TFTF

Prelude to Crisis

December 20, 2019

Ignoring problems rarely solves them. You need to deal with them—not just the effects, but the underlying causes, or else they usually get worse. The older you get, the more you know that is true in almost every area of life.

In the developed world and especially the US, and even in China, our economic challenges are rapidly approaching that point. Things that would have been easily fixed a decade ago, or even five years ago, will soon be unsolvable by conventional means.

There is almost no willingness to face our top problems, specifically our rising debt. The economic challenges we face can’t continue, which is why I expect the Great Reset, a kind of worldwide do-over. It’s not the best choice but we are slowly ruling out all others.

Last week I talked about the political side of this. Our embrace of either crony capitalism or welfare statism is going to end very badly. Ideological positions have hardened to the point that compromise seems impossible.

Central bankers are politicians, in a sense, and in some ways far more powerful and dangerous than the elected ones. Some recent events provide a glimpse of where they’re taking us.

Hint: It’s nowhere good. And when you combine it with the fiscal shenanigans, it’s far worse.

Simple Conceit

Central banks weren’t always as responsibly irresponsible, as my friend Paul McCulley would say, as they are today. Walter Bagehot, one of the early editors of The Economist, wrote what came to be called Bagehot’s Dictum for central banks: As the lender of last resort, during a financial or liquidity crisis, the central bank should lend freely, at a high interest rate, on good securities.

The Federal Reserve came about as a theoretical antidote to even-worse occasional panics and bank failures. Clearly, it had a spotty record through 1945, as there were many mistakes made in the ‘20s and especially the ‘30s. The loose monetary policy coupled with fiscal incontinence of the ‘70s gave us an inflationary crisis. Paul Volcker’s recent passing (RIP) reminds us of perhaps the Fed’s finest hour, stamping out the inflation that threatened the livelihood of millions. However, Volcker had to do that only because of past mistakes.

Recently, reader Mourad Rahmanov, who has thought-provoking (and sometimes lengthy) reactions to almost every letter, kindly sent me some of his personal favorite John Mauldin quotes. One was this passage which succinctly captures my feelings about the Fed. (Context: This was part of my response to Ray Dalio’s comments on Modern Monetary Theory.)

Beginning with Greenspan, we have now had 30+ years of ever-looser monetary policy accompanied by lower rates. This created a series of asset bubbles whose demises wreaked economic havoc. Artificially low rates created the housing bubble, exacerbated by regulatory failure and reinforced by a morally bankrupt financial system.

And with the system completely aflame, we asked the arsonist to put out the fire, with very few observers acknowledging the irony. Yes, we did indeed need the Federal Reserve to provide liquidity during the initial crisis. But after that, the Fed kept rates too low for too long, reinforcing the wealth and income disparities and creating new bubbles we will have to deal with in the not-too-distant future.

This wasn’t a “beautiful deleveraging” as you call it. It was the ugly creation of bubbles and misallocation of capital. The Fed shouldn’t have blown these bubbles in the first place.

The simple conceit that 12 men and women sitting around the table can decide the most important price in the world (short-term interest rates) better than the market itself is beginning to wear thin. Keeping rates too low for too long in the current cycle brought massive capital misallocation. It resulted in the financialization of a significant part of the business world, in the US and elsewhere. The rules now reward management, not for generating revenue, but to drive up the price of the share price, thus making their options and stock grants more valuable.

Coordinated monetary policy is the problem, not the solution. And while I have little hope for change in that regard, I have no hope that monetary policy will rescue us from the next crisis.

Let me amplify that last line: Not only is there no hope monetary policy will save us from the next crisis, it will help cause the next crisis. The process has already begun.

Radical Actions

In September of this year, something still unexplained (at least to my satisfaction, although I know many analysts who believe they know the reasons) happened in the “repo” short-term financing market. Liquidity dried up, interest rates spiked, and the Fed stepped in to save the day. I wrote about it at the time in Decoding the Fed.

Story over? No. The Fed has had to keep saving the day, every day, since then.

We hear different theories. The most frightening one is that the repo market itself is actually fine, but a bank is wobbly and the billions in daily liquidity are preventing its collapse. Who might it be? I have been told, by well-connected sources, that it could be a mid-sized Japanese bank. I was dubious because it would be hard to keep such a thing hidden for months. But then this week, Bloomberg reported some Japanese banks, badly hurt by the BOJ’s negative rate policy, have turned to riskier debt to survive. So, perhaps it’s fair to wonder.

