Op-Ed: Social Security’s impending bankruptcy doesn’t resonate with voters, yet

Estimated Reading Time: 3 minutes

I am not a constitutional lawyer, but I see nearly zero chance that funding Social Security out of the general fund would be allowed for any significant length of time. It is at best a fool’s errand to hold out hope that Congress will be able to float the program’s imbalances out of the general fund.

This thought comes to mind because of the 2022 midterms and the inherent contradiction between the importance of Social Security and the weight that voters have placed on the program on Election Day despite two decades of continuous financial decline.

No group should be more interested in the prospects of the program than women who are over 50 years old. Yet, an AARP poll revealed that Social Security placed a distant fifth in voting priority in the 2022 midterm elections among people in this segment of the population.

At this point, a woman turning 77 today expects on average to outlive the system’s ability to pay scheduled benefits. If that voter doesn’t care, no one does.

The only explanation for the indifference to the program’s ability to keep its promises that I can imagine is voters have reached the conclusion that Congress will simply never allow Social Security to fall into crisis.

Apparently, Americans have faith in politicians that would make the Pope covet.

To provide an example, one of my readers wrote to me, “And, as I pointed out, the general fund is already going to be on the hook for the SS shortfall, one way or the other.” The reader reasons that no matter what happens, he will get paid. Hence, he has nearly zero interest in the prospects of the system.

It is a misplaced faith. The general fund is not on the hook, and likely never will be. Funding Social Security from the general fund would likely be deemed unconstitutional in court.

Yes, Social Security was determined to be constitutional in 1935 in Helvering v. Davis. That doesn’t mean that a legislative change in the way that the program is financed would be exempt from judicial review.

Just because the law is called the Social Security Act does not grant the pieces and parts of the law a special status.

The Supreme Court is not interested in the wisdom of how the power is exercised. Rather it deals with deciding whether that power is granted by the Constitution to Congress. In the Helvering case, the Supreme Court held that “Congress may spend money in aid of the ‘general welfare.’” Further, the Court held that the “concept of welfare is shaped by Congress, not the states.”

The Court added a caveat that earns your attention: “The (definition of welfare) belongs to Congress, unless the choice is clearly wrong, a display of arbitrary power is not an exercise of judgment.”

Here is the problem. Social Security is not universal nor equal. The highest payment goes to the man or woman who had the best job over the longest period. It is very difficult to explain taking money from the working poor to provide a stipend to the wealthy retiree particularly when many of our poorest seniors are not even eligible for benefits.

When the money for benefits comes from the general fund, someone is going to ask whether giving money to the idle rich is a sound way to aid the general welfare of the nation. The benefits formula works when the money comes from workers who are contributing to a plan that pays them a future benefit. It is very different when we take money that could be spent on other priorities.

Back in 1935, the Court indicated that it wasn’t terribly interested in the wisdom of the benefits arrangement. According to the Court, the law was a well-researched solution to a well-established problem. In its decision, the Court cited congressional studies, presidential commissions, advisory councils, and extensive public hearings.

The Court ruled, “A great mass of evidence was brought together supporting the policy which finds expression in the act. “

Imagine if this standard were applied to an annual subsidy from the general fund. Funding would require a similar exercise of judgment demonstrating that Congress thoughtfully valued this expense against every other expense that money might have served. That is every year, where the reasoning is we are spending the money today because the politicians of the past didn’t do their job. In the coming years, it would behoove voters of all ages to take this issue more seriously.

In 1935, the Supreme Court allowed Congress the power to provide a legislative solution to a well-documented problem that threatened a growing number of Americans. Today, the Court would be tasked with considering whether Congress should be given the power to deal with a very different problem: voters have not paid attention.

This article was published by The Center Square – Opinion and is reproduced with permission.

The Long Odds of Solving the Budget Crisis

Estimated Reading Time: 6 minutes

The budgetary crisis in the US has reached a critical phase. The debt ceiling fight about to unfold will simply be the latest phase.

Experts say it is irresponsible to “play a game of chicken” with the debt ceiling. In the past, this means, Congress should increase the debt limit without resistance.

The Democrat Congress has played a game of chicken with a blowout budget and now we will be told the only reasonable thing to do is fund it. But the debt ceiling can be used as a lever to get spending concessions. To use it in this way is considered by Democrats as more dangerous than excessive spending. Is it really worse than a giant omnibus bill passed in the dead of night? A bill, hardly anyone even read? Are all previous spending decisions forever untouchable? Under pressure, can’t Congress go back and cut some spending? If Congress was balancing the budget we would not have to raise the debt ceiling in the first place. Let that last point sink in.

Is not raising the debt ceiling like facilitating a “spendaholic” and giving him the booze for another bender? Unlike the failed attempt to stop the spending done last session, the new Republican House majority will not be frozen out of the process.

It is too bad it comes down to this but every previous attempt to restrain spending has failed so why not use this tool for leverage to get some budgetary sanity? It is only because of a lack of alternatives that we find ourselves where we are in this process.

Yes, it runs the risk of destabilizing markets and politics but so does national bankruptcy. It is only a question of when we get destabilized.

As we recently pointed out,  we now have a series of positive, self-feeding feedback loops operating simultaneously and largely outside of normal political control. Any one of these trends such as the increase in interest costs or the demographic crisis hitting Social Security would be sufficient cause for alarm. But to have so many negative trends operating at the same time is really quite unique and dangerous.

The political machine in the US certainly has tried on occasion to restrain itself but deficit spending has been the norm since the mid-1960s with the adoption of the Great Society. Much of the expansion of government is simply an extension of that original idea. And the Great Society itself was an addition to FDR’s New Deal.

Some may fondly remember the Balanced Budget Act of 1997, which briefly gave us a short interlude of balanced budgets because Bill Clinton and Newt Gingrich had some maneuvering room after the end of the Cold War. Then there was Pay Go, a Congressional rule that any party suggesting an increase had to show from whence they would get the money. And remember the spending caps? Congress has broken free of all of these attempts to restrain them.

Nothing tried previously has worked, in part because America decided that it desired a very large and very expensive government. After a few budget surplus years in the late 1990s, we got back to the long-term deficit spending trend which has now reached the parabolic stage. That is why the debt ceiling fight is now so important. There may not really be an alternative to having this fight right now.

Conservatives and Libertarians see government playing a diminished role in the personal life of Americans, greater freedom, greater personal responsibility, and a smaller and less expensive government. Except for funds to defend the homeland and run the courts and the like, they see a small  Federal Government. The bulk of the social safety net should be on a state level because states must balance their budgets because they don’t have the power to print and borrow as does the Federal government. Further, if states become too oppressive, citizens can move.

As attractive as we think that vision is, it has not been embraced by the American people for a long time. Pitting self-responsibility against free stuff from the government has been hard to sell.

Some say it is because we have done a poor job of explaining our vision and the consequences of progressivism. It is true we have been shut out of institutions such as schools, the clergy, and the mainstream press.  It does not alter the outcome. We are losing.

We think it goes deeper than even that. Our voice is being heard, maybe not to the extent we think it should.  But the sad fact is the public is not buying what we have been selling. Americans have not wanted a small government and self-responsibility. They want a welfare state. They want to be taken care of and they don’t want to pay for it.

Progressives and Liberals want an almost total government with a government providing welfare, healthcare, education, child subsidies, a huge military for international intrigue, changing the climate of the earth, reformulating families and sexual relationships, a national security state, and a censorship state, a reparations state, a union with both labor and capital in a fascist like structure. Government should play a role in every aspect of life and individuals are to be cared for by the state.

This by its nature, requires a huge and expensive government. Democrats remain convinced it can be funded by taxing the rich, without negative consequences to productivity and incentives. They also maintain the fiction that all this can be achieved without compulsion.

Rolling debt out to the future plays into the Progressives’ hands. They get to promise the benefit and the cost is pushed mysteriously onto everyone through inflation and the debt onto future generations. No wonder the American people think a welfare state can be a free lunch.

