Federal Reserve – Dennis Tubbergen

Inflation and Debt Realities

Ever since the updated “New Retirement Rules” book was published in 2016, I have been warning that debt excesses would lead to a severe deflationary environment.

While such an economic climate has not yet fully emerged, there are signs that we are entering such a period. Stocks have fallen 20% from their peak, real estate markets are running out of steam, and the Federal Reserve is raising interest rates to attempt to tame inflation. Ironically, Federal Reserve easy money policies have led to the inflation we have been experiencing, and now the Fed is attempting to solve a problem that it had a big role in creating.

Meanwhile, as Americans are trying to deal with the inflationary environment, credit card debt has been rising – now topping $1 trillion for the first time in history. This¹ from “ABC News”:

U.S. consumers’ total credit card debt exceeded $1 trillion for the first time, according to a new study by the personal finance website WalletHub.

Consumers took on an additional $92.2 billion in debt last year, the highest single-year amount since 2007. The average U.S. household owes $8,600 on credit cards, WalletHub found.

The accumulation of debt reflected Americans’ confidence in the economy, according to Jill Gonzalez, a senior analyst at WalletHub.

“We haven’t seen anything like this,” she told ABC News. “Consumer confidence is at its highest point. Since the recession, people have been saving up for houses, cars … new furniture and appliances, which often get charged on credit cards.”

I find it interesting that Ms. Gonzalez interprets such high credit card debt as somehow being good for the economy.

In my view, Ms. Gonzales’ rationale for such a conclusion is completely nonsensical. If consumers have indeed been “saving up” for major purchases like cars, furniture, and appliances, it seems that credit card debt would not be higher; instead, it would be lower.

If I were saving up for a major purchase and elected to put the purchase on a credit card, I would be paying off the credit card balance on the due date to avoid interest charges.

This is NOT what is happening.

Instead, consumers are carrying balances on their credit cards.

And a quick review of the retail sales numbers confirms that this record-high level of credit card debt is not due to retail purchases. This² from “Market Watch”:
The numbers: Sales at retailers fell 0.4% in February and declined for the third time in four months, pointing to a slowdown in consumer spending as higher interest rates take a bite out of the U.S. economic growth.

Retail sales are a big part of consumer spending and offer clues about the strength of the economy. Sales had been forecast to fall 0.4%, based on a Wall Street Journal poll of economists.

Setting aside car dealers and gas stations, U.S. retail sales were still fairly tepid. Receipts fell at department stores, home centers and outlets that sell home furnishings, clothing and sporting goods.

Seems that these numbers invalidate the opinion of Ms. Gonzales.

It seems more likely that the reason credit card balances topped $1 trillion is that consumers are feeling the pinch of inflation and dealing with it by taking on debt.

Of course, this will only exacerbate the debt problem and make the eventual deflationary environment worse.

Another headwind for the economy and the government is the ever-increasing cost of servicing the US Government’s debt.

This⁴ from “Global Macro Monitor”:

Interest payments on the national debt during the current fiscal year (October to February) are up 29 percent y/y, one of the fastest-growing expenditure components of the Federal budget (see table).

Revenues are down, especially individual income taxes, which may reflect the slowing economy. Theory dictates (ceteris paribus) that government tax revenues should be rising with inflation, however. Hmmm.

The fact income tax receipts are lower but self-employment tax revenues (1099 employees) are higher, coupled with what is happening with the employment data, can we hypothesize that high income earners are leaving the workforce (or getting fired) and starting their own businesses, such as consultants, for example? Or could it be just a timing issue?

The overall deficit is exploding, btw, up 50 percent.

If the current situation normalizes and Treasury securities lose their flight-to-quality bid, interest rates are going to spike faster than one of Elon’s rockets.

Interest costs to service the debt are higher, and tax revenues are lower (can you say recession?).

Worse yet, can you say financial crisis ahead? Whether it is around the corner or a few years off, the current spending trajectory is not sustainable.

As the economy slows, expect tax revenues to decline and deficits to widen even further.

The overriding theme of the current world economy is excessive debt. Debt excesses exist in the private sector and on the balance sheet of nearly every world government.

Applying a little common sense (which has almost gone the way of the dinosaur) to the current worldwide debt situation has one concluding that there is no way for the debt to be paid.

The only question is how long it will be before the full reset arrives.

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The Problem with Fractional Reserve Banking and an Interesting Irony

Last week, I discussed the failure of Silicon Valley Bank and the harsh realities of the fractional reserve banking system.

Since I wrote that piece last week, there have been more bank failures and bank rescue packages.

Signature Bank followed Silicon Valley Bank. Credit Suisse was propped up with a $54 billion loan from the central bank of Switzerland. First Republic Bank is being bailed out by bigger banks.

As I have been stating here for a VERY long time, when there is too much debt to be paid, it won’t be paid. And, since banks have debt as assets, when debt goes unpaid, banks fail.

In the case of Signature Bank, there is an interesting ancillary story.

First, the facts around the Signature Bank failure. While I am no longer a fan of the editorial content of “Forbes”, the magazine did report on the Signature Bank failure (Source: https://www.forbes.com/sites/brianbushard/2023/03/13/what-happened-to-signature-bank-the-latest-bank-failure-marks-third-largest-in-history/?sh=b4456b890ff6):

Signature Bank, a New York-based regional bank that became a leader in cryptocurrency lending, shuttered suddenly on Sunday, marking the third-biggest bank failure in U.S. history just two days after the country’s second biggest failure, Silicon Valley Bank, rocked the stock market and reignited fears of “challenging and turbulent” economic times.

New York’s Department of Financial Services announced Sunday it had taken possession of the bank, which had more than $110 billion in assets and more than $88 billion in deposits as of the end of last year.

Signature Bank became the third regional bank to collapse in a matter of weeks, following the high-profile collapse of California-based crypto-friendly banks Silvergate Bank and Silicon Valley Bank, whose failure spooked investors wary of widespread financial vulnerability.

Interestingly, one of the Signature Bank board members is former US Congressman and co-sponsor of the Dodd-Frank Act, Mr. Barney Frank.

If you’re not familiar with the Dodd-Frank Act, it was passed in 2010 in response to the banking failures at the time of the Great Financial Crisis. Dodd-Frank (among other things) created the Financial Stability Oversight Council. According to the Dodd-Frank Act, the FSOC has three primary purposes (Source: https://www.investopedia.com/terms/f/financial-stability-oversight-council.asp):

“To identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace.
To promote market discipline by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the U.S. government will shield them from losses in the event of failure.
To respond to emerging threats to the stability of the U.S. financial system.”

I find number 2 above especially interesting. Reading it, one would logically conclude that bailouts would be a thing of the past. But, as we all know, bailouts are once again being used to make depositors, even uninsured depositors, whole. This from “CBS News” (Source: https://www.cbsnews.com/news/silicon-valley-bank-signature-bank-collapse-joe-biden-cbs-news-explains/)

The startling collapse of Silicon Valley Bank and Signature Bank continued to ripple across the American economy even as the U.S. raced to stabilize the banking system.