Whatever the cause, the situation doesn’t seem to be improving. On Dec. 12 a New York Fed statement said its trading desk would increase its repo operations around year-end “to ensure that the supply of reserves remains ample and to mitigate the risk of money market pressures.”

Notice at the link how the NY Fed describes its plans. The desk will offer “at least” $150 billion here and “at least” $75 billion there. That’s not how debt normally works. Lenders give borrowers a credit limit, not a credit guarantee plus an implied promise of more. The US doesn’t (yet) have negative rates but the Fed is giving banks negative credit limits. In a very precise violation of Bagehot’s Dictum.

We have also just finished a decade of the loosest monetary policy in American history, the partial tightening cycle notwithstanding. Something is very wrong if banks still don’t have enough reserves to keep markets liquid. Part of it may be that regulations outside the Fed’s control prevent banks from using their reserves as needed. But that doesn’t explain why it suddenly became a problem in September, necessitating radical action that continues today.

Here’s the official line, from minutes of the unscheduled Oct. 4 meeting at which the FOMC approved the operation.

Staff analysis and market commentary suggested that many factors contributed to the funding stresses that emerged in mid-September. In particular, financial institutions' internal risk limits and balance sheet costs may have slowed the distribution of liquidity across the system at a time when reserves had dropped sharply and Treasury issuance was elevated.

So the Fed blames “internal risk limits and balance sheet costs” at banks. What are these risks and costs they were unwilling to accept, and why? We still don’t know. There are lots of theories. Some even make sense. Whatever the reason, it was severe enough to make the committee agree to both repo operations and the purchase of $20 billion a month in Treasury securities and another $20 billion in agencies. They insist the latter isn’t QE but it sure walks and quacks like a QE duck. So, I and many others call it QE4.

As we learned with previous QE rounds, exiting is hard. Remember that 2013 “Taper Tantrum?” Ben Bernanke’s mild hint that asset purchases might not continue forever infuriated a liquidity-addicted Wall Street. The Fed needed a couple more years to start draining the pool, and then did so in the stupidest possible way by both raising rates and selling assets at the same time. (I don’t feel good saying I told you so but, well, I did.)

Having said that, I have to note the Fed has few good choices. As mistakes compound over time, it must pick the least-bad alternative. But with each such decision, the future options grow even worse. So eventually instead of picking the least-bad, they will have to pick the least-disastrous one. That point is drawing closer.

Ballooning Balance Sheet

Underlying all this is an elephant in the room: the rapidly expanding federal debt. Each annual deficit raises the total debt and forces the Treasury to issue more debt, in hopes someone will buy it.

The US government ran a $343 billion deficit in the first two months of fiscal 2020 (October and November) and the 12-month budget deficit again surpassed $1 trillion. Federal spending rose 7% from a year earlier while tax receipts grew only 3%.

No problem, some say, we owe it to ourselves, and anyway people will always buy Uncle Sam’s debt. That is unfortunately not true. The foreign buyers on whom we have long depended are turning away, as Peter Boockvar noted this week.

Foreign selling of US notes and bonds continued in October by a net $16.7b. This brings the year-to-date selling to $99b with much driven by liquidations from the Chinese and Japanese. It was back in 2011 and 2012 when in each year foreigners bought over $400b worth. Thus, it is domestically where we are now financing our ever-increasing budget deficits.

The Fed now has also become a big part of the monetization process via its purchases of T-bills which also drives banks into buying notes. The Fed's balance sheet is now $335b higher than it was in September at $4.095 trillion. Again, however the Fed wants to define what it's doing, market participants view this as QE4 with all the asset price inflation that comes along with QE programs.

It will be real interesting to see what happens in 2020 to the repo market when the Fed tries to end its injections and how markets respond when its balance sheet stops increasing in size. It's so easy to get involved and so difficult to leave.

Declining foreign purchases are, in part, a consequence of the trade war. The dollars China and Japan use to buy our T-bills are the same dollars we pay them for our imported goods. But interest and exchange rates also matter. With rates negative or lower than ours in most of the developed world, the US had been the best parking place.

But in the last year, other central banks started looking for a NIRP exit. Higher rate expectations elsewhere combined with stable or falling US rates give foreign buyers—who must also pay for currency hedges—less incentive to buy US debt. If you live in a foreign country and have a particular need for its local currency, an extra 1% in yield isn’t worth the risk of losing even more in the exchange rate.