The Progressive view has largely prevailed, and the conservative forces have put up ineffectual rear guard action.  We have not convinced people this financial shell game will end in ruin.

Democrats have their own internal divisions but they are much less consequential. Democrats largely move lockstep with one another and centrist elements have largely been purged from the party.

So-called nonpartisan organizations such as the Concord Coalition, The National Taxpayers Union, and the Committee for a Responsible Federal Budget crank out very interesting commentary and statistics but they too have also been ineffectual at stopping the spending and the piling up of debt.  

In the end, the American people are largely at fault for desiring the warm embrace of government payments without the real desire to pay for it. They wish to borrow production from the future for the benefit of today, largely forgetting what burden they leave on future generations.

Sadly, it seems no amount of argument seems able to innoculate us from the very real human foible of wanting things for free. Get what you can for yourself, as long as someone else is paying for it. It never dawns on many who that someone else would likely be.

We are sorry to reach such a dour conclusion but even if we are wrong, we are likely now too far along in the process to stop it before serious consequences hit.

The hope is the coming financial crisis itself will awaken some common sense in the populace and the crisis itself will be the catalyst to finally get reforms that put America back on a sound financial path. However, the pain of such a crisis is no guarantee the political ball will bounce our way. Often such crises simply make the government even bigger and more draconian because the crisis will require self-responsibility from a population that has forgotten what that is.

Educating the public is the best way to ensure the political ball bounces into the possession of those wanting freedom and limited government and that it does not bounce into the hands of those that want total government intervention.

In that regard, the Concord Coalition put together a list of lessons after observing years of budget battles that the American people need to understand.

  1. Fiscal Policy Remains Unsustainable
  2. Demographics Drive Our Long-term Fiscal Challenges
  3. Popular Options, Like Cutting Waste, Fraud and Abuse or Growing Our Way Out of Debt, Are Not Enough
  4. The Independence and Credibility of the CBO Are Essential
  5. The American People, if Presented with Credible and Understandable Information, Can Make Tough Fiscal Policy Trade-offs
  6. Making Health Care Programs Sustainable Depends on Controlling Costs
  7. Doing Nothing Is Not a Plan to Fix Social Security
  8. Trust Fund Accounting Obscures Fiscal Problems of Social Security and Medicare
  9. It’s Important to Distinguish Between Short-Term Cyclical Deficits and Long-Term Structural Deficits
  10. Bipartisan Policy Changes Can Put the Debt on a Downward Trajectory
  11. It’s Easier to Correct Overshooting on Deficit Reduction Than Undershooting
  12. A Balanced Budget Amendment to the Constitution is Not Necessary for Responsible Fiscal Policy
  13. Tax Cuts Don’t Pay for Themselves
  14. The Debt Limit is More Trouble Than It’s Worth
  15. Mandatory Spending Growth Means the Budget Debate is Increasingly Focused on a Shrinking Part of the Budget
  16. The Broken Budget Process Should Be Refocused on Long-Term Planning
  17. Expressions of Concern About the Deficit Are Not Always What They Seem
  18. ‘Tax Expenditures’ Should Be Considered Large Spending Programs
  19. PAYGO is an Important Standard
  20. Both Sides are Guilty of Budget Gimmicks
  21. Changes in Borrowing Costs Can Have a Dramatic Impact on the Federal Budget
  22. Entitlement Reform Should Reduce Subsidies for Those Who Don’t Need Them
  23. Budget Process Changes or Trigger Mechanisms Can Not Substitute for Political Will
  24. Sequestration is a Bad Way to Make Budget Cuts
  25. Everything Needs To Be On the Table in Budget Negotiations


Our Smart but Stupid Economic Masters

Estimated Reading Time: 6 minutes

A review of The Lords of Easy Money:  How the Federal Reserve Broke the American Economy, by Christopher Leonard, Paperback Edition, Simon & Schuster Paperbacks, 2023, 373 pages.

Your neighbors might object to you reading The Lords of Easy Money.  That’s because it’s a book that will make you want to go outside and howl at the moon, given its brilliant but damning description of the economic havoc wreaked on America’s plebeians by the patricians at the Federal Reserve, at Wall Street banks, at hedge funds, and at government agencies, especially the US Treasury.

The havoc took place and is continuing to take place, while elected Members of Congress were fiddling and continue to fiddle.

It may not have been the intent, but the book shows that both capitalism and democracy are broken.  And they were broken by men and women with advanced degrees, mostly from Ivy League universities.

Author Christopher Leonard is masterful in explaining in layman’s terms the inner workings of the Federal Reserve and how it creates money, controls interest rates, works hand-in-glove with Wall Street, and, in recent decades, developed such monetary “innovations” as quantitative easing (QE), zero-interest-rate policy (ZIRP), and purchases of long-term debt (Operation Twist).

He goes on to describe with a reporter’s skill what these innovations wrought:  the enrichment of Wall Street, inflated asset prices, bubbles in stocks and housing, mountains of debt, and the shifting of capital from productive uses to stock buybacks, financial engineering, and corporate buyouts, which in turn hollowed out companies, closed factories, and threw working stiffs on the street.

Admittedly, I found the voyeuristic parts of the book to be particularly interesting.  The organizational politics, social norms, and even décor within the Federal Reserve’s Eccles building in Washington are described.  Also described are the personalities, communication styles, and monetary philosophies of some of the key players, including past and present Fed chairpersons, governors, and regional presidents.

Reading like a novel, the book features a protagonist by the name of Thomas Hoenig.  The former President of the Kansas City Fed, Hoenig would go on to be vice chairman of the Federal Deposit Insurance Corporation or FDIC.

Hoenig is a Midwesterner and not a coastal elite.  And with a PhD in economics from Iowa State, he’s not an Ivy Leaguer and doesn’t come across as an egghead, unlike Ben Bernanke and Janet Yellen.

While at the Fed, Hoenig consistently warned about the folly of quantitative easing and was often the lone dissenting vote at the regular meetings of the Federal Open Market Committee, or FOMC.

Among other anecdotes, the book describes a speech he gave in 2006 to bankers at a resort in Tucson, Arizona, where he warned the audience that their embrace of easy money would end badly for them and the country.  No one applauded at the end.  The Great Recession and the bursting of the housing bubble followed two years later.

Years after that, while at the FDIC, Hoenig gave speeches and lobbied Congress on the need to break up big banks into smaller ones and to increase banks’ capitalization.  These actions would be much better fixes for what ails the banking system, he said, than the tens of thousands of pages of Dodd-Frank regulations and the Basil III accords.  Naturally, the political power of the big banks kept that from happening.

The chapters on current Fed Chairman Jay Powell can give the reader an urge to rail about white privilege and become a socialist.   Powell grew up in Chevy Chase, one of the wealthiest towns in America and a suburb of Washington.  He attended the exclusive Georgetown Prep, and his family belonged to the hoity-toity Chevy Chase Club, as well as to an exclusive dining club.

In the spirit of honesty, I have to admit that I also grew up with country-club experience.  You see, I worked as a teen at an exclusive country club in St. Louis, Missouri—a club where Jews, blacks, and Italians weren’t welcome as members in those long-ago years.  I was the only non-black on an otherwise all-black janitorial, kitchen, and wait staff in the clubhouse.

Maybe I have a case of class envy.  If so, the rest of Powell’s background makes it worse.

Powell would graduate from Princeton and then earn a law degree from Georgetown University.  After a stint as a legislative aid, he went into investment banking. Eventually, he ended up at the Carlyle Group, one of the richest and most prestigious private-equity firms at the time, a firm that was headquartered in D.C., unlike most private-equity firms, because that gave it a competitive advantage, due to specializing in the buying and selling of businesses that relied on government spending.

Carlyle was an example of the revolving door between the government and the financial industry.  It was co-founded in 1987 by David Rubenstein, a former staffer to Jimmy Carter.  The book names other bigwigs:

Partners included James Baker III, a former Treasury secretary, and Frank Carlucci, a former defense secretary.  President Emeritus George H. W. Bush was an advisor to the firm.  In 2001, Carlyle hired the former chairman of the Securities and Exchange Commission, the former chairman of the Federal Communications Commission, and the former chief investment officer of the World Bank.  These people helped steer deals to Carlyle, and Carlyle helped these people monetize their granular knowledge and personal connections in the industries they once regulated.

