Early signs are that in economic terms, President Biden has his work cut out. The federal government, writes Doug Noland, is in the process of expanding debt by more than 30% of GDP in only two years. Hopefully not at double-digit annual rates, yet massive deficit spending is inevitable as far as the eye can see. Importantly, Washington is running massive deficits despite both record stock prices and corporate debt issuance – in the face of about the loosest financial conditions imaginable.
How enormous will deficits balloon when this historic financial Bubble bursts? Are $5.0 TN annual deficits an unreasonable guesstimate? No worries, apparently. There’s always the “whatever it takes” Federal Reserve balance sheet. In the financial and economic crisis scenario, does the Fed boost Treasury, MBS, corporate bond and EFT purchases to, say, $500 billion monthly ?
Two headlines from Powell’s Thursday Princeton zoom call: “U.S. Federal Debt Not on Sustainable Path” and “High Public Debt Does Not Affect Monetary Policy.” Perhaps a more pertinent caption would read, “Monetary Policy Fomenting High Public Debt.” I might be persuaded to believe in the most extreme circumstances (i.e. war or during acute financial crisis) there may be justification for central banks temporarily pegging long-term market yields. Today is not such a scenario. The system is currently in a most desperate need of market discipline. At this point, only the markets can keep Washington from completely bankrupting our government with unmanageable debt.
Meanwhile, as Scott Galloway points out, the shareholder class has used the panic surrounding Covid-19 as cloud cover to toss some tokenistic loaves of bread at the poor, while simultaneously accruing trillions of dollars of wealth at the expense of the younger generation and those as yet unborn:
A crisis is a terrible thing to waste, and Covid-19 provided the wealthy with the opportunity for the greatest economic grift in history.
The pandemic and the measures taken in response to it have created an economic crisis of historic proportions. Unemployment leapt to 15% in April, and while it has gradually recovered, it remains twice as high as it was before the pandemic. Job losses and many other forms of harm have been concentrated among the lowest earners, and to a much greater degree than in other recent crises.
The response by the federal government has also been historic, and massive. But of the $5 trillion spent (so far), only around $1.5 trillion came in the form of direct aid to individuals. A quarter of that funded $1,200 and $600 stimulus checks, many of which went to people who had not suffered financially (only 15% of recipients of the first round of checks said they planned to spend the money). Read that last sentence: more than four in five recipients of money borrowed from future generations (debt) did not urgently need it. Another $1 trillion or so went to pandemic response (medicine, PPE, medical services), and while this was necessary, the money ended up largely in the pockets of health care company shareholders.
The remaining $2.5 trillion came via mostly forgivable loans and handouts to businesses. But don’t let the name “paycheck protection program” fool you — recipients were not required to actually protect any paychecks. The final tally is about $1 trillion in direct aid to those who truly needed it, $1 trillion to the actual pandemic response … and a $3 trillion wealth transfer to the rich and powerful. We’re calling it: The Great Grift.
The future can never be precisely clear, but from the fog of the present it seems quite extraordinarily unclear now. The US seems like it will be riven by deep political faultlines for the foreseeable future. President Biden is evidently determined to unpick many of Donald Trump’s pet hate projects, signing a blizzard of 17 executive orders which will, amongst other things, tear down the wall, reverse the travel ban, announce an immigration bill granting citizenship rights to illegal immigrants, rejoin the Paris climate accord, and rejoin the WHO. Measures to crack down on fossil fuel development will almost certainly lead to energy price inflation, whereas under former President Trump the US had managed to achieve something approaching energy self-sufficiency.
Closer to home, Europe shows no signs of any rapprochement towards the UK. The Times reports that European governments are considering a travel ban on all UK residents and cutting all passenger travel links with Britain. What Brexit started, coronavirus panic is clearly continuing.
Fractious politics, growing inflationary pressure on top of already unsustainable bond yields, likely currency turbulence, rising tensions between the regulators and Big Tech.. we seek solace of a sort in defensive, cash-generative listed business internationally (and especially in ex-China Asia); also in uncorrelated, systematic trend-following funds; and in real assets, notably the monetary metals, gold and silver, but increasingly in cash-generative listed businesses with little or no debt operating in the wider commodities markets. Inflation is perhaps our Number 1 fear for 2021. And we see huge merit in diversification. This is no year to be living dangerously. In conclusion, we cite the words of Carl Richards:
Risk is what’s left over when you think you’ve thought of everything.
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and specialist managed funds.
