Episode 242 - US Monetary Outlook

Today the gang's all here, gathered around the fireplace, eating metaphorical marshmallows as papa Karim, our resident economist, busts out the spit facts. We're going over the current economic state of the US, monetary strategies, how they affect economies and trade between them, and much, much more. So, grab a stick, poke a marshmallow and relax while Karim gets them FACTS into your brain.

The U.S. Treasury Will Borrow A Record $3 Trillion This Quarter As Stimulus Spending Soars

• Over last two months Congress has authorized more than $3 Trillion in emergency stimulus
• In order to come up with that cash the Treasury will have to issue record breaking amount of debt
• Last quarter, the Treasury borrowed about $500 billion, and it plans to borrow another $677 billion in the third quarter.
• relatively cheap to borrow with record low interest rates (10 year note yielding about 0.6%)
• The Treasury’s numbers only account for legislation that has been passed to date. Another stimulus package is in the works

US Debt big picture

• $25 Trillion threshold crossed, $7 trillion in the last 5 years
• According to data from the US Treasury growth is
• $1.2 million per minute
• $1.7+ billion per day

National Debt Clock

• Every 15 secs our tax revenue is falling by like 100k
• Debt per citizen $75,600
• Per Tax payer though that’s $200,000
• Currency Creation (M2 Money supply) +$100,000 every few seconds

Who owns that debt?

• Majority of US debt owned by Americans (investors, fed, banks).
• 30% owned by foreign entities
• China and Japan more than 1 Trillion each

Debt to GDP

• 2019 -publicly held federal debt was almost 80% percent, $17 trillion
• According to CBO estimates then, debt was already rising faster than the economy and was projected to reach 98% by 2030
• now at 107% and projected to 108% by 2021, our record was 106% year after WWIIAnother chart shows Gross debt to GDP after WWII at around 118%
• Checked again this morning on Nat debt clock, looks like we broke this barrier as of 5/21 119.08%

Saw this back of envelope simplifications 35m to 1 reduction

US as household

• Income - 100k p/yr
• Debt - $714k
• Unfunded liabilities (medicare,SS,VA) - $4.2m

International perspective

• 06-18

FWIW Trump said if he gets re-elected he’ll wipe the debt =) he said that last time too and it was +5Trillion going into this (last time we cleared the debt was Andrew Jackson 1835)

Interesting quote though to keep this in perspective -

“If the Fed didn’t take these and other emergency measures, “the system already would have blown up,The markets would have crashed 10 times over.” - Tim Duy University of Oregon (Economist, US Treasury)

Modern Monetary Theory, Is there a limit?

• MTT points out a government that controls its own currency can't default on debt
• But defecit + interest rates increase outstanding debt, is there a limit?
• Sustainability does not require the government deficit to be zero, or surpluses
• it requires that the debt increase at the same rate, or more slowly than, GDP growth
• Parts of MMT rely on the President and Congress to fight, at some point, the inflation created by money printing
• by either tax increases or reducing government spending.
• But this ignores the political realities that easy for fed to print, but hard for politicians to tax more or cut spending
• MMT also "ignores distributional effects of paying for borrowing"
• Essentially MMT tends to consider debt payment as occruing between two players within the economy
• As we mentioned before, irl USA has 30% of debt owned by foreign entities
• Interest payments to those investors reduce the income flowing to U.S. residents, making Americans less well off.
• This would be justifiable if today’s spending raised income and living standards in the future
• So this is not just a problem of scale, but of allocation

Here is the catch 22

• If we keep creating money, there is going to be inflation unless we raise interest rates (which makes borrowing /spending more expensive)
• “too much money chasing too few goods”
• If we raise interest rates, we exacerbate the debt problem

Devaluing the currency?

• strong currency is not necessarily in a nation's best interests.
• Weak Domestic currency
• makes exports more competitive, while making imports more expensive
• Having more exports spurs economic growth,
• pricey imports can stimulate local consumption
• wealth effect also takes hold here as widely held assets prices rise, making ppl feal wealthy
• Dangers
• Devaluation hurts citizens purchasing power overseas
• Can lower productivity by making capital equipment and machinery more expensive to import
• Strategic devaluation doesn't always work though, and here we can get currency wars
• Strategic reasons to devalue currency
• To boost eports (as explained)
• To shirnk trade defecits
• If your country was importing too much and exporting too little this can be used to achieve a better balance
• while Many countries run persistent imbalances, Economic theory says this isnt sustainable
• The important one here, to reduce Sovereign Debt Burdens
• If debt payments are fixed, a weaker currency makes these payments effectively less expensive over time.
• Say you had to pay $1m each month in interest on outstanding debt… if that same $1m becomes less valuable its easier to pay it off
• If we devalue currency by half we effectively owe only 500k value wise

“The United States can pay any debt it has because we can always print money to do that,” former Federal Reserve chairman Alan Greenspan said on NBC in 2011. “So there is zero probability of default.”

But most goverments are doing very similar things, central banking is the world standard. so as grim as this looks for the US, and arguably the dollar, the fact that it looks so much worse in other fiats creates flight to the dollar

Central Bank Foreign Currency Reserves are 61% Dollars, next best is Euro at 21%

Also remember that our discussion on devaluing local currencies applies to tons of countries that do business with the US, like China and Japan (the largest debt holders)

• Not Unfathomable
• According to Juan Zarate's "Treasur Wars", Russia approached China in 2008 with a plan for a coordinated sale of government-sponsored debt to exacerbate America's financial crisis. China thankfully declined.

Still Over a trillion USD countries and companies need to make interest payment on dollar-baseed debt