In a bid to contain the risk of contagion, financial regulators announced Sunday that they will guarantee all deposits at the banks, while President Biden said Monday that “Americans can have confidence that the banking system is safe.”

In the case of the Signature Bank failure, there is an interesting, ironic side story. Seems that the co-sponsor of the Dodd-Frank Act, former congressman Barney Frank, is on the Board of Directors of Signature Bank. This from “The Wall Street Journal” (Source: https://www.wsj.com/articles/barney-frank-signature-bank-failure-silicon-valley-bank-dodd-frank-congress-elizabeth-warren-d1588178?mod=djemalertNEWS):

Life is full of irony, but it’s hard to think of a richer one than Barney Frank sitting on the board of the failed Signature Bank. The former Congressman who was the scourge of Wall Street, the co-author of the Dodd-Frank Act that was supposed to keep the banking system safe, wasn’t able to prevent his bank from becoming one of the first casualties of the latest bank panic.

It’s amusing to think of Mr. Frank cashing a check as a bank director, but then even left-wing former Congressmen have to make a living. And in Mr. Frank’s case, it has been a nice one, with cash compensation of $121,750 and stock awards of $180,182 in 2022 alone. He’s been on the board since 2015. Perhaps out of office and late in life, Mr. Frank developed a strange new respect for capitalism.

Mr. Frank once famously said he wanted to “roll the dice” to ramp up lending on Fannie Mae and Freddie Mac before they failed. Signature seems to have done the same as it dove into crypto during the Federal Reserve-fueled financial mania.

In recent interviews, Mr. Frank is blaming crypto for the bank’s demise in the wake of the Silicon Valley Bank (SVB) closure on Friday. He told Politico that Signature was in good shape as recently as Friday, but was then hit by “the nervousness and beyond nervousness from SVB and crypto.” He said the bank is the “unfortunate victim of the panic that really goes back to FTX,” the failed crypto exchange.

Mr. Frank seems to blame regulators for taking a needlessly hard line against Signature because of crypto. “I think that if we’d been allowed to open tomorrow, that we could’ve continued,” Mr. Frank told Bloomberg. “We have a solid loan book, we’re the biggest lender in New York City under the low-income housing tax credit.”

We sympathize with Mr. Frank because the Biden Administration really does want to purge the U.S. banking system of any dealings with crypto companies. It may be that the regulators decided to roll up Signature Bank because of its crypto association. It wouldn’t be the first time regulators saw an opening in a crisis to achieve a political goal by other means.

If Mr. Frank is right, he now knows how hundreds of thousands of other people in business feel when regulators panic for political reasons and look for businesses to shut or blame.

As for the failure of Dodd-Frank’s regulatory machinery to prevent the latest bank failures, Mr. Frank is taking no blame. He says the reforms made the system sturdier, and he also dismisses claims by Sen. Elizabeth Warren that some modest Trump-era changes in bank rules for mid-sized banks made a difference.

“I don’t think that had any effect,” Mr. Frank told Bloomberg. “I don’t think there was any laxity on the part of regulators in regulating the banks in that category, from $50 billion to $250 billion.” He ought to know from where he sat on the Signature board.

Mr. Frank is getting a painful education in the difficulty of running a company when politicians don’t like the business you’re in.

The reality is, as I noted last week, that under the fractional reserve banking system, even banks that would be considered healthy by current standards can be taken out by a bank run by depositors. This is a reality that was reiterated in a recent MSNBC interview by former FDIC Chair Sheila Bair. (Source: https://www.msn.com/en-us/money/companies/banking-system-on-the-verge-of-a-bear-stearns-moment-former-fdic-chair/ar-AA18LP2A)

Bair added that the “immediate problem” posed by the situation in the banking system is “if people start to panic and take deposits out of a perfectly healthy bank, they’re going to force that bank to close.”

“It’s the classic Jimmy Stewart problem,” she told host Neil Cavuto. “We deposit money into a bank, they lend it out, they invest it in securities, it’s not all sitting in a vault. If you try to get all the money out at once, you’re going to force the bank to unnecessarily fail.”

According to Bair, actions taken by the government have created “mass confusion” that could cause efforts to support the banking system to backfire. Acknowledging there are some banks with problems, she also emphasized that only a small percentage of the overall banking system has issues.

“[The government is] trying to imply that all uninsured are protected, which they don’t have legal authority to do, frankly, and this is putting pressure on community banks,” she said. “It’s really troubling.”

Stagflation Imminent?

Last week, I discussed the inevitable outcome of government overspending and central bank overprinting.

This outcome will be as ugly as it will be predictable in my view.

Eventually, inflation will give way to an ugly deflationary environment. In the meantime, we will probably see stagflation – rising consumer prices and falling asset prices. Professor Noriel Roubini has a similar take. This from “Markets Insider” (Source: https://markets.businessinsider.com/news/stocks/nouriel-roubini-economy-recession-inflation-debt-market-crash-dr-doom-2023-3):

A “perfect storm” is brewing, and markets this year are going to get hit with a recession, a debt crisis, and out-of-control inflation, the economist Nouriel “Dr. Doom” Roubini said.

Roubini, one of the first economists to call the 2008 recession, has been warning for months of a stagflationary debt crisis, which would combine the worst aspects of ’70s-style stagflation and the ’08 debt crisis.

“I do believe that a stagflationary crisis is going to emerge this year,” Roubini said Thursday in an interview with Australia’s ABC.

With consumer inflation still sticky at 6.4%, Roubini said he estimated that the Federal Reserve would need to lift benchmark rates “well above” 6% for inflation to fall back to its 2% target.

That could spark a severe recession, a stock-market crash, and an explosion in debt defaults, leaving the Fed with no choice but to back off its inflation fight and let prices spiral out of control, he added. The result would be a steep recession, anyway, followed by more debt and inflation problems.

“Now we’re facing the perfect storm: inflation, stagflation, recession, and a potential debt crisis,” Roubini said.

He has remained ultrabearish on the economy, despite the market’s growing hope that the US could skirt a recession this year.

Though more bullish commentators are making the case for a healthy rebound in the S&P 500, which fell 20% last year, Roubini has previously said the benchmark stock index could slide another 30% as investors battled extreme macro conditions.

“They will continue to go down,” he said of stocks, pointing to the recent sell-off as investors priced in higher interest rates from the Fed. “The market is already correcting.”

He urged investors to protect themselves by choosing inflation hedges, such as gold, inflation-indexed bonds, and short-term bonds. Those picks are likely to beat stocks and bonds, he said, which could suffer.

I believe Roubini is correct on a couple counts.

