The Most Important Thing
Priorities Driving Economic Policy
We all have the tendency to sit back and analyze things through our own lens rather through the lens of others. This is especially true for Americans. We speak one language (generally), rely on US based news sources and view the world through American eyes as many of us don’t travel or have contact with the rest of the world. It is important to keep an open mind about the views of others so you don’t get stuck in the rut of thinking from a unipolar world. As I mentioned in prior rantings, we live in a different world. Many still point to Trump as the mastermind (or deficient mind, depending on your politics), but really, he mostly in the right place at the right time to do what he is going to do. Trump and the government in general have one thing at the very top of their list of important things. Keep the debt based monetary system intact. In order to do this, USG debt must be bought when the USG needs to sell it.
Looking back to 2008 there was panic behind the scenes in many central banks around the world. In many cases it was even WORSE than the news media let on. The failure of the banking system would bring financial destruction to every corner of the world. I remember the economy freezing up due to the lack of credit available for even normal business operations. Companies froze as banks were unwilling or even unable to extend lines of credit for normal things like floor planning, payroll, inventory and expansion. Hundreds of thousands were laid off or fired. Businesses failed. The ultimate widows and orphans stock, GM went out of business. Not just down, OUT OF BUSINESS. If you owned stock in GM in 2007, you no longer own that stock. You were zeroed out. If you own GM now, that is a whole new company. The GM stock symbol is the same but it is a new company. Many other companies followed or preceded GM. Bear Sterns, Lehman Bros, other banks and many main street companies. They of course bailed out the banks, everyone got their bonuses, some deserved and some not. They did this because as bad as it was, it could have been A LOT WORSE! Imagine you wake up and your bank account is zeroed, you can’t get money from a money market because there is no liquidity. Stocks have crashed, not just 50% as they did, but 80 or 90%. What then? This is what would happen if our debt based system locked up or lost the trust of market participants. A mini version of this happened in England when Liz Truss was PM for less than 2 weeks. She tried to cut taxes and the bond market FLIPPED OUT.
So, what does all of this mean? We all know about the massive debt and deficit we are running and have been running since you know, the pandemic thing happened. We pulled out all the stops because the political reaction to the lab enhanced cold/flu combo was extreme. We had helicopters fly over the country and drop money everywhere. We barely cared where the money went, as long as it got spent. A smart Treasury Secretary might have termed out the country’s debt with 10s or 30 year bonds at 1%, but NOOOO, Yellen put it all in short term to save PENNIES. So now we have this massive debt rollover due this year. $10 Trillion give or take. At these rates, rolling it long term would make out interest expense more than any other budget line item. When we talk about what we can cut, that is not one of the things we can cut!
On to today. Trump is elected and with him actually comes a pretty decent team of advisors. Scott Bessent is very bright. If you have a spare hour, this podcast was very good. Also Stephen Miran is worth a listen on this BBG interview. These guys understand what is important and have a plan to move past this disaster of debt which Trump both contributed to with his first round of Covid stimulus which was probably needed at the time as well as inherited from Biden. They are pulling out all measures and thinking outside the box for solutions on how to get this debt sold this year and next year without resorting to financial repression. Financial Repression is when the government starts implementing capital controls and other policies to force purchases of govt debt. This could take the form of forcing pensions and retirement accounts to tax X% of USG debt or restrict the flow of capital or do what Japan has done and monetize the debt. Doing any of those things would be tantamount to admitting the system is broken and failing. Let’s hope their other plans work!
The other plans are a multi-part strategy consisting of tariffs, spending cuts, and politely asking countries we provide security for to perhaps buy some of out debt for the long run. Other policies like cutting regulations, increasing energy abundance and securing natural resources from the US, North American and through friendly alliances will help keep inflation in check and help grow the economy to get the deficit percentage closer to the trendline. In other words we must grow our way out of the debt which has been created while keeping a lid on inflation.
Every aspect of our financial system depends on 10 year rates. Banks use the 10 year to hedge off risk when making loans into the economy. If we have a credit event, however bad 2008 was, this time will be much worse. Our country is divided and we will go through some very rough and possibly some violent times if such an event happens. You will know things are starting to get frosty if and when the 10 year yield goes over 5% and holds there.
So the most important thing is - keeping our debt based system alive. If we can’t sell the bonds, it is OVER and the reaction in this country and around the world will be monumental. Since Bretton Woods more or less ceased to exist when the Gold Window was shut in 1971, we have been operating without a real formalized framework. We tried to patch things with the Plaza Accord in the 1980s. It is probably time for a new monetary accord. I’m far from smart enough to know what the actual smart people in the room have in mind, but something is likely coming in the next few years. Some are despicably rooting against Trump on this because OMB (Orange Man Bad). Severe TDS prevents rational thought. Whether like or hate Trump, we as a country and probably the rest of the world, should be rooting for a solution to this debt issue. If there is a failure, returning to what you might of thought was the status quo will be impossible. That world is gone, look to the future and root for the smart people to be smart enough to get us through this.