If it’s deficit and debt doomsaying you’re after, I’m not your guy.
Regular readers are well apprised of my position on US government financing. The US can’t go “broke,” nor are there “limits” on government spending, nor does Washington need to “borrow” dollars from China (or anybody else) and no, the US government doesn’t “need” your tax dollars.
The US government is the sole legal issuer of genuine US dollars. As such, there’s no need to “source” them from anywhere — the US government is the source. Treasurys aren’t “debt.” They’re interest-bearing dollars, with the interest payable in more dollars. You can’t “owe” a sum that’s denominated in something you issue at will (if you choose not to issue it and thereby default, that just means you’re Plaxico Burress, it doesn’t mean you’re broke). Other than happiness, there’s nothing in the world US dollars can’t buy. Because Treasurys are the overwhelming favorite for recycled savings and because the dollar dominates global trade and payment settlement, the threshold for “irresponsible” fiscal policy in D.C. to trigger any sort of real crisis for the US (or its currency) is so high that even the gross level of ineptitude on display every day inside the Beltway can breach it (though certainly not for lack of trying).
Note what’s implicit in all of the above: There is a threshold. Money is just a confidence game, after all. And as we learned in October with the Liz Truss budget boondoggle, even the most respected currencies can experience crises due to the perception of fiscal largesse gone totally rogue. Furthermore, the dollar will collapse one day. All currencies do. The question is what the catalyst will ultimately be, and my contention is that as things currently stand, the most likely candidates are still acts of God or, perhaps, domestic strife and the threat of autocracy. For now (note the emphasis) the biggest threats to the dollar aren’t “out of control” government spending or any grandiose “rise of the renminbi” narratives.
One final disclaimer: It’s certainly true that the ongoing weaponization of the dollar-based financial system against the West’s geopolitical adversaries undermines the greenback’s appeal to autocratic states, many of which fear they too may one day be kicked out of the “club.” But that’s a slow-to-develop narrative — deliberate de-dollarization and reserve diversification are real, observable phenomena, but they represent a glacial process. And there has to be a viable alternative. Currently, there is no such alternative. October’s theatrics in the UK plainly suggested the pound isn’t so “sterling” anymore. The euro is the shared unit of account for a fractious bloc of nations which can’t provide for their own energy security and don’t share a fiscal framework (responsible, irresponsible or otherwise). And Japan is a basket case. Finally, do you want to trade 100,000 shares of your US government federal money market fund brokerage sweep account for 100,000 units of Zoltan Pozsar’s “BRICS Coin”? No? Well, you’re in good company, because neither does anybody else not called “Vladimir.”
I’ve now thoroughly and irretrievably buried the lede, as I’m wont to do. My original intent was to highlight one bank’s summary of the latest CBO projections. I don’t typically cover CBO forecasts for reasons implicit in everything said above, but given the debt ceiling fight in D.C., I’d be remiss not to make mention. Thankfully, BofA’s Michael Hartnett gives me an easy in.
“[The CBO] projects US government debt to rise >$21 trillion over the next 10 years [which is] $5.2 billion every day or $218 million every hour,” he wrote, adding that the federal deficit is projected to “remain above 5% of GDP [for the] next decade as government expenditures stay above World War II peaks.”
Regardless of what this means (or, more aptly, doesn’t mean) in the context of my lengthy editorializing, it does have potential ramifications for bonds and markets. The vast majority of market participants, and also politicians, think all of this matters. And there’s a very real sense in which if they think it matters, it does matter, because markets determine prices and politicians determine crises.
Hartnett’s view is that bonds will “work in 2023,” even if there’s a “short-term yield bump” tied to the hawkish repricing across US rates and hot US data indicative of a “no landing” macro conjuncture during the first half of the year. Remember: 10-year US government bonds (or their equivalent) have never, in the entire history of the republic, logged three consecutive years of negative returns. That suggests 2023 will be a decent year for bonds coming off what may as well have been the worst year on record.