Stocks will likely decline further in my view. One only needs to look at the Buffet Indicator to quickly conclude that despite last year’s decline in stock values, stocks remain heavily overvalued.

And, in order to tame inflation, as I have stated previously, real interest rates need to be positive – interest rates need to be higher than the inflation rate.

There are already signs of stagflation emerging. The real estate market is a good example. Wolf Richter, had this to say on real estate (Source: https://wolfstreet.com/2023/03/04/housing-bust-2-has-begun/):

The housing market in the United States has turned down, and in some big markets very dramatically so. Other markets lag a little behind.

That’s how it went during the last Housing Bust, that I now call Housing Bust #1. During Housing Bust #1, Miami, Phoenix, San Diego, Las Vegas, etc. were a little ahead; other places, like San Francisco were a little behind. In 2007, people in San Francisco thought they would be spared the housing bust they saw unfolding across the country. And then it came to San Francisco with a vengeance.

This time around, San Francisco and Silicon Valley, and the entire San Francisco Bay Area, are at the forefront, along with Boise, Seattle, and some others. In the San Francisco Bay Area, during the first 10 months of this housing bust, Housing Bust #2, the median house price has plunged faster than it did during the first 10 months of Housing Bust #1. That’s what we’re looking at. I’ll get into the details in a moment.

Across the US, home sales have plunged month after month ever since mortgage rates started to rise a year ago. In January, across the US, total home sales plunged by 37% from January last year. Sales plunged in all regions, but they plunged worst in the West, by 42% year-over-year, and the least worst, if I may, in the Midwest, by 33%. This is happening everywhere.

The median price of all types of homes across the US in January fell for the seventh month in a row, down over 13% from the peak in June. Some of the decline is seasonal, and some is not.

This drop whittled down the year-over-year gain to just 1.3%. At this pace, we will see a year-over-year price decline in February or March, which would be the first year-over-year price decline across the US since Housing Bust 1.

Active listings were up by nearly 70% from a year ago, though by historical standards they’re still low. Lots of sellers are sitting on their vacant properties and are holding them off the market, and are putting them on the rental market or are trying to make a go of it as vacation rentals. And they’re all hoping that “this too shall pass.”

“This too shall pass” – that’s the mortgage rates. The average 30-year fixed mortgage rate went over 7% late last year, then in January, it dropped, went as low as 6%, and the entire industry was breathing a sigh of relief. This was based on fervent hopes that inflation would just vanish, and that the Federal Reserve would cut interest rates soon, and be done with this whole nightmare.

But in early February came the realization that inflation wasn’t just going away. Friday’s inflation data confirmed that inflation is reaccelerating, that it already started the process of reacceleration in December. Some goods prices are down, but inflation in services spiked to a four-decade high. Services is nearly two-thirds of what consumers spend their money on. Inflation is very difficult to dislodge from services. The Federal Reserve is going to have its hands full dealing with this – meaning higher rates for longer.

And mortgage rates jumped again and on Friday were back to about 6.9%, according to the daily measure by Mortgage News Daily. Just a hair below the magic 7%.

And potential sellers are still sitting on their vacant properties, thinking: and this too shall pass.

So how many vacant homes are there? The Census Bureau tracks this. In the fourth quarter last year, there were nearly 15 million vacant housing units – so single-family houses, condos, and rental apartments. That’s over 10% of the total housing stock.

In 2022, the number of total housing units increased by over 1.3 million. If each housing unit is occupied on average by 2.5 people, that’s housing for 3.3 million more people than in the prior year. The US population hasn’t grown nearly that fast in 2022.

Ok, so now here are nearly 15 million vacant housing units. Of them, 11 million were vacant year-round. Some of the 11 million were being remodeled to be rented out, and others were for sale, and that’s the inventory we actually see, and there are other reasons why homes were vacant.

But 6.6 million homes were held off the market, for a variety of reasons, such as that the owners don’t want to sell the property at the moment.

If just 10% of these 6.6 million homes that are held off the market show up on the market, it would double the total number of active listings. If 20% of these homes show up on the market, it would trigger an enormous glut.

This is the shadow inventory. It can emerge at any time. And during Housing Bust 1, this shadow inventory that suddenly emerged created the biggest housing glut ever.

As I noted last week, history teaches us that excessive debt levels lead to deflation.

This time will ultimately be no different.

Deflation will at some point, become the prevalent economic force. In the meantime, expect stagflation.

That will be more bad news for stocks and real estate as well as consumer prices.

The best advice that I can offer is to have some of your assets that will be protected from a prolonged decline in stocks and real estate and other assets that will perform well in an inflationary environment.

An Artificial Economy

The March “You May Not Know Report” discusses how the current economy (since the time of the Great Financial Crisis) is artificial- the result of easy money policies by the Federal Reserve and government stimulus.

History teaches us that when governments overspend and central banks over print, eventually, reality sets in. One of the founding fathers, Thomas Jefferson, told us that we could expect inflation followed by deflation and that is exactly the track on which we now find ourselves.

Inflation has not subsided; the most recent data shows that inflation is accelerating exactly as Jefferson suggested it would. And Americans are suffering as a result. There are now also signs of deflation setting in as well. This from Michael Maharrey writing for Schiff Gold (Source: https://schiffgold.com/commentaries/this-strong-economy-is-a-facade-built-out-of-debt/):

Retail sales surged in January, creating the impression that the economy is humming along nicely. After all, there can’t be a problem if consumers are out there consuming, right?

But a lot of people are ignoring a key question: how are people paying for this shopping spree?

As it turns out, they’re putting a lot of this spending on credit cards.

Even with a big 1.8% decline in retail sales in December, revolving credit, primarily reflecting credit card debt, grew by another $7.2 billion that month, a 7.3% increase.

To put the numbers into perspective, the annual increase in 2019, prior to the pandemic, was 3.6%. It’s pretty clear that Americans are still heavily relying on credit cards to make ends meet.

Meanwhile, household debt rose by $394 billion in the fourth quarter of 2022. It was the largest quarter-on-quarter increase in household debt in two decades.

Debt balances have risen $2.7 trillion higher than they were at the beginning of the pandemic.

Clearly, this isn’t a sign of a healthy economy. Americans are spending more on everything thanks to rampant price inflation that doesn’t appear to be waning, and they’re relying on credit cards to do it. Saving has plunged. This isn’t a sound economic foundation, and it isn’t even sustainable. Credit cards have a nasty thing called a limit. And with credit card interest rates at record-high levels, people will reach those limits pretty quickly.

I ran across something the other day that provides an even more striking example of just how reliant the US economy is on debt.

A company called the Wisconsin Cheeseman sells gift packs of cheese, candies and other treats. And you can buy the gifts on their in-house credit plan.

Let this sink in for a moment. A primary pitch from a gift company is that you can buy on credit.

The annual percentage rate will run you a modest 5.75% to a hefty 25.99% depending on the state. (Most states are currently above 20%. But don’t worry. Your payments can be as low as $10 a month.) Just don’t think about the fact that you’ll probably be paying for this cheese for years to come.