I know some think China or other countries are opting out of the US Treasury market for political reasons, but it’s simply business. The math just doesn’t work. Especially given the fact that President Trump is explicitly saying he wants the dollar to weaken and interest rates go even lower. If you are in country X, why would you do that trade? You might if you’re in a country like Argentina or Venezuela where the currency is toast anyway. But Europe? Japan? China? The rest of the developed world? It’s a coin toss.

The Fed began cutting rates in July. Funding pressures emerged weeks later. Coincidence? I suspect not. Many factors are at work here, but it sure looks like, through QE4 and other activities, the Fed is taking the first steps toward monetizing our debt. If so, many more steps are ahead because the debt is only going to get worse.

As you can see from the Gavekal chart below, the Fed is well on its way to reversing that 2018 “quantitative tightening.”

Louis Gave wrote a brilliant essay recently (behind their pay wall, but perhaps he will make it more public) considering four possible reasons for the present valuation dichotomies. I’ll quote the first one because I believe it is right on target:

1) The Fed’s balance sheet expansion is only temporary.

The argument: The Fed’s current liquidity injection program is not a genuine effort at quantitative easing by the US central bank. Instead, it is merely a short-term liquidity program to ensure that markets—and especially the repo markets—continue to operate smoothly. In about 15 weeks’ time, the Fed will stop injecting liquidity into the system. As a result, the market is already looking through the current liquidity injections to the time when the Fed goes “cold turkey” once again. This explains why bond yields are not rising more, why the US dollar isn’t falling faster, and so on.

My take: This is a distinct possibility. But then, as Milton Friedman used to say: “Nothing is so permanent as a temporary government program.” The question here is: Why did the repo markets freeze in mid- to late September? Was it just a technical glitch? Or did the spike in short rates reflect the fact that the appetite of the US private sector and foreign investors for short-dated US government debt has reached its limit? In short, did the repo market reach its “wafer-thin mint” moment?

If it was a technical glitch, then the Fed will indeed be able to “back off” come the spring. However, if, as I believe, the repo market was not the trouble, but merely a symptom of a bigger problem—excessive growth in US budget deficits—then it is hard to see how, six months before a US election, the Fed will be able to climb back out of the full-on US government monetization rabbit hole in which it is now fully immersed.

In this scenario, the markets will come to an interesting crossroads around the Ides of March. At that point, the Fed will have to take one of two paths:

1. The Fed does indeed stop its “non-QE QE” program. In this scenario, US and global equities are likely to take a nasty spill. In an election year, that will trigger a Twitterstorm of epic proportions from the US president.

2. The Fed confirms that the six-month “temporary” liquidity injection program is to be extended for another “temporary” six months. At this point bond yields everywhere around the world will shoot up, the US dollar will likely take a nasty spill, global equities will outperform US equities, and value will outperform growth, etc.

Looking at the US government’s debt dynamics, I believe the second option is much more likely. And it is all the more probable since triggering a significant equity pull-back a few months before the US presidential election could threaten the Fed’s independence. Still, the first option does remain a possibility, which may well help to explain the market’s cautious positioning despite today’s coordinated fiscal and monetary policies (ex-China).

Just this week Congress passed, and President Trump signed, massive spending bills to avoid a government shutdown. There was a silver lining; both parties made concessions in areas each considers important. Republicans got a lot more to spend on defense and Democrats got all sorts of social spending. That kind of compromise once happened all the time but has been rare lately. Maybe this is a sign the gridlock is breaking. But if so, their cooperation still led to higher spending and more debt.

As long as this continues—as it almost certainly will, for a long time—the Fed will find it near-impossible to return to normal policy. The balance sheet will keep ballooning as they throw manufactured money at the problem, because it is all they know how to do and/or it’s all Congress will let them do.

Nor will there be any refuge overseas. The NIRP countries will remain stuck in their own traps, unable to raise rates and unable to collect enough tax revenue to cover the promises made to their citizens. It won’t be pretty, anywhere on the globe.

Luke Gromen of Forest for the Trees is one of my favorite macro thinkers. Like Louis Gave, he thinks the monetization plan will get more obvious in early 2020.

Those that believe that the Fed will begin undoing what it has done since September after the year-end “turn” are either going to be proven right or they are going to be proven wrong in Q1 2020. We strongly believe they will be proven wrong. If/when they are, the FFTT view that the Fed is “committed” to financing US deficits with its balance sheet may go from a fringe view to the mainstream.

Both parties in Congress are committed to more spending. No matter who is in the White House, they will encourage the Federal Reserve to engage in more quantitative easing so the deficit spending can continue and even grow.