The book goes on to detail how Powell took the lead in Carlyle’s leveraged buyout of Rexnord, an industrial conglomerate headquartered in Milwaukee that made high-precision equipment used in heavy industry, such as specialty ball bearings and conveyor belts.  He and Carlyle loaded the company with unsustainable debt and made millions from the deal.

At the time of the buyout, Rexnord’s headquarters was in a bare-boned, modest building near a company factory in an industrial area.  After Powell became a member of the company’s board of directors and helped manage the company, the management team began holding meetings at hotels and country clubs instead of the headquarters building.  In 2014, he made the class separation complete between company minions and fat cats.  As companies across the land have done, the executives moved into a renovated downtown office building.

It was in one of those up-and-coming areas where once-empty storefronts were being repopulated with wine bars, microbreweries, and Mexican takeout joints.  During Lunch breaks, the Rexnord executives could stroll along the winding pedestrian path across the street, overlooking the Menomonee River, which snakes through downtown [Milwaukee].  The new offices were a self-contained environment, elevated above the middle layers of management and the thousands of employees who worked at Rexnord’s global network of factories.

Such downtowns are a modern version of a Potemkin village.  They hide the economic distress in working-class neighborhoods and the hinterlands.

Tellingly, a new Rexnord chief executive was hired with a background in finance and not in engineering or manufacturing.  Financial engineering was key to Carlyle’s strategy for the company.  “The management team’s biggest maneuvers had to do with leveraged loans and rising stock prices, rather than conveyor belts or ball bearings.”

Carlisle later sold the company to another private equity firm for more than twice what it had paid for the company four years earlier.

As has become a common tragedy in America, Rexnord workers were fired, factories were closed, and operations were offshored.  The book tells the story of a machine operator who lost his job when a factory in Indiana was transplanted to Mexico.  He was offered a severance bonus if he would train his Mexican replacement.  He refused.  The book did not say if he later voted for Donald Trump.

All of this destructive financial engineering was facilitated by the easy money and cheap debt created by the Federal Reserve, where, ironically, Jay Powell would become chairman.

Powell was nominated by Donald Trump in 2018 to replace Janet Yellen.  To Powell’s credit, he began normalizing the Fed’s monetary policy by winding down quantitative easing and raising interest rates.  But the financial system had become so fragile that the stock market fell and economic conditions became precarious.  In typical fashion, Trump contradicted himself on his earlier position on monetary policy and began attacking Powell on Twitter and in the news media.

Powell retreated from the normalization.  He retreated further when the repo crisis hit, and then further still when the pandemic hit.  (The author does a great job in explaining what the repo market is, how it works, and how the Fed’s actions led to the crisis.)

Author Christopher Leonard is better than most authors at being nonpartisan in laying blame, but he’s not a perfect 50-50.  He’s about 53% left and 47% right.  A sure giveaway is when he uses the adjective “far-right” in describing conservatives who railed against the Fed but doesn’t use “far-left” in describing liberals.  This is in keeping with the convention of media and academia in using “right-wing” far more often than “left-wing.” 

Leonard also unfairly criticizes the Tea Party for keeping Congress from addressing the nation’s problems,  because of the other party’s focus on cutting taxes. That’s a curious criticism in a book that exposes the economic carnage from the Fed’s easy money, a regimen that enabled the government to live beyond its means.  Tea Party members may not have known how all the gears of government work, but at least they knew that the gear shift is not in the hands of middle- and working-class Americans.

But these are minor flaws in an otherwise excellent book.

My conclusion is that Congress has delegated too much economic policymaking to the unelected Fed, as well as to humongous federal agencies.  At the same time, 70% or so of the federal budget is for non-discretionary spending and thus on automatic pilot and politically untouchable.  But these failures haven’t kept metro Washington from being one of the top three richest metro areas in the nation.

Incidentally, Chevy Chase, the boyhood home of Jay Powell, has a median household income of $207,971 and a poverty rate of 1.7%.  No doubt, residents don’t have to worry about their jobs being exported to Mexico, and few undocumented migrants from Latin America live in the town.  By contrast, here in my adopted hometown of Tucson, close to the southern border, the median household income in the city is $48,058, and the poverty rate is 19.8%.

There I go again with my class envy.

Signing off now.  Heading outside to howl at the moon.

Positive Feedback Loops With Negative Consequences – Part 2

Estimated Reading Time: 9 minutes

Editors Note: Janet Yellen, US Secretary of the Treasury said late last week that the US would be out of money by January 19th, and would begin to take extraordinary measures to keep the government afloat until June. The problem is the previous Congress has already approved massive spending but has to go back to the new Congress once again to approve an increase in the debt ceiling. That approval simply gives the US government the authority to borrow more money from new investors so that it can pay the old investors. It is just rolling the debt forward and borrowing additional funds as needed. Markets seem to have taken the problem calmly so far and believe most of the debate is political theatre. As in the past, after some noise, the debt ceiling will be approved, or so it is thought. We hope such views are wrong. Some will call balking at raising the debt ceiling irresponsible and childish. Actually, running up $31 Trillion dollars worth of debt when Baby Boomers are hitting Social Security and Medicare is what is childish and irresponsible. Stopping the country from driving off a fiscal and monetary cliff is less childish than going over the cliff. The combination of a 30% increase in discretionary spending, increased need for defense spending, increased interest costs, and the aforementioned demographically sensitive entitlements, are all driving the US like Thelma and Louise at the movie’s end. Somebody needs to take the wheel and jam on the brakes. We hope the change in House rules, a new Speaker with a spine, will get real spending concessions from the Democrats. Remember as well as we saw with the speakership battle, in a closely divided Congress, a relatively small group of dedicated Congressmen can extract meaningful concessions. This is absolutely necessary for the good of the country.  However, the political battle has the potential to rattle markets. In 2011, it caused some market spasms and lead one rating service to downgrade the creditworthiness of the US. At the end of the day, if we cannot get control of spending, we are all headed for a fiscal crisis anyway.  In 2011, it did little to stop wild spending. We have to do a lot better this time despite the risk to the markets.


There is one other cycle of importance, that operates somewhat independently of these other trends. That is demographics.

Demographics for much of the past 20 years was a force restraining inflation, but now is shifting towards aggravating inflation. The dependency ratio, that is the percentage of people who live off government benefits is rising rapidly while the number of workers to support this teetering regime is falling. The number of “dependents” on government spending includes both the rapid increase in the elderly who leave the workforce and the rapid rise of people on disability. It is odd as we have moved away from dangerous industrial jobs and to safe office jobs that disability claims should be soaring. It is a combination of liberalization of definitions of disability, poor diet, and drug abuse. In addition, we have almost a third of prime working-age men leaving the workforce. Generous benefits plus the expansion of Medicaid help subsidize their absence. This drop in the workforce not only is expensive for those who do work, but it also tends to force up wage rates aggravating inflationary pressures in the labor market.

In Western welfare states, the bulk of government benefits is triggered by age. For medical benefits, age 65 for Medicare. For Social Security, typically around 66 or so in the US.

The baby boom was not linear but had its own internal booms and busts. The Baby Boom is typically measured from 1946 to 1964.  On average, about 4.2 million births per year. But you know the old adage about averages. The man’s head was in the oven and his feet were in the freezer, but on average, he was comfortable.

The biggest part of the Baby Boom was from 1957 to 1961. Then it started to tail off about by 1965. Births then dropped about 25% and have now fallen below replacement levels of 2.1 children per family.

Assuming age 66 means full Medicare and Social Security benefits for most people, add 66 to 1957. That takes you to 2023. That means starting right now and continuing for the next seven years, an enormous number of Baby Boomers will qualify for benefits, driving up Social Security and Medicare spending. The next few years will see the biggest burden ever placed on the system.