There are other companies facilitating borrowing this doesn’t even show up in the official debt figures.

The use of BNLP services such as Affirm, Afterpay and Klarna has exploded in the last couple of years. These services allow consumers to pay off purchases through installment payments, often interest-free. In a December 2021 report, Cardify CEO Derrick Fung said buy now, pay later has rapidly become more mainstream.

“The consumer over the last 12 months has become more compulsive and BNPL products are the result of us being locked up for too long and wanting more instant gratification,” he said.

Buy now, pay later is a convenient way to spread out spending, but there is a dark side. It encourages consumers to spend more. Nearly 46% of those polled said they would spend less if BNPL wasn’t an option.

The rise of buy now pay later (BNPL) is another sign of a deeply dysfunctional economy. Americans are piling up millions of dollars of additional debt using BNPL on top of their credit cards.

So, while the mainstream pundits tell you the economy is strong, they are looking at a facade. It’s a house of cards. And eventually, it will collapse.

American consumers continue to “support the economy” by spending money today despite rising prices. But they’re borrowing to do it. Tomorrow is fast approaching. And with it depleted savings, higher interest rates, and looming credit card limits. This is simply not a sustainable trajectory, no matter how the mainstream press tries to spin it.

Consumers are struggling. That means that the deflation part of the cycle that Jefferson warned us about may be about to emerge in earnest.

As I have stated in the past (and there are many analysts who would disagree with me), I expect that the Federal Reserve will reverse course and begin pursuing easy money policies once again.

Should I be right about this, we will have to wait and see if the Fed can be effective. I have my doubts. Consumers are accumulating too much debt.

The chart below breaks down debt accumulation by age. Alarmingly, those age 60 plus are accumulating more debt on a percentage basis than other age groups. That should serve as a huge red flag and warning sign.

This time will be no different.

Deflation will, at some point, become the prevalent economic force.

That will be more bad news for stocks and real estate.

Stocks are already feeling it, and real estate is now beginning to dramatically unwind in many parts of the country.

Debt Truths

A seldom-discussed topic that has a significant economic impact is private sector debt levels.

Ever since 1971, when the US Dollar became a fiat currency, and new currency has been created by loaning it into existence.

If banks have a 10% reserve requirement, a $100,000 deposit into a bank can be transformed into $1,000,000 if the velocity of money is high enough.

For example, say you deposit $100,000 into your bank. Your banker reserves 10% or $10,000 and loans out the other $90,000. Say the borrower of the $90,000 buys an expensive car and borrows the $90,000 now available from your bank to do so. The car dealer deposits the $90,000 into her bank. That banker reserves 10% or $9,000 and loans out the other $81,000. That process continues up to a maximum of new currency created of $1,000,000.

Historically, when the Federal Reserve wanted to jump-start the economy by increasing the currency supply, the central bank would reduce interest rates to increase the velocity of money, thereby creating more currency.

That worked until the time of the financial crisis when interest rates were reduced to zero, but lending did not follow due to the fact that, collectively speaking, the American public was already deeply in debt.

It was at that point the Federal Reserve made the decision to ‘temporarily’ pursue a program of quantitative easing or currency creation. As we all now know, the program continued long past the time that a reasonable person would say it was temporary.

As I have often stated, it is my belief that this program will once again be revived in earnest, although it will likely be called something other than quantitative easing.

Since the time of the financial crisis, this policy of currency creation has caused debt levels to increase immensely. At the time of the financial crisis, worldwide debt was about $100 trillion. It now stands at $300 trillion – a truly remarkable number.

Presently, debt levels are continuing to increase. The data shows that consumers are increasingly taking on new debt to cope with rising living costs. This from “Zero Hedge” (Source: https://www.zerohedge.com/markets/consumer-debt-soars-394bn-most-20-years-record-169-trillion-young-borrowers-struggle-repay):

While it won’t tell us anything we don’t know – since it is two months delayed and we already get monthly updates from the Fed via the G.19 statement – this morning, the NY Fed published its quarterly Household Debt and Credit report, which showed that total household debt in the fourth quarter of 2022 rose by 2.4% or $394 billion, the largest nominal quarterly increase in twenty years, to a record $16.90 trillion. Balances now stand $2.75 trillion higher than at the end of 2019, before the pandemic recession.

And the same chart broken down by age:

Every type of consumer credit increased in Q4, and here is a detailed breakdown:

Mortgage balances rose by $254 billion in the fourth quarter of 2022 and stood at $11.92 trillion at the end of December, marking a nearly $1 trillion increase in mortgage balances in 2022.
Home equity lines of credit rose by $14 billion to $340 billion.
Student loan balances now stand at $1.60 trillion, up by $21 billion from the previous quarter. In total, non-housing balances grew by $126 billion.
Auto loan balances increased by $28 billion in the fourth quarter, consistent with the upward trajectory seen since 2011.
Credit card balances increased $61 billion in the fourth quarter to $986 billion, surpassing the pre-pandemic high of $927 billion.

There is an eternal truth about excessive debt accumulation – if there is too much debt to be paid, it won’t be paid.

This is true regarding private sector debt and it is true as far as government debt and liabilities are concerned as well.

It is my view, based on simple math, that debt levels are now past the point of no return and are now too high to ever be paid.

The result, at some future point, will be a massive deflationary environment that will, in my view, resemble the 1930’s; or, possibly, worse.

Looking at the first chart above, one can see the combined debt total of mortgage debt, home equity loan debt, auto debt, student loan debt, and credit card debt is now about 1/3^rd higher than at the time of the financial crisis.

Alarmingly, debt levels have grown the most among those over age 60. That, at least in my view, indicates that consumers are increasingly relying on debt to make ends meet in what is a very difficult economy.

And, to add insult to injury, the most recent inflation numbers indicate that inflation is not under control. This was not at all surprising to me. As I have been stating, the Fed isn’t doing enough to get inflation under control.

Inflation will not be controlled until we have real, positive interest rates – something we are a long way away from.

In the meantime, the US economy (and the world economy) is heading for a time of painful stagflation.

Bubbles and a Stock Forecast

Ever since the time of the Great Financial Crisis, I have written about the topic of bubbles.

Whether the bubble is a price bubble in stocks, bonds, real estate or commodities, there are some ‘bubble characteristics’ that often hold true.

The first characteristic is that bubbles are often symmetrical, taking as long to unwind as they do to build.

The second bubble characteristic is that when a price bubble is graphed, the downside of the bubble is nearly a mirror image of the upside of the bubble.

Charles Hugh Smith wrote a piece on this topic last week that, in my view, does a nice job explaining these bubble characteristics. (Source: https://www.oftwominds.com/blogjan23/bubble-symmetry1-23.html) Here is an excerpt from his excellent piece: Should bubble symmetry play out in the S&P 500, we can anticipate a steep 45% drop to pre-bubble levels, followed by another leg down as the speculative frenzy is slowly extinguished.