As I have often noted, the next recession, whenever it happens, will bring a $2 trillion+ deficit, meaning a $40+ trillion dollar national debt by the end of the decade, at least $20 trillion of which will be on the Fed’s balance sheet. (My side bet is that in 2030 we will look back and see that I was an optimist.)

My 2020 forecast issue, which you’ll see after the holiday break, I’m planning to call “The Decade of Living Dangerously.” Sometime in the middle to late 2020s we will see a Great Reset that profoundly changes everything you know about money and investing.

Crisis isn’t simply coming. We are already in the early stages of it. I think we will look back at late 2019 as the beginning. This period will be rough but survivable if we prepare now. In fact, it will bring lots of exciting opportunities. More on that in coming letters.

Merry Christmas and the Happiest New Year

Perhaps I should say Feliz Navidad, as I will be spending Christmas in Puerto Rico with some of my children coming to visit. Not much chance for a white Christmas, but Shane and I really enjoy living in this tropical paradise.

There will be no letter next week. The first issue of January will be my annual forecast letter. This is the time of year when I think deeply about my goals for the future and reflect on how I responded to life’s challenges in the past. Perhaps it is just my age, but as I approach each new year, I become a great deal more reflective and appreciative of the time that I have to enjoy with family and friends.

One of the greatest gifts I receive is your attention and time to reading these hopefully thoughtful musings. One serious challenge of The Age of Transformation is the overwhelming amount of information demanding our attention. That you would give me part of your time is a greater honor than I can possibly imagine. My pledge to you in 2020 is to continue treating it with the respect you deserve.

And with that, I will hit the send button and wish you a truly Merry Christmas and the best of New Years. May you spend it with friends and have the most prosperous year ever!

Your ever hopeful analyst,

John Mauldin

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djordan@l-jinc.com

Dec. 30, 2019, 10:08 a.m.

I think both political parties and the President will continue deficit spending of 1 to 2 trillion dollar range until the US Government runs out of credit and if this is the case;
1. How much time do we have before the Great Reset?
2. Where should we invest our money (stock, bonds, real estate, etc.) knowing the Great Reset is coming?
3. What is the best country you would move to and when?
I don’t think it is a matter of “if” but “when” the Great Reset will happen and how long it will last.
When Gen. Jim Mattis was asked what was the biggest threat to the US was, he replied…Deficit spending would lead to the collapse of the US economy.

gooddogs@verizon.net

Dec. 24, 2019, 7:05 p.m.

My understanding of macroeconomic theory is not where I’d like it to be. Can you point me somewhere to help me understand your paragraph above: “But in the last year, other central banks started looking for a NIRP exit. Higher rate expectations elsewhere combined with stable or falling US rates give foreign buyers—who must also pay for currency hedges—less incentive to buy US debt. If you live in a foreign country and have a particular need for its local currency, an extra 1% in yield isn’t worth the risk of losing even more in the exchange rate.” Thanks John.

belikemike@rogers.com

Dec. 24, 2019, 1:38 p.m.

Dear John,

Most of the time it is hard to figure which grain of sand will destabilize the pile. In 2020 the Social Security trustees have said that for the first time disbursements will exceed contributions. There are still zillions of dollars of iou’s in the Social Security trust fund and those won’t be exhausted for a long time. But from a cash accounting perspective this year treasury bills will have to be sold to pay beneficiaries. Up until now contributions exceeded disbursements with the surplus being used to buy treasury bills. This is a profound change.

Andrew Fately 49963

Dec. 24, 2019, 6:57 a.m.

John,

I have been a reader for a number of years and truly enjoy your commentary and insights.  However, one of the things that I question is the concept of central bank independence.  That seems to be something that is seen as the critical feature that allows central bankers to behave properly in the face of political pressures.  But is that really the truth?

Every central bank head is a politician in their own right, at least since Paul Volcker (RIP) was in charge.  After all, do you think that they could get appointed to such a plum job without a great deal of politicking?  While in the past thirty years, they were generally economists first, with strong political skills, I think we can look at both Chairman Powell and Madame Lagarde, in particular, and recognize that is no longer the case.  They are politicians first with, perhaps, some basic understanding of economics and finance.

And these same folks, who area adamant about the importance of their independence, are quick to intervene in the political discussion regarding fiscal policy, arguing for more, with many talking about coordinated fiscal and monetary policies.  It seems to me that coordinated policies are the very antithesis of monetary independence.