This has been known for some time, but no preparations were made for this enormous increase in expenditures.  Instead, Democrats with the help of RINO Republicans spent as if these burdens did not exist.

Now all the bills are coming due at the same time, putting enormous pressure on spending, and making it very difficult not to run enormous deficits. And remember, deficits have to be financed in some way: borrowing, inflating, or higher taxation.

Social Security has gone into negative cash flow (that means SS taxes collected are not enough to pay benefits), which then forces the system to “sell” nonmarketable treasury bonds which make up the reserves of the system. Without getting too far into the technical weeds, that means the unfunded debt now becomes a funded debt. We will have to borrow and tax additionally going forward to keep paying benefits.

However, the higher the inflation, the more spent on Social Security due to cost-of-living adjustments, another perverse feedback loop.

As indicated, driving many of these feedback loops is the towering deficit, the need to finance it, and the political difficulty of balancing the budget.  The Committee For a Responsible Federal Budget recently put out this chart, which must be studied to be truly appreciated.

Because so much spending is now “baked in the cake”, it would require a cut of 85% in the portion of the budget not in the cake,  to bring the budget into balance.  It would require a 26% cut in all spending in the cake and out of the cake, to get to balance.

How could such cuts be made if Congress can’t even have the guts to cut funding for NPR, which is already lavishly supported by super-rich liberal foundations?  If we can’t find the nerve to cut something as frivolous and redundant as NPR, how could we ever possibly find the political nerve to cut Social Security benefits?

Added to all these trends of increased spending, rising rates, and inflationary feedback loops, wars are always expensive and cost more and last longer than anyone thinks. Having ended abruptly the War in Afghanistan, our leaders immediately got us involved in a war with Russia via Ukraine. Rearming and reshoring our defense supply chains from China will also be expensive.

Most estimates suggest total aid and military operations for Afghanistan came to a tad over $2 trillion dollars. For a 20-year war, that is around $100 billion a year, on average.

According to the Center for Strategic and International Studies, the US alone has spent $68 billion and has proposed an additional $37 billion for Ukraine. That’s over $100 billion and does not include support from the rest of the world. Moreover, it does not include the cost of distortions in food and energy markets created by sanctions, which have tripled the cost of electricity in Europe and the cost of food and energy worldwide.

We have no idea what the final costs will be but you can be sure it will be more than anyone thinks it will be.  Some of these costs are direct, but many are indirect.

Usually, war creates a necessity to ration existing resources and expand resources as quickly as possible. But in our era, we have another cycle working, the extreme environmental movement. It seeks to achieve zero carbon emissions, starving existing energy resources and driving up the cost of food and fuel, just as central banks battle to fund the Ukraine war, rearmament to face China, demographic time bombs, and years of previous reckless spending.

Environmentalism is now embracing “no growth”, and “no babies, which makes all the negative financial and demographic trends mentioned earlier even worse.

How can you support a huge and growing worldwide debt bubble without economic growth and increased revenue to service the debt? How can all the future obligations we are piling up be paid for by a diminishing number of babies?  This is not a good time to become a no-growth fanatic!

Rarely have so many feedback loops with negative consequences come together in the same time period, each with its own intersecting feedback loops.

Rising debt can be dealt with only in three ways. You can pay the debt down, you can roll the debt forward and pay increased interest, or you can default on that debt. All alternatives except default need rising income streams (economic growth), but that is now being strangled by progressive over-regulation and environmentalism.

Government among all institutions has wiggle room in the default option. That one is the depreciation of the value of money (inflation), which can be regarded as a slow-motion default. But make no mistake. It is a form of default.

Because it spreads misery over time and the population, inflation of the currency has been the historic “solution” to government funding problems. However, it really is not much of a solution. It creates class conflict, and radical politics, and has often resulted in war. It all pivots on how severe the inflation is and the strength of the social fabric and institutions of the afflicted nation.

But given where we are, inflation may not be option planners think it will be. Many government benefits are now indexed to inflation, a great way to drive spending higher. Burst the asset bubble and you now have additional costs to rescue banks and other institutions and key industries.

Once the debt bubble reaches a certain size (and we have reached that size), inflation-induced rising interest rates cause asset prices to fall and the economy to slow, impairing revenue streams, triggering defaults, and requiring bailouts. Both in the busts around 2000 and then in 2008, deflation became a serious problem. Defaults in housing (the private debt bubble) wrecked the economy and the banking system, which in turn caused a huge rise in expenditures for bailouts of banks, autos, pensions, airlines, and state governments.

As a further complication, the US is the center of the international financial system and a net huge borrower with a massive deficit in our balance of trade. The dollar is the reserve currency of the world and the currency to settle oil payments. If inflation is let out of hand, the world may well abandon the dollar as it is not a reliable reserve asset.

And what good is there holding bank reserves in dollars if the US government can seize them at any time, with no judicial process whatsoever?

We are already seeing hints of that with central banks buying more gold in 2022 than any year since the breakdown of the international monetary arrangements with the collapse of Bretton Woods in 1971.

Further aggravating the problem, the US has militarized the international monetary system by seizing Russian bank reserves and forcing them out of the international payments system (the SWIFT payments system).

Other countries such as Saudi Arabia, India, Brazil, and especially China, have taken note of the hazard of getting crosswise with the US. It could happen to them next. This quite naturally sets in motion a desire to seek better alternatives and not be subservient to the US.  In other words, we have shown the big international buyers of our debt that they are fools to fund us in the future.

Those who militarize money can only expect others to retaliate in kind. That risks the US losing its “exorbitant privilege” of being able to issue the reserve currency. We remain the only country that can “pay” for both internal and external debt by printing money. We lose that subsidy and it will quickly become a very expensive world for us.

How all this works out is difficult to know. It is not clear that inflation can work as a policy choice because of the dangerous trends that decision self-actuates.  Inflation can’t reduce the debt burden when its very existence is adding to debt at the same time. What investors need to appreciate is that the “long-term problem” of debt and deficits is now coming due. The future is becoming the present. 

There will be some combination of inflation, recession, default, or expensive and crushing debt service. You can’t waive the debt away. One man’s debt is another man’s asset. You can’t get one man out of a burden without imposing it on another.

That is the price you pay for short-sighted and stupid financing decisions. Political leaders run on a 2 to the 4-year political cycle, so they have had the incentive to get the political benefit of big spending today and defer the cost to the ether of the future. They worry about the next election and don’t make decisions for a stable future. Let the kids pay for all the benefits. Just get me elected today. That works for a while until there are too few kids to pay the bills, or they wake up. It has been a very successful game of kicking the can down the road.

The problem is, we are rapidly running out of road. We are all about to get kicked in the can really hard.

We say this because most of these feedback loops are now self-sustaining and almost immune from normal politics.

If demographics are not destiny, it is about as close as you can get.

Even if wisdom and political will could be found, you can’t pass legislation stopping compound interest. You can’t pass a bill to stop people from aging. And, there is no legislation you can pass to stop the business and credit cycle.

From both a political and investment standpoint, the next several years will likely prove to be turbulent and difficult to deal with. There is simply no way of getting out of this without pain.  The huge spending by Democrats in the past few years has likely put any kind of easy solution out of reach.  

Trends had already bought us to the edge of the cliff but this latest burst of sheer irresponsible budgetary excess has pushed us over the edge.

Thus, the consequences of these feedback loops are to put us between the alternatives of inflation and deflation, both very serious outcomes that can wreck society and political stability.  Financial crises seem to be coming closer and closer together. We are already working on the third one since the turn of the century.

Inflation or deflation? Boom and bust. As suggested, how this works out depends on the strength of institutions and social cohesion when these things occur. How would you rate social cohesion, institutional trust, and confidence in our government at this time?

