We’ve probably used our share of clichés in these posts, but we don’t think we’ve ever resorted to “perfect storm.” (If we have, we beg forgiveness!)
But sometimes it takes a cliché. How better to describe the convergence of critical factors that together create a transcendent calamity, a disaster that is greater than the sum of its parts? So if today we mean such an event, we’ll cop-out and just say “P.S.”
Because the P.S. book and the 2000 motion picture with George Clooney and Mark Wahlberg describe the real-life conditions of a 1991 tragedy driven by two powerful weather fronts and a hurricane, we will similarly limit our description of the coming economic P.S. to the confluence of three factors.
First, the US government deficit is spiking. The Congressional Budget Office points out that for the first two months (October and November) of Fiscal Year 2020, the deficit is already $342 billion. Annualize that and we would be looking at an unthinkable $2 trillion deficit of the year. In any case, for the first two months of the new fiscal year, the deficit is up 12 percent over the same period last year.
Here’s the thing to remember: Federal spending has risen twice as fast as revenue.
The second factor is closely related to the first. We are not going to grow our way out of our deficit spending. As we have pointed out several times, additional debt is not resulting in sufficient growth or productivity. We call this the Doom Loop: how much growth do you get for each additional dollar of borrowing? “It is one thing,” we wrote, “if incremental indebtedness is producing more wealth. But it is very serious indeed when debt is outpacing productivity. And that is what is happening in the US today.”
The point: A dollar of new debt is not producing a dollar of additional GDP.
Thirdly, the Fed has already embarked on a massive new money-printing program. It has been pouring liquidity into the repo markets (the overnight and short-term borrowing market among financial institutions, banks, and hedge funds) since mid-September when overnight rates surged to 10 percent. This dramatic policy response is an attempt to stamp out interest rate flare-ups. Earlier this week we reported that on one day alone the Fed added close to $100 billion in new liquidity to the financial markets. The Fed is desperate to extinguish any signs of higher rates breaking out since normalization of interest rates means a bond market collapse and a breakdown of the stock market. At the same time servicing US government debt in a higher interest rate environment will become impossible without unprecedented, full-tilt money printing and debt monetization. But the markets are filled with well-grounded speculation that more bank-liquidity interest rate flare-ups are headed our way. Very soon, according to those that watch such things carefully. And those interest rate flare-ups can only be met by aggressive money printing, a stepped-up QE.
Here’s the takeaway: The Fed has stomped on the money-printing gas, but it looks like it will have to push it even harder.
To recap: Debt growing faster than revenue. New debt failing to result in sufficient growth justify the debt. And because the debt is not matched by revenue or economic growth, it is being sustained by massive money-printing.
We won’t say it, but this has the makings of a P.S.
Gold is the only financial or monetary asset that is not someone else’s liability. That makes a big difference in when you are seeking shelter from the storm.