Bubble symmetry is, well, interesting. The dot-com stock market bubble circa 1995-2003 offers a classic example of bubble symmetry, though there are many others as well. The key feature of bubble symmetry is the entire bubble retraces in roughly the same time frame as it took to soar to absurd heights.

Nobody could see bubble symmetry coming, of course. At the peak and for some time after, bubbles are viewed as the natural order of markets, and so they should continue expanding forever.

Alas, the natural order of markets is mean reversion and the collapse of whatever is unsustainable. This includes speculative manias, credit bubbles, asset bubbles, and projections of endless expansion of margins, profits, sales, consumption, tax revenues, and everything else under the sun.

There’s a well-worn psychological path in the collapse of bubbles. This path more or less tracks the Kubler-Ross phases of denial, anger, bargaining, depression, and acceptance, though the momentum of speculative frenzy demands extended displays of hubris and over-confidence, i.e., the first wobble “must be the bottom.”

There are also repeated spikes of false hope that “the bottom is in” and the bubble is starting to reflate.

This pattern repeats until the speculative fever finally breaks, and all those betting on a resumption of the bubble mania finally give up.

This process often takes about the same length of time that it took for the bubble mania to become ubiquitous. If it took about 2.5 years for the bubble to expand, it takes about 2.5 years for the bubble to pop and the market to return to its pre-bubble level.

Once again, we hear reasonable-sounding claims being used to support predictions of a never-ending rise in stock valuations.

What hasn’t changed is humans are still running Wetware 1.0, which has default settings for extremes of emotion, particularly manic euphoria, running with the herd (a.k.a. FOMO, fear of missing out), and panic / fear.

Despite all the assurances to the contrary, all bubbles pop because they are based in human emotions. We attempt to rationalize them by invoking the real world, but the reality is speculative manias are manifestations of human emotions and the feedback of running in a herd of social animals.

As I was reading Mr. Smith’s analysis, I thought I would graph stocks using a chart of an exchange-traded fund that tracks the price of the Standard and Poor’s 500:

Note that I have drawn 3 horizontal lines on the price chart.

Should stock prices fall to the most obvious strong area of support as noted by the top horizontal line, there would be a further decline in stock prices of about 40%.

Should prices fall to the second (or middle) horizontal line I’ve drawn on the chart, that would mark a decline of about 54% from these levels.

And, should stock prices fall to the levels noted by the third (or bottom) horizontal line on the chart, that would be about a 62% declines from these levels.

While the ‘buy the dip’ mentality seems to be dominating stock investors’ actions at this point, I expect a lot more downside in stocks before the bottom is finally in. I also believe that may mark a terrific opportunity to invest in stocks.

I am often asked for my ultimate stock forecast. While it’s impossible to predict the future actions of the Federal Reserve, I think that we will see additional downside in stocks of 40% to 60%.

Until we reach that point, I am of the opinion that many investors would be well-served to take a cautious and deliberate approach to managing assets.

Consequences of Debt Excesses and Irresponsible Currency Creation

Debt has consequences. As does currency creation to temporarily mask the economic effects of excessive debt.

While an entire book could be written on how the consequences of debt and high levels of currency creation will manifest in the months and years ahead, in this issue of “Portfolio Watch,” I will examine two of these outcomes.

First, let’s discuss debt, in particular, student loan debt.

While there are many with student loan debt who were hopefully anticipating that their loans would be forgiven, it now seems that is not likely. That said, if you have defaulted on student loan debt, don’t think you are off the hook; that unpaid debt will follow you into retirement. This is from “Insurance News Net”:

While the promise of student loan debt relief seems to slip further out of reach, the prospects of the debt coming back to bite people in their retirement grows.

That is because student loan debt delinquencies can be deducted from Social Security benefits to the tune of thousands of dollars per year. The number of debtors is rising, along with delinquencies, according to a recent study by Boston College’s Center for Retirement Research. In fact, student loan delinquency rates have surpassed all other types of consumer debt delinquencies between 2012 and early 2020.

That trend is accelerating, meaning more Americans will see their Social Security benefits shrink. The withholding amount is the lessor of 15% of the Social Security monthly benefit or the amount by which the benefit exceeds $750 per month. The deduction is an average of $2,500 annually, a 4% to 6% decrease in benefits, according to the study.

“While these amounts are relatively small, for households that are just making ends meet, even a small decline in income can have significant consequences,” according to the study. “Putting these numbers into context, the amount of withheld benefits could roughly pay off the average per capita credit card balance. Since delinquency rates are higher among younger borrowers, student loans may pose a bigger risk for this group’s future retirement security.”

While this may not be a huge economic headwind now, as time passes, it will become more of a problem, pulling discretionary income out of the consumer spending dependent US economy.

Currency creation causes the wealth gap to widen. History teaches us this unequivocally. This time around is no exception. This is from CNBC:

Over the last two years, the richest 1% of people have accumulated close to two-thirds of all new wealth created around the world, a new report from Oxfam says.

A total of $42 trillion in new wealth has been created since 2020, with $26 trillion, or 63%, of that being amassed by the top 1% of the ultra-rich, according to the report. The remaining 99% of the global population collected just $16 trillion of new wealth, the global poverty charity says.

“A billionaire gained roughly $1.7 million for every $1 of new global wealth earned by a person in the bottom 90 percent,” the report, released as the World Economic Forum kicks off in Davos, Switzerland, reads.

It suggests that the pace at which wealth is being created has sped up, as the world’s richest 1% amassed around half of all new wealth over the past 10 years.

Oxfam’s report analyzed data on global wealth creation from Credit Suisse, as well figures from the Forbes Billionaire’s List and the Forbes Real-Time Billionaire’s list to assess changes to the wealth of the ultra-rich.

While the Federal Reserve is ostensibly holding the line on more currency creation, as I have often stated in this publication, it will be impossible for the Fed to totally cease currency creation until the Washington politicians balance the Federal budget.

The prospect of this seems highly improbable. Instead, I fully expect that there will be more currency creation in the future. Perhaps this currency creation will not take the form of quantitative easing as it has in the past, but I am forecasting that there will be some scheme put forth by the politicians and central bankers to subsidize the bad fiscal behavior of the collective group of Washington politicians.

One such scheme that has been discussed is the minting of a trillion-dollar coin.

Michael Maharrey, writing for Schiff Gold, recently commented on the scheme.

Policy wonks and government people come up with some really dumb ideas. And a lot of those dumb ideas just won’t go away.

Now that we’re in the early stages of the fake debt ceiling fight, a really dumb idea has been resurrected from the dead – the trillion-dollar coin.

Last week, the federal government ran up against the debt ceiling. That means it either has to come to some kind of agreement to raise the borrowing limit or it will default.