Positive Feedback Loops With Negative Consequences – Part 1

Estimated Reading Time: 5 minutes

Editors’ Note: Debate over the budget and deficit spending has been a staple of American political debate since they became chronic with Lyndon Johnson and the Great Society. Too bad it has in recent years just become background noise for both political parties because the stakes for America are very high. However, as this article indicates, there is a time when the argument that “someday this is going to kill us” comes due. Unfortunately, because of demographics and their impact on entitlements, rising interest costs, war spending, and reckless social spending, the future is now – the present. This week, the fight over the debt ceiling begins and it will resurface in June. The Democrats have gotten a 30% increase in discretionary spending. Running a trillion-dollar deficit has now been normalized. Will the Republicans show the nerve necessary to curtail spending and set the nation on a course to avoid the inflationary/deflationary crisis described below? Moreover, it may be too late for any actions to avoid significant societal and economic pain. The debt ceiling fight basically is Democrat blackmail. Either accept all of our past excesses or we will shut the country down and blame the Republicans for the crisis. In the past, Republicans have allowed the framing of this crisis to make them look irresponsible and heartless as the last confrontation in 2011 demonstrated. Can Republican leadership find a way out of this blackmail trap? We are about to find out.


All dynamic systems have feedback loops, either negative or positive loops. For example, the sun heats the earth. Heat and humidity form clouds and push them higher with updrafts, which create rain and partially block sunlight, cooling the earth and providing moisture for another cycle. This is a negative feedback loop and is a mechanism in nature for the regulation or maintenance of a specific state of nature.

In comparison, many feedback loops in nature are self-reinforcing and are referred to as positive which tend to a definitive endpoint, such as the death of a living entity. We have a number of these operating in the economy right now related to Federal intervention in the economy. Not only have many become self re-inforcing, but they also intersect with other feedback loops creating even bigger positive feedback loops with serious negative consequences.

In the case of US government finance, we now have some feedback loops that are increasingly dangerous and out of control. This disequilibrium could also spread to foreign governments and the private sector as well.

Let’s take a look at some that are obvious and some not so obvious.


With a total deficit federal debt now over $31 trillion and growing, the cost of rolling over the US debt is rising because the debt pile to finance is both getting larger and the cost of interest payments is rising.  Both trends require more debt to be financed and the more debt that is offered to the markets, the lower the price of bonds and the higher interest rates will otherwise be unless there is offsetting demand for those bonds. The more money paid out to service the debt, the less money is left for the government to spend on other things.



Thus, higher interest rates will help create higher rates, a self-feeding trend that some refer to as a doom loop.

You can sell more debt if there is more demand ready to take the increased supply. We don’t expect the government to go broke. They will be able to finance themselves. The question is at what interest rate will the government be completely funded and who else is damaged by the government’s voracious appetite for funds?

Unfortunately, some of the big buyers of bonds are publicly either pulling out of the market or becoming sellers. For example, the FED has expanded its balance sheet by buying huge quantities of bonds, but now the FED itself is a net seller as it reduces its holdings in an attempt to staunch inflation that it created. We have moved from Quantitative Easing (FED buys bonds) to Quantitative Tightening (FED sells bonds).

Big foreign buyers of US debt such as Japan, Saudi Arabia, and particularly China, are also cutting back on what they buy and, in some cases, have become net sellers as well. To make bonds attractive to buyers of any sort, they must pay a superior yield and the bondholder must feel secure that they will be paid in a currency that holds reasonable value.

More supply and less demand mean lower bond prices which is just another way of saying higher interest rates. Higher rates in turn beget more borrowing, resulting in higher rates again, hence a self-reinforcing cycle.

Higher rates mean lower bond prices, so it hurts those institutions like pensions and insurance companies that already own bonds at higher prices. This is one of the reasons a typical 60% stocks and 40% bond portfolio last year delivered the worst results since 1871. The bond portion, which was supposed to “diversify”, was almost as weak as the stock portion.

A higher rate structure also has the potential to destabilize pensions since they have low cash holdings and must meet obligations, by selling investments bought at higher prices. You recently saw a pension crisis in England that caused the fall of a conservative government that was just elected. In fact, it was the shortest-serving government in British history.

Moreover, higher interest rates impact all debtors and all borrowers, not just the US Treasury. Private borrowers also have to refinance at higher rates and thus increased interest payments have to come out of corporate or household cash flow and are thus not available for other things. Ask any recent homebuyer how rising rates have increased monthly payments. Higher interest rates depress company profits. That is why rising rates tend to slow down economic activity.

Foreign governments are also borrowers and for those not well-financed, a generally higher rate structure could cause some defaults among those borrowers that don’t have a strong balance sheet.

Central banks around the world are raising interest rates to deal with the worst inflation in 40 years. That puts pressure on economies worldwide. The idea is that only a recession can relieve the pressure on inflation. That is not a very good policy option, is it? You basically substitute the pain of recession for the pain of inflation. Either way, you are inflicting pain on the citizens because governments spent too much money and central banks financed their excesses.

However, the recession itself creates another set of feedback loops with negative consequences. A slower economy causes a drop in tax revenues, making the deficit larger. That deficit must be financed either by borrowing more (increasing the supply of bonds and increasing interest rates) or currency debasement (inflation), which with some delay, results also in higher interest rates since borrowers want to be paid back in real inflation-adjusted terms.

Government revenue streams are tied to taxes collected and taxes collected are tied to economic activity. An unemployed worker or a shuttered business pays fewer taxes than before. This dependence can become extreme.  In California for example, 49% of income taxes are paid by 1% of the population.  That 1% is the stock and real estate speculators. So, the “everything bubble” created by the FED, drives government revenue. Pop that bubble and a lot of revenue dries up quickly, causing state and federal budgets to go into deficit. Those deficits have to be financed.

Besides causing tax revenue to drop, a recession triggers an internal flaw in the social entitlement welfare states of the US, Canada, and Europe. The worse the recession, the more people fall into the “social safety net.” This causes social expenditures to rise, right as revenue is contracting. This causes budget deficits to bulge everywhere, already aggravated by the previously mentioned problems in government finance.

It remains to be seen if the FED can continue to reduce its balance sheet and “pivot” with the growing decline in foreign purchases of US Treasury paper.  As the video below explains, US debt finance needs relative to global GDP growth creates some serious issues.

Biden Is Lying about the Jobs Data

Estimated Reading Time: 5 minutes

The personal savings rate is near seventeen-year lows. Credit card debt is at record levels. Millions of prime-age workers have quit the job market, and full-time employment continues to wither. On the other hand, the Biden Administration wants you to think things have never been better.

Last week, following the release of December’s jobs data by the Bureau of Labor Statistics, Biden crowed that “Real wages are up in recent months … and we are seeing welcome signs that inflation is coming down as well.” Biden concluded by saying “it’s a good time to be a worker in America.”

Unfortunately, things aren’t nearly as good as the White House and its accomplices in the corporate media would have us believe.

It’s only a “good time” to be a worker in America if one equates falling real wages and falling full-time employment with “robust” employment conditions.

Moreover, the numbers that the administration continued to cherry-pick to burnish its political image are themselves quite suspect. Response rates to employment surveys sent out by the BLS have gone into steep decline, and the Philadelphia Federal Reserve has recently accused the BLS of vastly overstating employment growth in 2022.

A more sober look at broader economic trends continues to point toward economic pain in 2023, and there is less reason than ever to think that the Federal Reserve will engineer a fabled “soft landing” for the economy after years of record-breaking monetary inflation.

Falling Real Wages, Falling Full-Time Employment

In spite of what Biden may say, real wages in the United States fell, year-over-year from April 2021 to November 2022. That’s likely to also be the case for December once we get the inflation growth numbers for December. Put another way, wages are falling in real terms because the inflation rate has been outpacing wage growth during all that time. Nominal wage growth actually slowed in December according to the new BLS numbers, so unless the inflation rate suddenly collapsed to below 4.5 percent in December—which is unlikely—we will find that real wages fell in December for the twenty-first month in a row.

Another factor pointing to weakness in job markets is the fact that the number of full-time workers fell in December. Nearly all of the gains in workers were part time.

