BFTP: How to Become a Trillionaire And Other Thoughts

BTFP:  Blast From The Past

Time to repost our piece from January 2017, almost two weeks before the Trump administration took power.

We hit the big topics back then which are now making headlines today:  1)  Modern Monetary Theory;  2)  How Trump’s fiscal policy will lead to larger trade deficits, regardless of his “trade deals”;  and 3) Our call on spikey interest rates, which though gained some traction by breaking out in September 2018, which took the stock market down, but has yet to fully play out.  Give it some more time.

New Charts

Here are some up-to-date charts, which confirm some of our predictions back in January 2017.

Absolutely stunning to see such large budget deficits as far as the eye can see with the actual and projected unemployment rate under 5 percent. What kind of budget deficit beast will we run if we have a recession?  Will demand for Treasury securities be there to finance, say, a $2 trillion deficit?

Source:   Forbes

Source:  Forbes

Another Macro Divergence 

The Exploding Twin Deficits Will Eventually Hit Stocks

Source:  Otavio (Tavi) Costa  @TaviCosta

Also see the recent Forbes article, Trump’s Twin Deficits Are Exploding.

Nobody cares until it they think it matters — and it will, folks.

How to Become a Trillionaire and Other Thoughts

Grab one of these:

Careful what you wish for central bankers and fiscal policy makers.  Though we don’t see signs of “rollover risk” in any of the G5 or G20, it’s all about confidence and you know what Joe said about confidence:

Confidence is a very fragile thing.  – Joe Montana

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The World Economic Forum reports this about Zimbabwe’s ghost of hyperinflation past,

Zimbabwe was once so gripped by hyperinflation that the central bank could no longer afford paper on which to print practically worthless trillion-dollar notes. 

The government reported in July 2008 that Zimbabwe was experiencing inflation of 231 million percent (231,000,000%). However, the Libertarian think tank, the Cato Institute, believes that the real inflation rate was 89.7 sextillion percent or 89,700,000,000,000,000,000,000%.

It is interesting to note that the country is now grappling with the opposite problem.

Like Britain, Japan, the US and other nations dealing with the consequences of weak demand and cheap oil, Zimbabwe is threatened more by the prospect of falling prices. But that doesn’t mean its people are ready to trust that hyperinflation won’t happen again.

The Russians made a political choice to default and inflict the pain on foreigners rather their domestic population through hyperinflation.   What was interesting is Russia continued to pay their dollar-denominated euro bonds, which had a relatively low debt service burden compared to the maturing GKOs.  The Russian government effectively carved out and gave implicit seniority to a specific component of their debt structure.  Totally contrary to what MMT predicts will happen, i.e.,  print money to pay the local debt and default on the hard currency external debt.

The major industrialized countries have gotten away with massive money printing and central bank financing not only of their sovereign governments but even some private corporations as well.

Good things don’t last forever.

As interest rates rise and are normalized,  highly indebted countries could enter a vicious cycle on the fiscal side,

Our current debt may be manageable at a time of unprecedentedly low interest rates. But if we let our debt grow, and interest rates normalize, the interest burden alone would choke our budget and squeeze out other essential spending. There would be no room for the infrastructure programs and the defense rebuilding that today have wide support.

It’s not just federal spending that would be squeezed. The projected rise in federal deficits would compete for funds in our capital markets and far outrun the private sector’s capacity to save, to finance industry and home purchases, and to invest abroad.

Instead, we’d be dependent on foreign investors’ acquiring most of our debt — making the government dependent on the “kindness of strangers” who may not be so kind as the I.O.U.s mount up.  – PAUL A. VOLCKER and PETER G. PETERSON

We think foreigners will not be that “kind” to the U.S. in the new hardball world of  Trumplandia as the risk of trade wars and deglobalization increases.  Run, don’t walk, to read Martin Wolf’s latest,  The long and painful journey to world disorder.

Furthermore, given the Trump fiscal policy, which will significantly reduce net public savings and is highly dependent on big increases in private investment and consumption for growth, further reducing net private savings,  the U.S. current account balance, by definition, will deteriorate markedly over the next several years.   Thus, there will be yuuuuge competition for the world’s foreign savings to finance the larger U.S. current account deficits.  In this world, if realized, real interest rates will head north in a hurry.

Remember the National Accounting Identity,

(S-I) + (T-G) = (X-M)

 (S-I) is the ‘private savings balance’ or the difference between private sector savings (S) and investment (I); (T-G) is the ‘government balance’ or the difference between tax receipts (T) and all government expenditure (G); (X-M) is the difference between exports (X) and imports (M) and is usually called the simple ‘current account balance’.  – George Irvin

As the tide of easy money recedes,  we have a queasy feeling we’ll be seeing a lot of schlong over the next few years as the markets find out who has been swimming naked.

And, always, keep this in mind:

“In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.” – Rudiger Dornbusch

Fasten your seatbelts, it’s going to be a bumpy night.    Stay tuned!