And with all that in mind, I fear you are correct with regard to the monetization of US government debt, but I think your timeline is early.  The Japanese have proven that you can maintain that process for many years before implosion, and there is no doubt that the US is heading down that road.  Whether it will be explicit (the Fed will literally tear up the Treasuries when they come due), or simply continue along the current path, more debt and more money printed to buy it will continue to drive rates lower, not higher.  In fact, my view is it is entirely realistic that the Fed’s balance sheet grows to at least $25 trillion over the coming decade, reaching 100% of the US economic output.  MMT is the future, of that we should all be sure.  The real question is, how can we manage whatever assets we have to maintain their value as instability arrives on the back of this unprecedented monetary activity.

2% growth is not going to solve the problem, but it sure can allow it to persist for a very long time.  I fear that our children’s future will be far more difficult than our own.

thanks
adf

paul@asiaxpat.com

Dec. 23, 2019, 3:58 p.m.

John - you need to ask yourself (as I did around 10 years ago):

WHY WOULD THE FED BURN DOWN THEIR OWN HOUSE?  ARE THEY STUPID - CORRUPT - FECKLESS? 

Or—IS THERE SOMETHING I AM MISSING?


When and Why did we board the train to hell?  i.e. when did the stimulus start - and WHY?

The Beginning of the End (my title)

JUNE 13, 2003 - There is increasing evidence that massive economic stimulus — monetary, courtesy of the Federal Reserve, and fiscal, thanks to the president and supply-side minded lawmakers — is taking hold. The magnitude of the policy turnaround, which caps a constructive, multi-year reflation process, should overwhelm the economic negatives — including the drag from expensive oil and poor finances at the state- and local-government levels.

Expensive oil and its impact on other energy costs remains a concern.

The current level of U.S. monetary stimulus is massive. Real interest rates have fallen 5.2 percent from December 2000 to March 2003, reaching -1.2 percent. A swing of this magnitude may be historical.

Read more at: http://www.nationalreview.com/article/207227/reversal-fortune-david-malpass


THE PERFECT STORM (see p. 58 onwards)

The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy. But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel.

http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf

 

Expensive oil is the root cause of the problem.  We are not finding any cheap (conventional) oil any longer.  That is why we are fracking, steaming oil out of tar and drilling miles beneath the sea (all at enormous cost).

The stimulus we are seeing is aimed at offsetting the impact of expensive oil on the economy.  If not for the stimulus then we would long ago have entered a deflationary death spiral.

The Central Banks are doing EXACTLY what one would expect - if one understood the true root of the problem.

They will of course at some point fail. 

Enjoy civilization while you can.  Cuz there ain’t going to be no reset.

 

 

Stuart Harnden

Dec. 22, 2019, 11:27 a.m.

Dear John,

A great letter on a situation not nearly being discussed enough, but getting better.  One item you haven’t mentioned, but I feel certain you are aware of, is the use of debt as a weapon against a country or regime for which you don’t agree.  One of the founders of the Constitution warned of two ways to take down a country….via the sword, or via debt.  Since Obama ran up our national debt more than all other preceding Presidents combined, and since we have added over 13 Trillion in debt since the 2008 Financial Crisis, it is fairly obvious this is the path we’re on.  I am certainly not the first who has entertained the thought that the Elites and the Deep State may well plan a financial debacle before the 2020 election.  We have people in our country along with some of our “Too Big to Fail” banks who certainly have the will and ability to do so.  Remember the Bank of England near failure of the early 90’s, and the attempt to bring Hungary to its knees with an 800+ Billion package, both being used as a financial weapons manipulating their currencies. The centuries old big money elites and those who emulate them will, in my humble opinion, use their assets to retain their positions at the top of the financial chain at all costs, and this is to me a very real threat to our country.  We ignore this threat at our own peril and I hope we’ll soon find out why our supposedly healthy biggest banks suddenly need to rely on the Fed for the repo markets.  Is it by choice, or by necessity. We must get to the bottom of this soon.

Sincerely,

Stuart B. Harnden
Bedford, NH

Patrick Grimes 38293

Dec. 22, 2019, 8:08 a.m.

John – blame it on the baby boom. 

My wife and I are the peak of the baby boom born in 1957 and 1958.  The peak of the boom graduated from college in 1979 and 1980.  Ronald Regan was elected and we got to work in a big way.  Intel, Microsoft and nearly all of the technologies we commonly use today were created and set lose in the global economy.  This started an unprecedented economic expansion that ran from 1980 to 1999. 