Specifically, full-time employees dropped by 1,000 workers while part-time workers rose by 679,000 (month-over-month). The total gain in all workers for the period was 717,000. Moreover, the overall trend since 2021 is one in which growth in full-time work in general is falling—and turning negative in some months—while part-time employment represents most of the growth.

An important aspect of the “household survey” Rosenberg mentions is that it considers part-time workers and barely-employed self-employed people as among the “employed” on a par with full-time workers. Yet, when we consider the reality of slowing wages combined with a lack of growth in full-time workers, one suspects that the employment situation isn’t exactly lucrative for a great many workers. There is also good reason to believe that many workers who are now taking on part-time work are doing so because the cost of living has increased substantially. For example, over the past year, the average hourly wage increased 4.6 percent while CPI prices rose 6.4 percent. Workers are falling behind, and it’s hard to square this with Biden’s claim that workers are doing unusually well.

Stagnant Labor Force Participation

Another reason to suspect the labor market isn’t as great as we’re being told is the fact that total prime-age (i.e., age 25-49) workers are hardly flocking to join the labor force. People leaving the work force could be a sign of a very robust economy, of course, as people can scale back working hours when real wages surge. But its extremely unlikely that’s what’s happening in our current period of rising costs, falling wages, and rising debt.

In fact, the number of prime-age workers “not in the labor force” is still up from where it was before the covid panic of 2020. In January 2020, about 21.3 million workers labeled themselves “not in the labor force.” That is, these people reported not working for market income at all during the previous year. As of December, the number had risen to 22.2 million. Since the Great Recession began in late 2007, the number of workers not in the labor force is up by more than a million. Biden may think it’s a great time to be a worker in America, but apparently many prime-age workers don’t agree.

This all reflect a larger historical trend in which workforce participation has fallen, with men especially prone to leaving the work force. This all helps to push down the unemployment rate as the pool of potential unemployed workers continues to shrink.

“Jobs” vs. Employed People

But why is it that we keep hearing about how there is so much job growth? Those “good” numbers are based mostly on a separate job survey which looks only at the number of jobs created, as opposed to the number of employed persons. This means a large number of part-time jobs could be created, with few new employed persons, and this could be reported as robust job growth. In fact, in terms of cumulative employment growth since January 2021, we find a persistent gap between the two surveys. This gap narrowed in December 2022, but, as noted above, this was mostly driven by part-time work. In every month since April 2022, this unexplained gap between employed persons and “new jobs” has ranged from 96,000 up to 1.8 million.

This gap could theoretically be explained by a rising number of multiple job holders, but it seems this need not explain all of the gap, as it seems the establishment survey has been overestimating job growth considerably. According to a new report released by the Philadelphia Federal Reserve the total number of new jobs added during the second quarter was closer to 11,000 than the 1.1 million that the establishment survey had shown. This doesn’t tell us much about the second half of the year, of course, but it does suggests there’s something very wrong with the survey that’s been repeatedly used to “prove” the job market is excellent.

The iffy numbers might have something to do with declining response rates to the BLS’s surveys. Since the covid panic, the surveys used to collect this data have seen sizable drops in response rates. The establishment survey (CES) response rate has fallen from 59 percent in early 2020 to 45 percent today. The “JOLTS” survey, which produces many rosy estimates about job openings, has fallen to a 30-percent response rate since 2020. In contrast, the Household Survey (CPS) still has a response rate over 70 percent.

Without parsing the data sources, it’s impossible to guess how much the establishment survey’s narrowing data sources are affecting the numbers. In any case, the establishment survey is increasingly delivering estimates that appear questionable given larger economic indicators. The “good” employment data still leaves us wondering why the savings rate is falling and why disposable income is below trend. Why is credit card debt mounting if households are enjoying the fruits of a “strong” labor market?

The writers of Biden’s press releases offer us no answers. Once we take a broader view, however, the numbers point to recession and declining fortunes for a great many of America’s workers. In November, the money supply actually fell, continuing a trend of rapidly falling money-supply growth. That’s a strong recession signal. An even more reliable recession signal is the yield curve showing the 3-month/10-year yield spread. When this goes negative, a recession has been assured in every case for decades. This spread is now the deepest in negative territory it’s been in more than 40 years.

Misplaced Trust in the Federal Reserve

At this point, Wall Street and the regime are both banking on the hope that the Federal Reserve will engineer a “soft landing” through its monetary policy. The idea here is that the Fed will somehow figure out how to allow interest rates to rise just the perfect amount to rein in inflation while also not triggering a recession. This is hope based on fantasies, however. It’s entirely possible a recession may somehow be averted this year or next, but if that occurs, we hardly have any reason to assume the Federal Reserve planned it all. After all, the Fed has made it abundantly clear in the past two years that it has absolutely no special insights when it comes to economic trends or how monetary inflation will affect the economy. After record breaking amounts of monetary inflation in 2020 and 2021, Fed economists were still insisting that price inflation would be no problem and would be “transitory.” Numerous Fed economists from Neel Kashkari to Jerome Powell continued to state that the Fed should keep interest rates low well into 2022, or even into 2023.

This article was published by Mises Institute and is reproduced with permission.

Dip in Mortgage Rates Not Slowing Housing Bust 2: Mortgage Lenders Sing the Blues

Estimated Reading Time: 2 minutes

It just keeps getting worse. 

Mortgage applications to purchase a home are a forward-looking indicator of where home sales volume will be. Existing home sales that closed in November already plunged by 35% year-over-year, the 16th month in a row of year-over-year declines, making for a historic plunge. And mortgage applications went in the wrong direction from there, despite the dip in mortgage rates.

Applications for mortgages to purchase a home fell to the lowest level since the Christmas week of 2014, and beyond the lows of 2014, we have to go back all the way to 1995, according to data from the Mortgage Bankers Association today.

Compared to a year ago, purchase mortgage applications have plunged by 44%. Even during Housing Bust 1, mortgage applications didn’t plunge that much year over year.

That little dip in mortgage rates had no impact. This drop in mortgage applications came despite the dip in mortgage rates that started in mid-November from the 7.1% range and hit a low point in mid-December at 6.28%. In the latest reporting week, the average 30-year fixed rate was at 6.42%, according to the Mortgage Bankers Association today.

The drop in mortgage applications indicates that it doesn’t really matter to the volume of home purchases whether the 30-year fixed rate is 6.3% or 7.1%. The difference is just cosmetic. The current home prices – though they have come down in many markets, and have come down hard in some markets – are still simply way too high.

Refinance mortgage volume has died: Applications to refinance a mortgage have collapsed by 86% from a year ago, despite the invisibly small uptick in the latest week. Since October, refinance applications have hovered at the lowest levels since the year 2000. And this makes sense because hardly anyone would be refinancing a 3% or 4% mortgage with a 6% or 7% mortgage, except when under duress to extract cash.

Mortgage lender woes.

Mortgage lenders, whose revenues have collapsed as mortgage applications volume has collapsed, have spent the last 12 months laying off people and shutting down divisions. Some smaller operations have shut down entirely…..


Continue reading this article at Wolf Street.

Understanding Today’s Economy and Financial Markets

Estimated Reading Time: 7 minutes

Editor’s Note: The Prickly Pear published a related article last week on January 3 entitled The Price of Easy Money Now Coming Due. We recommend reading both articles together to understand current economic conditions and our readers’ concerns about personal financial situations.


When it comes to the economy, nearly the entire populace is of the same mind.  Almost all of us like economic expansions and booms and almost all of us dislike recessions and depressions.  For decades the federal government and the Federal Reserve have accommodated these desires.  A few interruptions have occurred, namely, the 1987 crash, the bursting of the tech bubble in 2000-2002, and the mortgage-backed securities meltdown in 2007-2008.  But by and large, it’s been onward and upward from, say, 1982 to approximately the middle of 2021.

The Fed has fueled the expansion and booms by fostering the expansion of credit and debt, by creating money out of thin air through open market purchases of U.S. Treasury obligations, and by keeping interest rates significantly below the levels that would prevail but for the two aforementioned policies.  Congress has done its part by running enormous budget deficits almost every year since the onset of the Great Depression.