Now, we all know how this will end. After months of political theater and hand-wringing, Congress will raise the debt limit. But that just kicks the can down the road. Because before long, the government will run up against the debt ceiling again, and we’ll have to watch another awful sequel to this awful movie.

The debt ceiling drama completely ignores the real issue — the US government has a spending problem. The current administration is blowing through about half a trillion dollars every single month and running massive budget deficits. The solution is simple. The federal government could stop spending so much money. Or it could raise taxes. Or, why not both?

But these are politically non-viable solutions. Nobody in Washington DC is willing to seriously contemplate spending cuts. Sure, Republicans will talk about it, but that’s nothing but hot air. And nobody in Washington DC is willing to seriously contemplate raising taxes. Sure, Democrats will happily tax “the rich,” but tax increases would have to go much deeper into the poor and middle class to actually address the spending problem. So, Democrats are full of hot air too.

But there are some people out there who think they have a simple, politically viable solution — a panacea if you will. It wouldn’t require raising the debt ceiling. It wouldn’t require spending cuts. And it wouldn’t require raising taxes. (Except that it would — I’ll get to that in a minute.)

All the US Treasury needs to do is mint a $ 1 trillion dollar coin.

Viola! Problem solved!

The government could mint the coin, deposit it at the Federal Reserve, and then it could write checks against that asset.

Now, that may sound a little bit like the government is just creating money out of thin air. And that’s because it is. But hey, it’s legal, they argue. So, why not!

You do realize this is dumb, right?

This is a monetary disaster waiting to happen. It would put inflation on hyperdrive.

We just saw what happens when the Fed prints trillions of dollars out of thin air and injects it into the economy. The price of everything goes up. We’re paying for pandemic stimulus every time we go to the grocery store.

I mentioned earlier that this scheme would raise taxes. This is how. It would jack up the inflation tax even higher. Minting a coin and pretending it is worth $1 trillion doesn’t change the dynamics. When you boil it all down, it would do nothing but increase the money supply. That is, by definition, inflation.

They can call it whatever they want, but currency creation is still currency creation, and inflation is still inflation.

I expect that although the acceleration of inflation has slowed, there is once again more intense inflation in the relatively near future unless the Washington politicians change their spending habits.

Fat chance of that.

That means that there will have to be some kind of currency creation in the future. Whether it is more quantitative easing, a trillion-dollar coin, or some other mechanism, the outcome will be the same.

An even heavier inflation tax and a further widening of the wealth gap.

Depression Parallels?

Depression parallels?

Not a comfortable topic to discuss, to be sure. But as my now oft-quoted history professor used to say, “those who don’t study history are doomed to repeat it.”

The older I get and the more experience I acquire, the smarter my history professor becomes.

Which brings me to this week’s “Portfolio Watch” topic – similarities between the period-of-time preceding the Great Depression and where we find ourselves today.

I address this topic very briefly this week, acknowledging the fact that an entire book could be written on the topic. In this brief narrative, I’ll discuss the wealth gap and consumerism excesses.

For context, it’s important to understand the role that central bank policy played in creating the prosperity illusion of the Roaring Twenties and the prosperity illusion that we’ve more recently experienced.

The central bank of the United States, the Federal Reserve, was founded in 1913. Shortly after its formation, the central bank reduced the backing of the US Dollar by gold. Prior to the establishment of the Federal Reserve, the US Dollar was essentially gold; the US Dollar was backed 100% by gold. An ounce of gold was twenty US Dollars.

Shortly after the Fed was set up, the backing of the US Dollar by gold was reduced from 100% backed by gold to 40% backed by gold. A little rudimentary math has us concluding that it increased the currency supply by 250%.

While I am not a trained economist (since the majority of trained economists today are of the Keynesian school of economics, I count my lack of formal training as an attribute rather than a detriment as my common sense has not been compromised), I have learned from my study of history that when currency is created, it always has to find a home.

While there are many eventual adverse outcomes as a result of currency creation, the two on which I will focus this week are income inequality (the wealth gap) and debt accumulation.

Let’s begin with debt accumulation. Here is an excerpt from an article published about consumerism and debt accumulation in the 1920’s (Source: http://athenaandkim.weebly.com/consumerism.html):

Consumerism in the 1920’s was the idea that Americans should continue to buy product and goods in outrageous numbers. These people neither needed or could afford these products, which generally caused them to live pay-check to pay-check. People bought many quantities of products like automobiles, washing machines, sewing machines, and radios. This massive purchasing period led to installment plans. These were plans for people in which they were able to purchase their products and pay for them at a later time in small monthly payments. This was the reason why “80% of Americans during the 1920’s had no savings at all – they were living pay-check to pay-check”. This consumerism later became a contributing factor to the start of the Great Depression because it greatly increased the amount of consumer debt in America.

The Great Depression was largely caused by debt excesses, debt levels in the private sector that were too large to be paid. As a result, many American citizens lived paycheck-to-paycheck.

We are now experiencing the same thing. Almost 2/3^rd’s of American households now live paycheck-to-paycheck.

This from MSNBC (Source: https://www.cnbc.com/2022/12/15/amid-high-inflation-63percent-of-americans-are-living-paycheck-to-paycheck.html):

As rising prices continue to weigh on households, more families are feeling stretched too thin.

As of November, 63% of Americans were living paycheck to paycheck, according to a monthly LendingClub report — up from 60% the previous month and near the 64% historic high hit in March.

Even high-income earners are under pressure, LendingClub found. Of those earning more than six figures, 47% reported living paycheck to paycheck, a jump from the previous month’s 43%.

“Americans are cash-strapped and their everyday spending continues to outpace their income, which is impacting their ability to save and plan,” said Anuj Nayar, LendingClub’s financial health officer.

While inflation, caused by excessive currency creation by the central bank, is a factor in the vast number of Americans currently living paycheck-to-paycheck, another factor is the level of debt that Americans have collectively racked up as a result of easy money policies and artificially low-interest rates. Here is just one example (Source: https://www.theatlantic.com/culture/archive/2023/01/buy-now-pay-later-affirm-afterpay-credit-card-debt/672686)

As familiar as Americans are with the concept of credit, many of us, upon encountering a sandwich that can be financed in four easy payments of $3.49, might think: Yikes, we’re in trouble.

Putting a banh mi on layaway—this is the world that “buy now, pay later” programs have wrought. In a few short years, financial-technology firms such as Affirm, Afterpay, and Klarna, which allow consumers to pay for purchases over several interest-free installments, have infiltrated nearly every corner of e-commerce. People are buying cardigans with this kind of financing. They’re buying groceries and OLED TVs. During the summer of 2020, at the height of the coronavirus pandemic, they bought enough Peloton products to account for 30 percent of Affirm’s revenue. And though Americans have used layaway programs since the Great Depression, today’s pay-later plans flip the order of operations: Rather than claiming an item and taking it home only after you’ve paid in full, consumers using these modern payment plans can acquire an item for just a small deposit and a cursory credit check.

