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October 9, 2020 | Limits To Monetary and Fiscal Policy Methinks…

Jack has over 20 years experience in the currency, equity, and futures arena. He is an investment advisor who has held key positions in brokerage, money management, trading, and research. Jack is founder and president of Black Swan Capital LLC. He was also founder of Ross International Asset Management (specializing in global stock, bond, and currency asset management for retail clients) and General Manager of Plexus Trading (specializing in currency futures and commodities trading).

The hottest places in hell are reserved for those who, in times of great moral crisis, maintain their neutrality.”

― Dante Alighieri

I presented the following chart below during showing the nasty feedback loop of rising debt and weak global demand during a webinar back in 2015 (and had developed the diagram a few years earlier).

Debt demand feedback loop.png

And what is scary is the fact this situation has not changed, but has worsened dramatically since 2015 despite, or because of, a massive increase in fiscal spending and money pumping….

Note the bullet points on the right side of the chart; they come from Murray Rothbard’s excellent book, The Great Depression.  The US “policymakers” have followed the game plan perfectly and have succeeded in prolonging a depression in the real economy—where real people live and work by selling their labor on a quasi-free market that is increasingly rigged against them.

America’s ruling elite don’t participate much in the real economy; but they extract a massive amount of wealth from it in the form of usury and corporate dividends and buybacks and private equity, etc.; thus, leveraging their capital, something, let’s call them “real people” can’t do.  The modern ruling elite in the West, circa about 1945 or earlier, have never heard the words noblesse oblige.  Instead, America’s finest employ their power and access to exploit their capital by all means necessary.  “What do you mean this crony-capitalism-neo-liberalism model isn’t working?  Just take a look at my balance sheet.”  [One wonders which circle of hell Dante would assign to the smug elite class in America?]

This cannot last.  There are limits to monetary and fiscal policy and we must be inching ever close to that limit.  To put it another way, the debt bubble, driving the equity bubble, of supposedly good intention are leading to the usual place good intentions lead.  The only question is how long till we arrive at the expected destination?

Are we starting to sense a bit of panic from those in the know; i.e. the Fed’s calls for another couple of trillion to keep the balls in the air on top of the several trillion already dumped onto Mr. Market.

Everybody is so concerned about the massive US current account deficit for the second quarter reported yesterday, and they should be, but not for the usual reasons.

100620 deficit.png

What it highlights is another point on Mr. Rothbard’s keys to depression: Stimulate consumer spending.  The rising deficit says a lot of things, but most importantly is says that lots of the money being pumped into the US economy, in order to keep things afloat, are being sent offshore in the form of consumer spending (other countries dumping their excess supply on the US; which effectively shows our Fed is the global central bank) at the expense of households with fewer and fewer job prospects taking on additional debt to stay afloat.  In the process, this effectively means more and more US dollar supply sent to the rest of the world in order to sustain the usury money train of the previously defined US elites.

The last time we saw this game of a rising current account deficit a la supported by rising debt and illusory gains in real estate (the ATM if you remember and starting to look like déjà vu all over again) led to the Great Credit Crunch of 2007-08.  Interestingly, the credit crunch was part and parcel to too much debt in the economy at a time when we had a much strong job market and central banks with some bullets left in their guns.

So, fast forward to now.  We have a massively greater amount of debt, that has pushed capital prices higher and higher, creating a greater and greater drag on real growth (zombie companies and cash flow used to payback said debt) which creates a further drag on the job market.

And as the current account increases the US dollar weakens in response.  It is that supply-demand thing.  The world is full of debt and needs dollar funding.  So, you have the push and pull of demand vs. supply.  The Fed is satiating dollar demand with excess supply at the moment.  But, just as it did during the Credit Crunch there will come a time when dollar demand will again exceed whatever the Fed can throw on the market.  That will again lead to yet another major dollar risk bid higher, leading to yet another serious bout of global deflation (unless of course the US Congress takes complete control of monetary policy by then, meaning the game will end in hyper-inflation) and game begins again.

This is why the word’s “debt jubilee” are being taken seriously.  And it will seriously be opposed by America’s elites.

Did Dante ever talk about a 10th circle of hell?

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October 9th, 2020

Posted In: Black Swan Currency Currents

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