An expansion of total credit and debt on a nationwide basis creates an economic expansion because virtually no one borrows money to put it under a mattress.  It is borrowed to be spent, either by buying consumer goods and services or by investing in assets such as stocks,  bonds, real estate, etc.  Individual and corporate debtors occasionally end up bankrupt, but as long as the overall amount of credit and debt is growing nationally, the expansion continues.

Note, though, that this is a two-way street.  Should the total amount of credit and debt contract on a nationwide basis, the economy will contract as well.  Money paid to a creditor where the creditor does not re-loan the money to someone else is money that the debtor no longer possesses to buy consumer goods and services or to invest.

A somewhat similar force is at work in the stock and bond markets.  If the price of stocks and bonds is rising, the investor holding the stocks and bonds becomes wealthier and is in a better position to both buy consumer goods or invest in financial assets (including real estate).  This also is a two-way street.  A decline in stock and bond prices diminishes wealth and, generally speaking, may make it more difficult for the investor to purchase consumer goods or more stocks and bonds.

The Fed and the U.S. government have striven mightily to keep the economic expansions going and to ensure that stock and bond prices rise in the long run.  One of the enduring mysteries is how —until recently — the government has been able to print vast quantities of money out of thin air without causing rip-roaring consumer price inflation.  This mystery can be solved by focusing on the different ways in which the wealthier and the poorer elements of the population spend money.

Imagine you have one billion dollars and are given a choice:  either give the entire one billion dollars to a tech billionaire or, alternatively, give $1,000 apiece to one million U.S. citizens chosen at random.  What are the differences in how the money is spent?  Will the billionaire use part of his new one billion dollars to buy a big-screen TV?  Probably not.  He likely already has as many big-screen TVs as he cares to own.  The tech billionaire is more apt to invest his new billion in some fashion.  Now, some of that money will go into the real (as opposed to the financial) economy (building a new factory and hiring workers, for example), but the fact remains that more of the billionaires new billion is likely to go into the financial economy than the collective billion of the million average Americans who receive $1,000 apiece.  The average American is more likely to use their windfall to spend on consumer goods and services, to take vacations, etc. as opposed to investing in stocks and bonds.

The upshot is that it’s possible to print gigantic quantities of money without creating consumer price inflation as long as policies are put into place to keep the wages and salaries of America’s middle and working classes stagnant and low.  And this is precisely what’s been happening since around 1982.  Keep the average guy broke, and you can print vast quantities of money without creating a lot of consumer price inflation.  Among those policies are the following:  exporting good manufacturing jobs to other countries; bringing in hordes of immigrants to keep wages low under the ironclad law of supply and demand; creating vast amounts of student loans to turn the newly-minted graduates into a form of indentured servants once they enter the workforce; and that old reliable, union-busting.  In the January 5, 2023 edition of the New York Times, there was an article on the op-ed page by Peter Coy entitled “The Fed Doesn’t Want Your Pay to Catch Up to High Inflation.”  Of course not — keep those wages and salaries of average Americans low so that Congress can continue to run huge budget deficits and the Fed can continue to print vast quantities of money without creating much in the way of consumer price inflation.

And where does a great deal of that printed money go?  It goes into financial assets (including real estate).  Hence we have a Dow Jones Industrial Average that has risen from approximately 900 in 1982 to over 30,000 today.

These policies have been greatly aided by technological advances.  It’s now possible to pay bottom-basement wages without creating widespread starvation in the working classes.  We live in a society where even many of the destitute are obese.

For decades it looked like the U.S. government and the Fed had a perpetual motion machine.  The economy kept booming and the prices of stocks and bonds continued marching upward (except for the aforementioned retreats in 1987, 2002, and 2008).

And then came the Covid pandemic and the re-emergence of significant consumer price inflation.

What happened during the pandemic, in a nutshell, was that (1) production of goods and services was greatly reduced, and (2) large amounts of cash were passed out to the nation’s average Americans.  It was the perfect formula for consumer price inflation, and that is what we got.   Average Americans began spending that new money in the real (as opposed to the financial) economy in an environment where the supply of goods and services had been curtailed.  Higher demand and lower supply imply higher prices.

The initial response of the Fed and politicians was to pooh-pooh the CPI increases as “transitory,” but after that dog didn’t hunt anymore the Fed was forced to finally raise interest rates in a semi-serious manner.

We haven’t had a stock market crash yet, but individual issues have in fact seen stock prices reduced to crash-like levels.  As of this writing, Tesla’s 52-week high was 390.11; it’s now at 113.46; Google, 152.10, now 88.58; Apple, 180.17, now 127.03; Netflix, 592.84, then down to 162.71 and now back at 305.92.  Trillions of dollars of value in the equities market have evaporated.  Losses in the bond market have also been enormous (in the trillions) as interest rates advanced.

It’s beginning to look like the perpetual motion machine engineered by the Fed and the Treasury over the past 40 years is starting to go in reverse.

As the price of stocks and bonds retreats, the buying power of those who hold those stocks and bonds is diminishing.  As the late Richard Russell may have said, the ammo boxes of the investing classes are starting to empty.  It’s been a slow burn — trillions have been lost, but the volatility index (the VIX) remains relatively low.  There’s no panic yet.  Paradoxically, this is a very bad sign indeed for the equity and bond markets.  Another aphorism from Mr. Russell is apt here:  “The Bear likes a full elevator when he presses the down button.”  The Bear certainly has that now.  Stocks and bonds may be of great value at some time in the future, but prices can’t rise very much if there’s little or no buying power when that time finally arrives.

The other big part of the equation is credit and debt.  The gigantic amount of credit and debt that the Fed and the federal government have nurtured into existence is the fuel for a giant deflationary crash.  There are only three things that can happen to debt:  it can be repaid, it can be re-financed, or it can default.  The rising interest rates engineered by the Fed have increased the pressure on borrowers, and one wonders whether there is a tipping point when large portions of that credit come crashing down (notice: thereby reducing the buying power of creditors), creating an environment where repayment and re-finance of debt become rarer and rarer and default more common.

The all-important moment may be the moment when the Fed is put to a choice:  either (1) continue raising interest rates (or maintain them at their then-current level) for the purpose of reining in inflation even though the effect of that is to cause the stock market, the bond market and the economy to crash, or (2) lower interest rates to save stocks, bonds, and the economy, even though the cost of that is galloping inflation, where inflation rises from 7 or 8 percent per annum to 18 or 20 percent or more per annum. 

I will hazard a guess here and predict that in this situation, the Fed will opt for galloping inflation over a catastrophic crash and a new Great Depression.  If we see the Fed lowering interest rates after a major retreat in the stock market even though consumer price inflation remains high, we will likely know that the Fed has made its choice.

Will that all-important moment arrive in 2023 or sometime thereafter?  It’s difficult to say at the present time.  Perhaps the Fed will be able to engineer a soft landing, where inflation subsides, interest rates can come down, and recession is avoided.  An interested observer can continue to monitor monthly changes in the CPI, monthly changes in unemployment, and other economic statistics and make his or her own educated guess.

If there is one important market to keep a close eye on, it’s the gold market.  Major and persistent increases in the price of gold over $2,500 or $3,000 per troy ounce almost certainly will signal that the market believes the Fed is throwing in the towel in terms of fighting inflation and is doing whatever is necessary to prevent a crash and a new great depression.  If the economy remains troubled with inflation remaining high and there is suddenly a major upward surge in the price of gold, it can be inferred that the elite donor class knows the Fed has made its choice and which way things will be headed.   


Mark Wallace is a long-time student of financial markets and a former Federal Bankruptcy Judge.        




Investment Challenges Ahead in 2023

Estimated Reading Time: 5 minutes

In line with our promise to provide more guidance and opinions on personal finance,  the following is offered as our take on what 2023 will likely provide for investors. We hope to provide a little theory to develop your thinking and some actionable ideas. Keep in mind this is for educational and entertainment purposes only. Always do your own research and/or consult with a qualified financial professional before investing in anything.

