound-land, Canada, to Alabama.

Huge masses of older, deeply buried rocks were pushed northwest, and up and over younger rocks along a large, nearly flat-lying thrust fault, known as the Great Smoky Fault.  Fossils of small shells of crustaceans that lived in the waters of the ancient continental shelf over 450 million years ago can still be found in limestone rocks in Cades Cove, in the Smoky Mountains.

The Appalachian Mountains are speculated to have once had peaks as high as those in the modern zone of continental collision.  This includes the Himalayas, whose highest peak, Mount Everest, is over 29,000 feet above sea-level.

Though nothing lasts forever.  With every rise comes an inevitable fall.  Today these mountains are a shadow of their former self, with the highest peak just over 6,680 feet.  Geologists estimate the mountains are being eroded about two inches every thousand years.

What remains, if you’ve never been there, is absolutely majestic.

Overmountain Men

The Southern Appalachian region is better defined by the ancient mountain landscape than the lines on a map of political jurisdictions.  Though, for general orientation we’ll refer to the U.S. Forest Service, which defines Southern Appalachia as including West Virginia, southwestern Virginia, eastern Kentucky, East Tennessee, western North and South Carolina, northern Georgia, and northeastern Alabama.

The early old-world settlers to Appalachia, as colonial America made its initial push into the western frontier in the 18th century, were Scots-Irish.  These people, with origins from Lowland Scotland, were two-time rejects.

First, they were used as pawns by King James I of England in the early 1600s to displace the Irish population in Ulster.  Several generations later, fleeing a British rule that had placed severe restrictions on their Presbyterian faith, they sailed to America.

By the 1770s, it is estimated that over 250,000 Scots-Irish lived in the American colonies.  Many made their way to the hills and modest mountains of Southern Appalachia.  They brought their fiddle music and dance, and know-how for distilling whiskey.  Mark Sohn, in his book, “Appalachian Home Cooking: History, Culture, and Recipes,” wrote:

“For the Scots-Irish, whiskey-making was linked to freedom.  They came to Appalachia in search of freedom, and they brought not only their whiskey-making knowledge but also their worms and stills.”

Moreover, this freedom was something they were willing to fight for.  On October 7, 1780, the Overmountain Men, who’d hiked over 330 miles from Sycamore Shoals, near what is today, Johnson City, Tennessee, routed British loyalists at the Battle of Kings Mountain in South Carolina.

To the British, the rag-tag militia were “more savage than the Indians.”

Camp Hillbilly

Life in rural Appalachia continued as it had in the 18th century well into the 20th century.  Large bands of the area were left behind by the economic development and growth many other parts of America experienced.

That’s not to say there was no industry at all.  There were coal mining and commercial logging booms and busts that altered the mountain landscape and character of the region.  However, the wealth these abundant natural resources provided did not bring widespread prosperity to the region.

Towns and hollers were fragmented by the hills.  Communities were isolated.  The extension of modern roads and infrastructure was sporadic.

By 1960, the coal industry was losing jobs.  Other economic opportunities were limited.  Writing in the Washington Post at the time, Julius Duscha observed that the lack of infrastructure had “left the mountain areas in the backwash of modern civilization.”

Descendants of America’s early pioneers, with a history of fierce independence, were derided as hillbillies.  Backwards.  Uneducated.  Violent.  Inbred.

Perhaps there’s some truth to these stereotypes.  Perhaps they use too broad a brush to paint an entire region.

But with misconceptions come rewards.  Over time, like the uplifting of sedimentary rock, being backwards becomes being forwards.  So, too, being forwards becomes being backwards.

For example, many of America’s big coastal cities have destroyed themselves over the last 30 or more years.  Applying the cutting edge in social engineering and social justice, they’ve managed to tie themselves in knots with out-of-control regulations, encumbrances, and absolute idiocy.

By striving to be forward, cities like Los Angeles, San Francisco, Seatle, Philadelphia, D.C., and others, have produced extreme wealth stratification, a flagging middle class, high crime, and an easily triggered rage culture.  These big cities have become the backwaters.

Camp Hillbilly, by comparison, is now a much more civilized, sane, and pleasant place to be.

Just Another American Story

These days, like most places in America, the early defining culture of Southern Appalachia has diminished.  Things change.  Cycles turn over.

The largest percentage of Scots-Irish ancestry of any state is North Carolina, where 2.9 percent of the population claim the heritage.  South Carolina and Tennessee follow at 2.4 percent.

Or course, everyone has their own American story to tell.

Your lowly editor, for instance, was born and raised in San Diego with lineage extending to central Kansas, and possibly back to Presbyterian Scotland.  His fetching wife was born in Mexico City and raised in Los Angeles (eastside), with lineage extending back to Pre-Columbian Aztecs.

Our kids were born in Long Beach and transplanted at middle-school and high school age to the East Tennessee hills of Southern Appalachia.  To Scruffy City, USA.

This, however, is merely geography.  It is what’s in the places from where the stories come which really matters the most.

America, remember, as envisioned by the founding fathers, is more of an idea than it is a place.  And, alas, the liberty that Americans had enjoyed largely disappeared from the North American continent over 100-years ago.

Though in some isolated pockets, in the supposed backwaters, some remnants persist.  At least in attitude and a defining historical cultural imprint, if not always in practice.

Thanksgiving, being a uniquely American holiday, offers a respite of cup and contemplation, and served as the motivation for the words herein.

“How many things there are that I do not want,” remarked Socrates, circa 425 B.C.

Here at the Economic Prism, we’re certainly thankful for the many blessings our Creator has provided.  But more so, it is the things He has taken away that we’re truly grateful for.

[Editor’s note: Today, more than ever, unconventional investing ideas are needed.  Discover how to protect your wealth and financial privacy, using the Financial First Aid Kit.]

Sincerely,

MN Gordon
for Economic Prism

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