However, Hartnett alluded to the CBO figures, geopolitical considerations, the shifting macro regime and the realities of life in the 2020s in suggesting that for the decade as a whole, commodities will probably outperform bonds. I wouldn’t necessarily disagree.
“Oil [was the] biggest ’73/’74 driver,” he wrote, adding that between Russia, Iran and Venezuela, “15-20% of global oil production is now a sanctioned ‘shadow market,’ effectively off-grid” set against a “new upside” catalyst for crude from China’s re-opening and a better global growth outlook. Wars, Hartnett reminded readers, are “always inflationary.”
Dollars can’t buy immortality (yet). Also, I’m inclined to agree with Elon on the biggest threat to humanity (and thus the dollar based system we rely on): AI. To me, that’s what is most likely to lead to immortality as well as the unseating of the dollar as king.
The odds of an act of god large enough to unseat humanity are pretty slim on a human timescale. As for autocracy, I still see that as very low possibility and it may not necessarily lead to a decline in the dollar either. The alternatives to the dollar might still be worse.
All in all, I’m still pretty optimistic about the future, but we are about to enter a period where evidence and truth will become even harder to discern and the sheer volume of misinformation and disinformation will be ratcheted up by an order of magnitude.
I do wonder what will happen to the idea of “truth” if video/audio evidence and eyewitness evidence are no longer reliable. If George Santos can get elected in today’s climate, what’s going to happen when politicians can use generative AI to fabricate videos of their opponents or themselves with ease? Voters already struggle with a basic grasp of what’s real and what isn’t and readily latch onto anything that makes their guy or gal look good or whatever mud gets slung at their opponent.
Remember…”No currency is born a reserve currency, it becomes it.”…
One of your best. Right on.
You should send this piece to Mitch and what’s his name that sold our collective souls to make him speaker.
I never fully wrapped my head about the MMT debate when it was active a year ago. It did occur to me back then that, while Treasuries may not be “debt”, if they are treated as debt that can force certain behaviors.
As the Federal “debt” rises, so does the interest burden, which leads the Treasury to issue more bills/bonds regardless of demand, increases pressure on the Fed to hold rates low, increases the risk of low-rate-driven asset bubbles, motivates voters to support excessive spending cuts or tax hikes or engage in class conflict, etc.
This is spot on. Call it debt, ‘interest bearing dollars’, or whatever you want. The reality is that the fed either buys it or the economy experiences crowding out.
You’ve succinctly summarized the negatives of the one and we know what happens in the other.
Perfect Saturday afternoon read. Thanks
H-Man, so inflation hangs around for awhile. The bets just recalibrate.
At the Munich Security Conference, ongoing this weekend,
Deutsche Welle interviewed Anne Applebaum
, an historian who writes for the Atlantic Monthly. It’s worth watching if you have not seen it.
Coincidentally, I saw news this morning that Biden is going to Warsaw, not Munich. Biden is visiting Poland because things are changing in Ukraine, not necessarily for the better. China is talking about supporting Russia with weapons. Russia is planning a broader invasion of Ukraine, basically a do-over of the invasion last year.
That means the war in Ukraine is expanding. I’m hoping it also means the US and other western countries will provide Ukraine with F-16 fighter planes. We’ve been quite timid to do this so far, but it now seems to be necessary.
This implies an expansion of NATO and greater US involvement. It raises the stakes in the fight, and the possibility of potential impacts on our markets. But I say it is necessary. Just my opinion, but Putin has said he wants to relive the good-old days, when Russia had dominance over Eastern Europe. He said before this war that this was what he wanted most before leaving his post as president.
He’s getting his wish, but it’s more than he bargained for. If we have any interest in retaining the value of sovereignty for all the countries in Europe, we need at a very minimum to give more to the Ukrainians to defend themselves.
Plaxico Burress? Dude, I’m dying here. You’re the Bill Simmons of the financial world. A mix of deep subject matter expertise with a slice of geopolitics and pop culture thrown in. You’re not charging enough.