Early signs are that in economic terms, President Biden has his work cut out. The federal government, writes Doug Noland, is in the process of expanding debt by more than 30% of GDP in only two years. Hopefully not at double-digit annual rates, yet massive deficit spending is inevitable as far as the eye can see. Importantly, Washington is running massive deficits despite both record stock prices and corporate debt issuance – in the face of about the loosest financial conditions imaginable.
How enormous will deficits balloon when this historic financial Bubble bursts? Are $5.0 TN annual deficits an unreasonable guesstimate? No worries, apparently. There’s always the “whatever it takes” Federal Reserve balance sheet. In the financial and economic crisis scenario, does the Fed boost Treasury, MBS, corporate bond and EFT purchases to, say, $500 billion monthly ?
Two headlines from Powell’s Thursday Princeton zoom call: “U.S. Federal Debt Not on Sustainable Path” and “High Public Debt Does Not Affect Monetary Policy.” Perhaps a more pertinent caption would read, “Monetary Policy Fomenting High Public Debt.” I might be persuaded to believe in the most extreme circumstances (i.e. war or during acute financial crisis) there may be justification for central banks temporarily pegging long-term market yields. Today is not such a scenario. The system is currently in a most desperate need of market discipline. At this point, only the markets can keep Washington from completely bankrupting our government with unmanageable debt.
Meanwhile, as Scott Galloway points out, the shareholder class has used the panic surrounding Covid-19 as cloud cover to toss some tokenistic loaves of bread at the poor, while simultaneously accruing trillions of dollars of wealth at the expense of the younger generation and those as yet unborn:
A crisis is a terrible thing to waste, and Covid-19 provided the wealthy with the opportunity for the greatest economic grift in history.
The pandemic and the measures taken in response to it have created an economic crisis of historic proportions. Unemployment leapt to 15% in April, and while it has gradually recovered, it remains twice as high as it was before the pandemic. Job losses and many other forms of harm have been concentrated among the lowest earners, and to a much greater degree than in other recent crises.
The response by the federal government has also been historic, and massive. But of the $5 trillion spent (so far), only around $1.5 trillion came in the form of direct aid to individuals. A quarter of that funded $1,200 and $600 stimulus checks, many of which went to people who had not suffered financially (only 15% of recipients of the first round of checks said they planned to spend the money). Read that last sentence: more than four in five recipients of money borrowed from future generations (debt) did not urgently need it. Another $1 trillion or so went to pandemic response (medicine, PPE, medical services), and while this was necessary, the money ended up largely in the pockets of health care company shareholders.
The remaining $2.5 trillion came via mostly forgivable loans and handouts to businesses. But don’t let the name “paycheck protection program” fool you — recipients were not required to actually protect any paychecks. The final tally is about $1 trillion in direct aid to those who truly needed it, $1 trillion to the actual pandemic response … and a $3 trillion wealth transfer to the rich and powerful. We’re calling it: The Great Grift.
The future can never be precisely clear, but from the fog of the present it seems quite extraordinarily unclear now. The US seems like it will be riven by deep political faultlines for the foreseeable future. President Biden is evidently determined to unpick many of Donald Trump’s pet hate projects, signing a blizzard of 17 executive orders which will, amongst other things, tear down the wall, reverse the travel ban, announce an immigration bill granting citizenship rights to illegal immigrants, rejoin the Paris climate accord, and rejoin the WHO. Measures to crack down on fossil fuel development will almost certainly lead to energy price inflation, whereas under former President Trump the US had managed to achieve something approaching energy self-sufficiency.
Closer to home, Europe shows no signs of any rapprochement towards the UK. The Times reports that European governments are considering a travel ban on all UK residents and cutting all passenger travel links with Britain. What Brexit started, coronavirus panic is clearly continuing.
Fractious politics, growing inflationary pressure on top of already unsustainable bond yields, likely currency turbulence, rising tensions between the regulators and Big Tech.. we seek solace of a sort in defensive, cash-generative listed business internationally (and especially in ex-China Asia); also in uncorrelated, systematic trend-following funds; and in real assets, notably the monetary metals, gold and silver, but increasingly in cash-generative listed businesses with little or no debt operating in the wider commodities markets. Inflation is perhaps our Number 1 fear for 2021. And we see huge merit in diversification. This is no year to be living dangerously. In conclusion, we cite the words of Carl Richards:
Risk is what’s left over when you think you’ve thought of everything.
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and specialist managed funds.
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