In the 1990’s our kids were in grade school and moving to high school and college.  We spent a lot of money on them.  However, by 2008 we were no longer spending, rather, we started to rapidly save for retirement.  This pattern is normal.  When people hit 50, they tend to stop spending.  By the time the financial crisis hit in 2008 most of the baby boom were already in saving mode, perhaps exacerbating the depth of the crisis and making the recovery take longer and less robust.

Guess what?  The peak of the boom hits 65 in 2023.  At that time most of the 80 million boomers will be on social security and Medicare!  Worse, the remaining boomers will all be retired by 2029.  The Baby Boom will not be saving any more, we will be living off of our savings and off of taxpayers.  This will happen at the time you are suggesting the debt super cycle unwinds. 

The Baby Boom generation drove our economy for the past 60 years.  That role has come to an end, making any recovery from a future recession and or full blow economic crisis even more difficult.  However, I do think the boom will have one last hurrah.  Once the “great reset” happens, 80 million of us will make it politically difficult to enact any solutions that affects social security and Medicare in any way. 

That sounds like a rock and a very hard place no matter how you look at it.

brunolem33@gmail.com

Dec. 21, 2019, 10:06 p.m.

John,

A happy new year to you.

From all the authors I read, you are probably the one that invest (in quality) the most in his writings…and you deliver the bad news as if you were serving caviar and champagne…which is fine, because it makes you all the more credible.

Having said that, I am less optimistic than you.

While I completely agree with your analysis of the present, I disagree with your view of the future.

In short, it would be too easy to get away with decades of debauchery, culminating with the absurdities seen during the last ten years, with a simple reset = wipe the slate clean and let’s start anew.

What you forget is that it is not only the economy that has been perverted, but also the minds, especially those of the younger generations.

And for that, there is no reset.

The world, notably the Western world, is both in a state of decline and decadence, as was the Roman Empire, and the aftermath will be similar…not a continuation after a bad hangover, but a regression with a massive loss of knowledge (already well under way).

Back to economy and debt, which are one and the same these days.

To believe that one can run an economy with unlimited amounts of debt and zero interest rates, is like to believe that the geniuses behind this “invention” have discovered the perpetual motion machine.

Unfortunately, sooner or later, the laws of physics, or in this case the economic laws, reassert themselves.

And they, the central bank geniuses and those who gravitate around them, know it.

They just pretend, because they know that the only thing that is left now is confidence.

Fear is what is still holding the economic house of cards, because everyone in the officialdom is holding its breath (and its words and actions) in order to keep it standing another day.

How long can this fantasy (miracle?) last?

Who knows…because this situation is unprecedented…but like you and many kindred minds, I am convinced that it won’t last much longer and that the world is going to face the music during the coming decade, and probably early in the decade.

This is going to be very painful, because people have gone soft, overprotected by decades of state socialism…they are not resilient like the generation who went through the Great Depression…and they have no alternative…they have become completely dependent on the state and on technology…they are not going back to the farm to live of the land, waiting for things to improve…

You made the right choice by moving to Puerto Rico…you escaped taxes, but you will escape much worse than taxes when the s..t will hit the fan…


Bruno

rex.dupont@gmail.com

Dec. 21, 2019, 3:54 p.m.

This all sounds familiar. I have been thinking about what happened in the ‘60s.  We had “guns and butter” but no big inflation.  Then we got the inflation in the ‘70s. Why the time lag (lags are always a problem in economics/finance)?

The turning point seems to have been the end of the gold standard.  That freed up markets to bring on the inflation.  I think that what we are seeing now is towards the end of a period in which flight capital has been keeping the major rates low around the world (and tempting people to borrow way too much—not just governments).

I would guess that we are due for a new “Bretton Woods” lite agreement around some kind of basket of currencies for FX transactions (hopefully managed by gnomes in Zurich).  This would reset the flows that keep rates low and set us up for something like a new Volcker in a new administration (several years from now) to get us back in order. 

With a lot of collateral damage.

James Shutiak

Dec. 21, 2019, 2:45 p.m.

JOHN: I VERY MUCH APPRECIATE YOUR ARTICLES FOR THESE VERY MAQNY YEARS. MANY THANKS FOR YOUR OPINIONS AND THOSE OF SOME OF YOUR FIRIENDS. ALL VERY MUCH APPRECIATED.

A VERY MERRY CHRISTMAS AND THE HAPPIUEST NEW YEAR EVER TO YOU AND YOURS.

JAMES SHUTIAK CA EMBA CMC CFE CPA (RETIRED)
CALGARY, ALBERTA

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