From 2019 to 2021, the total value of buy-now, pay-later (or BNPL) loans originated in the United States grew more than 1,000 percent, from $2 billion to $24.2 billion. That’s still a small fraction of the amount charged to credit cards, but the fast adoption of BNPL points to its mainstream appeal. The widespread embrace of this kind of lending system says a lot about Americans’ relationship to debt—particularly among the younger borrowers who made BNPL popular (about half of BNPL users are 33 or under). “We found that most of the people that use buy now, pay later either don’t have or don’t use a credit card,” Marco Di Maggio, an economist at Harvard, told me. He said that Gen Z was skeptical of credit cards, possibly because many of them had seen their parents sink into debt.

Credit card debt is also reaching record highs. This from “Zero Hedge” (Source: https://www.zerohedge.com/markets/flashing-red-alert-near-record-surge-credit-card-debt-just-average-rate-hits-all-time-high):

Another month, another glaring reminder that most US consumer spending is funded by credit cards.

The latest consumer credit report was published by the Fed today at 3pm and it showed that in November, total credit increased by $27.962BN to $4.757 trillion, above the $25BN consensus estimate, and a number which would have been bigger than last month’s pre-revision increase of $27.1BN, had it not been revised modestly higher to $29.12BN.

As for the wealth gap, we are now once again seeing what was witnessed in the 1920’s. This from the same article quoted above:

The income gap of the 1920’s was the difference in income between the top 1% of wealthy Americans and the rest of the average earnings. Within this income gap, “60% of Americans earned below the poverty level. The top 1% of wealthy American’s saw their incomes increase by 75% during the 1920’s… the other 99% of Americans saw their income increase by only 9%… not enough to justify the huge expenditures on consumer products that most Americans were making”. This shows that there was a great split between those who earned an average income or less compared to the wealthy who earned a considerably larger amount of money.
Fast forward to today.

The wealth gap or income inequality gap is wider in the United States than in any other G7 country.

According to “World Population Review,” the top 1% of earners in the United States have an average earned income of $1,018,700 annually.

The bottom 50% have an average income of $14,500 annually.

If one peels out the top 10%, the average annual earnings are $246,800.

This is what currency creation and artificial markets do.

But artificial markets don’t last forever. History teaches us that this will end badly.

If you haven’t yet taken steps to protect yourself, now is the time.

Economic Deterioration and Washington Excesses

As the year 2022 comes to a close, and we look forward to next year, it is difficult to move ahead, anticipating a better year economically speaking.

That might seem too negative since the year 2022 wasn’t great economically. This past year saw negative economic growth in the first two quarters of the year, raging inflation, and now, as the year draws to a close, the evidence suggests that the economy is deteriorating despite the claims of some politicians to the contrary.

We have been discussing the economy and investing markets in this publication each week all year, and some of what will be discussed this week is a review of past discussions. However, this past week, Michael Snyder wrote a well-sourced piece documenting the strength of the economy as we move into 2023.

Here is a bit from the piece (Source: http://theeconomiccollapseblog.com/15-facts-that-prove-that-a-massive-economic-meltdown-is-already-happening-right-now/):

Economic conditions just keep getting worse. As we prepare to enter 2023, we find ourselves in a high inflation environment at the same time that economic activity is really slowing down. And just like we witnessed in 2008, employers are conducting mass layoffs as a horrifying housing crash sweeps across the nation. Those that have been waiting for the U.S. economy to implode can stop waiting, because an economic implosion has officially arrived. The following are 15 facts that prove that a massive economic meltdown is already happening right now…

#1 Existing home sales have now fallen for 10 consecutive months.

#2 Existing home sales are down 35.4 percent over the last 12 months. That is the largest year over year decline in existing home sales since the collapse of Lehman Brothers.

#3 Homebuilder sentiment has now dropped for 12 consecutive months.

#4 Home construction costs have risen more than 30 percent since the beginning of 2022.

#5 The number of single-family housing unit permits has fallen for nine months in a row.

#6 The Empire State Manufacturing Index has plunged “to a reading of negative 11.2 in December”. That figure was way, way below expectations.

#7 In November, we witnessed the largest decline in retail sales that we have seen all year long.

#8 Even the biggest names on Wall Street are starting to let workers go. In fact, it is being reported that Goldman Sachs will soon lay off approximately 4,000 employees.

#9 The Federal Reserve is admitting that the number of actual jobs in the United States has been overstated by over a million.

#10 U.S. job cuts were 417 percent higher in November than they were during the same month a year ago.

#11 A recent Wall Street Journal survey found that approximately two-thirds of all Americans expect the economy to get even worse next year.

#12 A newly released Bloomberg survey has discovered that 70 percent of U.S. economists believe that a recession is coming in 2023.

#13 Inflation continues to spiral wildly out of control. At this point, a head of lettuce now costs 11 dollars at one grocery store in California.

#14 Overall, vegetable prices in the United States are more than 80 percent higher than they were at this same time last year.

#15 Thanks to the rapidly rising cost of living, 63 percent of the U.S. population is now living paycheck to paycheck.

In a desperate attempt to get inflation under control, the Federal Reserve has been dramatically increasing interest rates.

Those interest rate hikes are what has caused the housing market to crash, but Fed officials insist that such short-term pain is necessary in order to tame inflation.

If you’d like to learn more details, visit www.RetirementLifestyleAdvocates.com and view the 12/26/2022 “Headline Roundup” webinar where I go into detail on each of these 15 points.

As I have discussed frequently in the past in this publication and on the “Headline Roundup” webinars, inflation cannot be brought under control until the Washington politicians balance the budget.

Rather than taking inflation and the budget deficit seriously, the Washington politicians recently rammed through a 4,000+ page piece of legislation that will set the country back $1.7 trillion.

True to form, given the time frame between the introduction of the bill and its passage and the sheer volume of the bill, there is not one politician that voted for the bill that could have read it.

As I noted last week, the politicians are not only wildly spending on a deficit basis, they are also fabricating the reported deficit numbers. Last week, in “Portfolio Watch”, I shared an excerpt from a piece written by Egon von Greyerz who noted that as the reported deficit was $1.4 trillion, the national debt increased by $2.5 trillion.

It must terribly frustrate Washington politicians that there are still citizens that can actually do the math. Sigh, it’s probably only a matter of time before the reported debt numbers are also manipulated to make them seem more favorable.

I liken this to the decades-old metaphor of re-arranging the deck chairs on the Titanic. It might seem more comfortable for a brief period, but the ship is still going to sink.

Michael Snyder, in the piece referenced above, comments:

This week, an abominable 1.7 trillion dollar omnibus spending bill is being rammed through Congress, but not a single member of Congress has read it.