Last year we suggested that it would be a risk-off year. We suggested that both stocks and bonds would have bear markets and the standard 60% stock, 40% portfolio, typically recommended for retired people, would fail.

Boy, did it ever. According to a chart created by the Financial Times, it was the worst year for both asset classes combined since 1871! Ouch!


Other sectors of the market that caught the public fancy, like cryptocurrencies, lost 70% of their value or more. The bloom not only came off the rose, but the rose proved poisonous.

Jason Goepfert at sentimentrader.com also determined that those who bought dips or rallies also fared poorly with the worst results since 1928. It was just a very difficult year.

Gold moved essentially sideways, which allowed it to outperform most other asset classes.  Oddly though, western investors continued to sell holding out of ETFs, while central banks were the biggest buyers since 1968, just before the collapse of Bretton-Woods. What do they know that we don’t?

In general, the whole of 2022 could be described as the year where all components of the “everything bubble” began to deflate. It was and remains a financial asset bubble of immense proportions blown up by years of easy money from the central bank and massive and irresponsible fiscal stimulus. It started to buckle under the weight of rising interest rates triggered by the worst inflation in 40 years.

Thus, this is not a natural market phenomenon, but rather a crisis with political origin. It is not a market error, it is a central planning error committed by politicians and the FED.

Not surprisingly, with such outsized influence, what the FED does in 2023 will likely prove determinative.

While the current market is oversold and likely to rally early in the new year, we doubt it can sustain gains in light of further increases in interest rates and the inevitable decline in earnings.

Many of the factors causing this unwind of the everything bubble, primarily the rapid rise in interest rates engineered by the FED, will continue to be important factors in the coming year. But we suspect returns for bonds will first improve substantially once rates peak to be followed by an equity rally later in the year. However, this improvement is more likely towards the second half of 2023, with the first half being rather brutal for equities.

History does not always repeat, but past business cycles show that stocks do not bottom until after the FED pivots to lowering interest rates. Even that does not guarantee a positive move in stocks since the reasons the FED will eventually cut (poor business conditions) can adversely influence both corporate earnings and debt quality.

History also suggests that markets don’t swing from overvaluation to fair valuation.  The excessive swing upward is usually followed by an excessive swing downward.

Also, valuations usually have to get cheap before a bottom for equities is found.  In that regard, we are still not in the inexpensive zone of market valuations.

We don’t know when that will be or at what level it will be, nor does anyone else.  Almost all the major brokerage houses predicted this time last year the S&P would be near 5000. Instead, we closed out 2022 near 3800 on the S&P. However, we would be interested in equities if the S&P index were to get around 3,000. We don’t know if it will hit that. However, if it does, it would command our attention.

Inflation should start moderating soon. The housing component is about one-third of the CPI index and housing statistics indicate sharp weakness in this sector. The money supply is also actually contracting now. However, that simply means inflation will moderate. We doubt we will hit the 2% FED inflation target level anytime soon, absent a bone-crushing recession.


A housing bust will almost certainly curtail consumer demand, not just for things like appliances and furnishings, but other things as well. The reason is a house is the biggest source of wealth for most families and when housing prices start to fall consumers both feel, and actually are, poorer than before. Sprinkle in some rising unemployment anxiety and consumers will likely pull in their financial horns in the first half of next year.  That is important because consumer spending is 70% of the GDP.

The debate about whether we are in a recession will likely be over by summer with the recession advocates fully vindicated.

So the good news is inflation for a while will moderate.  The bad news is it will be for the wrong reasons.

What investments could be used under the circumstances described?  We would say bonds would be the first beneficiaries.

Most investors purchase bonds to diversify their risk and get hopefully some cash flow.  But bonds can at times be vehicles for capital gains.

To understand why you need to understand the concept of duration.  Duration is basically a mathematical calculation that involves the coupon cash flow generated and the length of the bond to its final maturity date.

The second thing to understand is that bond prices move in the direction of interest rates.  They fall when rates are rising, and rise when interest rates are falling.

The bonds with the longest duration ( the longest maturity and the lowest coupon) are the bonds that will change the most in price given any change in interest rates.  

Timing as always will be important, but if you can buy long-duration high-quality bonds (like the 30-year US Treasury bond) near the coming peak in rates, you stand to make good money once rates begin to fall.  When rates near the bottom, we would sell since the US Treasury is not in good financial shape long term. In that sense, this is an intermediate-term trading idea, not a long-term buy-and-hold idea.

In short, buying bonds will likely be the best trade for the first half of the year if you can buy right near the peak in interest rates.  In a sense, stocks are not likely to do well until bonds have done well first.  Rates will have to peak and start to fall for either to work but bonds have just one variable, the direction of interest rates.  Stock prices are influenced by rates as well but also a host of other variables.

Your financial adviser should be consulted to see if such a strategy applies to your own circumstances and to get his or her ideas on the subject.

For those who manage their own funds, investigate Vanguard Extended Duration Treasury EDV, Pimco Long term Zero coupon (ZROZ), and TLT as possible vehicles to develop a position for the eventual reversal of FED interest rate policy.

The ultimate leverage to exploit a drop in rates are the longest bonds available with the lowest (can’t get lower than zero) interest coupon. Hence, the zero coupon bond idea.

This trade may also act as a strategy to deal with uncertainty. If paired with gold, the investor is hedged against inflation, possible deflation, and rising default risk.

There is also a risk of FED policy error.  They recently misplayed inflation badly.  Now they desire to reestablish their credibility.  They are pressing rates higher with the yield curve already badly inverted (short rates higher than long rates).  Yield curve inversion has about the best track record of smoking out a recession of any indicator that we have.  The Leading Economic Indicators have been down for 8 months. But the markets have been trained over the past 30 years to expect the FED to relent quickly as they did in late 2018.  The FED is concentrating on employment numbers, which are distorted by demographic factors and stimulus checks and thus may well overplay its hand.  If so, we could be looking at a hard landing, not a soft landing.

There’s A Massive Red Flag That Could Spell Disaster For Americans’ Pension Plans

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U.S. government pension funds currently have the lowest cash holdings since the 2008 financial crisis, and corporate pensions’ cash holdings are barely above the 13-year low they hit in 2021, which could spell disaster in the event of a financial crisis.

Over the past 15 years, public pensions had 2.45% cash holdings and private pensions had 2.07% on average, but those have dropped to 1.9% and 1.7% respectively, according to The Wall Street Journal. The figures were higher even in 2008, when some retirement funds had to sell at inopportune times to make payments; one economist told the Daily Caller News Foundation this could threaten Americans’ pensions in the event of a financial crisis, which could force funds to sell off assets at low prices in order to continue payments, resulting in a massive loss in value.

The insolvency of many pension funds, which was caused by making promises that could never be paid, will eventually rear its head in a financial crisis — it is just a question of when the music will stop and who will be left without a seat,” E.J. Antoni, research fellow for regional economics at The Heritage Foundation, told the DCNF.

Keeping too much cash on hand can lower returns for pension funds, but keeping too little can end up forcing companies to sell assets at unfavorable prices just to keep cash on hand for payments, according to the WSJ. Low interest rates in recent years drove fund managers to exchange liquid cash for higher risk assets, failing to anticipate that rates would eventually rise, according to Antoni.

This is part of the classic boom-bust cycle caused by the Federal Reserve’s manipulation of interest rates. The overleverage is not limited to pension funds, however, which is one reason why most businesses have slowed hiring or begun layoffs,” Antoni told the DCNF.

The $307 billion California State Teachers’ Retirement System had the equivalent of eight and a half years worth of benefits in liquid non-cash assets in November, down from ten and a half years in July, according to the WSJ.

Some funds are now pushing to build up their cash on hand in anticipation of a rocky 2023, which will likely include another rate hike from the Federal Reserve and may induce a recession, according to the WSJ.

This article was published by The Daily Caller and is reproduced with permission.