The bill is 4,155 pages long, and U.S. Senator Rand Paul just held a press briefing during which he wheeled it out on a trolley…

After the grossly bloated $1.7 trillion Omnibus spending bill advanced in the Senate by a vote of 70-25, GOP Senator Rand Paul held a press briefing during which he wheeled in the “abomination” on a trolley and demanded to know how anyone would be able to read it before the end of the week.

Paul, along with the only other dissenting Senate Republicans Mike Braun, Ron Johnson, Mike Lee, and Rick Scott highlighted how ludicrous the fast tracking of the bill has been.

Unfortunately, this absurd spending bill has broad support on both sides of the aisle, and that just shows how broken Washington has become.

Our system of government has failed time after time, and our politicians continue to spend money on some of the most ridiculous things imaginable.

The following examples that were pulled out of the 1.7 trillion dollar omnibus spending bill were discovered by the Heritage Foundation…

-$1.2 million for “LGBTQIA+ Pride Centers”
-$1.2 million for “services for DACA recipients” (aka helping illegal aliens with taxpayer funds) at San Diego Community College.
-$477k for the Equity Institute in RI to indoctrinate teachers with “antiracism virtual labs.”
-$1 million for Zora’s House in Ohio, a “coworking and community space” for “women and gender-expansive people of color.”
-$3 million for the American LGBTQ+ Museum in New York City.
-$3.6 million for a Michelle Obama Trail in Georgia.
-$750k for the for “LGBT and Gender Non-Conforming housing” in Albany, New York.
-$856k for the “LGBT Center” in New York.

And have you noticed that our politicians often prefer to push these types of bills through just before major holidays when hardly anyone is paying attention?

Ironically, the bill that established the Federal Reserve in 1913 was jammed through congress and signed into law just before the Christmas holiday as well.

Because of the actions of the politicians and the Fed, it’s my firm belief that severe deflation and economic pain lie ahead.

Make sure you educate yourself and take action to protect yourself.

Metals, Currency and Inflation

Precious metals, stocks, and bonds all rallied last week.

Interestingly, the rally in metals occurred after the inflation report came in cooler than expected. This from “Zero Hedge” (Source: https://www.zerohedge.com/personal-finance/core-cpi-inches-lower-40-year-highs-real-wages-tumble-19th-straight-month)

The headline CPI printed far cooler than expected at +7.7% YoY (vs 7.9% exp) and down from the +8.2% in Sept. That is the lowest since January…

The official measure of inflation, the consumer price index, is a heavily manipulated number using ‘adjustments’ like weightings, hedonic adjustments and substitution to make the reported number seem more favorable.

There are other alternative measures of inflation that are, in my view, more accurate in tracking the real inflation rate. One such measure is calculated by economist, John Williams, of www.ShadowStats.com.

This chart is from Mr. Williams’s website and compares the official inflation rate per the consumer price index with what might be considered to be the actual inflation rate, using the same methodology that was used to calculate the inflation rate pre-1980.

Notice from the chart that using the pre-1980 inflation calculation method, the inflation rate is about 16% which feels more accurate from my recent, real-world experience. Despite the disparity in calculation, the year-over-year inflation rate is declining.

Which brings us to the most important question – does this mean that the Fed is finally getting inflation under control?

Probably not in my view.

As I have stated many times previously, in order to get inflation under control, we need to have real positive interest rates. In other words, interest rates need to be higher than the inflation rate to create an incentive to save rather than spend. In 1980, then-Federal Reserve Chair, Paul Volcker, understood this as he increased interest rates to nearly 20%.

If we are generous, and round down the inflation rate to 7.5% and then compare that inflation rate to the current interest rate of 3.8% as I write this, it’s easy to see that real interest rates are still negative.

Yet, despite interest rates not being high enough to meaningfully impact inflation, the marginally higher interest rates that we are experiencing are already creating some potential problems. This from “Fox Business” (Source: https://www.foxbusiness.com/politics/next-us-debt-crisis-making-hundreds-billions-interest-payments)

The U.S. national debt keeps rising and to make matters worse, interest payments on the debt are rising at an even faster pace.

Next week, the Treasury Department will release data from the final month of fiscal year (FY) 2022, including how much the government spent to service $31 trillion in national debt, the highest it has reached in U.S. history.

According to Treasury data through August, which counts all but the final month of FY22, net interest payments on the debt totaled $471 billion. That is already much higher than the initial White House projection of $357 billion and above Treasury’s mid-year assessment of $441 billion; adding in September’s data could send the total over $500 billion.

At that level, interest on the debt is larger than the discretionary budgets of most federal departments and rivals the amount of money Congress gives to the Department of Defense each year.

Experts warn that one reason why the cost of servicing the debt was underestimated is because those estimates were made when interest rates were lower. For the last several months, the Federal Reserve has ratcheted up interest rates, which means when outstanding federal debt matures and is paid off through the issuance of new debt (or “rolled over”), that new debt is subject to higher interest payments.

Some say these rising rates is a major factor that will cause interest payments on the debt to explode higher in the next few years. The Peter G. Peterson Foundation warns that it is not just from other priorities.

For example, the foundation estimates that by next year, interest on the debt will soon cost more than all federal income support programs combined – programs such as unemployment, food stamps and child nutrition. Interest on the debt could soar to $1 trillion per year by 2032, or $3 billion each day and take up nearly one-fifth of all federal revenues in that year.

The numbers mentioned in the article are alarming enough when taken by themselves. But, when taking into account the additional spending that will occur for Social Security and Medicare and other programs, the numbers are totally and utterly unsustainable.

That’s why I believe that the Federal Reserve will ultimately ‘pivot’ and begin to pursue easy money policies once again via lower interest rates and quantitative easing.

And when they do, I believe that we will see a stagflationary environment emerge that will see higher consumer prices and lower financial asset prices. Literally the worst of both worlds.

Much of the rest of the world must agree with this assessment. While they may not be stating this outwardly and directly, they are taking actions that indicate this is the case. As the old axiom goes, you learn more by observing actions than you do by listening to words.

The BRICS countries are actively pursuing an alternative reserve currency to the US Dollar. This from “Economic Times” (Source: https://economictimes.indiatimes.com/news/economy/policy/brics-explores-creating-new-reserve-currency/articleshow/94628034.cms)

The BRICS countries are exploring establishing a new reserve currency to better serve their economic interests, according to senior Russian diplomat and BRICS points person Pavel Knyazev. It will be based on a basket of the currencies of the five-nation bloc, ET has learnt.

“The possibility and prospects of setting up a common single currency based on a basket of currencies of the BRICS countries is being discussed,” Knyazev, Russian Sou Sherpa on BRICS said during a discussion at Valdai Club in Moscow last week. Valdai is closely associated with President Vladimir Putin.
During the 14th BRICS Summit in June, Russian President Vladimir Putin announced that Brazil, Russia, India, China, and South Africa plan to issue a “new global reserve currency.”