The sarcastic derision in macro-market circles is pretty heavy these days. I’d be inclined to call it feigned. “Feigned incredulity,” to employ a phrase I find myself using more and more often as time goes on.
“[The] biggest piece of M&A in the past 12 months was the merger of Treasury and Fed,” BofA’s Michael Hartnett quipped in his latest, dated April 11, describing the zeitgeist.
I spent part of Thursday penning and publishing an article on that “merger.” If you didn’t read “Conspiracies, Ponzi Schemes And The Fed-Treasury-White House Nexus,” you should. The short version goes like this. You can argue, if you like, that the US government’s going further down the Ponzi scheme road than it has in the past in terms of funding deficits, but if you think this is new or, more to the point, if you were under the impression there was ever something “real” about the system, you’re mistaken. Hence my contention that sarcastic derision in this context is tantamount to “feigned incredulity” or, in some cases, outright disingenuousness.
Note that Fed critics spent the entirety of the QE era maligning the extent to which the primary dealer middleman hardly sufficed as a convincing cover story for a circular funding scheme whereby the Treasury was effectively selling debt to the people across the street at the Fed, who then remitted interest payments back to Treasury. Now, those same Fed critics spend their days pretending this is all new to them — that they’ve never seen such an exercise in flagrant, self-serving absurdity as that evidenced by the Fed’s tolerance for higher inflation amid fiscal excess in an election year.
If I didn’t know any better, I’d be inclined to suggest that in fact, it’s not the Fed and Treasury who’re so blinded by partisan considerations that they’re prone to dangerously irrational thinking, but rather their critics, who are so determined that there’s a conspiracy afoot to keep Donald Trump out of the Oval Office that they see the “deep state” in every chart, hear the “establishment” in every policy utterance and impute quarterly refunding details to “shadow president” Barack Obama.
I kid. And I digress. And, as noted earlier this week, I concede that the perceived overtness of the Fed-fiscal nexus raises uncomfortable sponsorship questions for the US debt market. It’s possible — indeed it’s likely — that those questions go some way towards explaining the “anything but bonds” character of the 2024 rally, to use Hartnett’s “ABB” description.
The figure below, from Hartnett’s latest, shows the 10-year annualized return for US Treasurys.
That’s a 65-year low if you’re keeping track at home, and as the chart header not-so-gently notes, it marks an “ugly end” to the four-decade bond bull.
Hartnett reiterated familiar talking points. The 2020s, he said, are the “era of war, protectionism, fiscal excess, scarce energy, housing and labor.” All of that’s conducive to “higher inflation and a higher cost of capital” unless and until a recession triggers a bid for what, by then, would be thoroughly “humiliated” bonds.
“Gold also say[s] the parlous state of US government finances means interest-cost control [and] yield-curve control” are “inevitable,” he went on, suggesting the market believes those are the only options “to prevent a debt crisis.”
Folks, I don’t know any other way to put this: The US isn’t going to have a “debt crisis.” The US doesn’t have any “debt.” That’s not what Treasurys are. And even if you want to persist in the misnomer, the world needs US paper a helluva lot more than the US needs to issue it.
Since we’re being passive aggressive about all of this, allow me to suggest that the real conspiracy is the witting perpetuation of a myth that says hard currency issuers — and particularly the reserve currency issuer — need(s) to issue “debt.”
Why might the government and the rich want to perpetuate such a myth?
One explanation is that this is akin to The Village: The color red (in this case red ink) is taboo because it attracts the monsters who live in the woods. Nobody’s allowed to dream beyond the village because if you go into the woods, the monsters will get you.
In fact, though, there are no monsters. In the film, the people who run the village are engaged in an elaborate ruse in order to preserve the pretense that it’s actually the 19th century, when in fact it’s modern day.
You might argue a similar dynamic’s at work vis-à-vis efforts to prevent society from learning the truth about Modern Monetary Theory, and the way government finance actually works in advanced economies with sufficient monetary sovereignty.
If the truth gets out, especially in the US, the villagers might start demanding things of the system. Things like good healthcare, good education and all the other goodies which currently (and increasingly) are the purview of the fortunate few.
Isn’t inflation the actual monster here as opposed to a nebulous “debt crisis”?
The monster’s whatever it needs to be. That’s the whole point.
Apparently I must have stumbled upon the right books because everything you’re saying, have been saying, suddenly makes a lot more sense to me. Humans are the dominant species on a planet, where they are not the most dominant physical specimen, because of their ability to tell stories and encourage cooperation. In a word, humans can lie to each other, get lots of people to agree with the lie, and thus conquer everything as an army with single-mindedness. Money, politics, religion, corporations, taxes, debt, laws, and just about everything else people care about are figments of the human imagination that did not exist until we decided that they should. To the uninitiated this probably sounds crazier than a QAnon conspiracy, but that’s because both the conspiracy and the given facts of life came from the same exact place. Someone thought it up and convinced other people to believe them. And if you think that’s crazy, remember all of the crazy things people USED TO DO in support of lies. Human sacrifice to the gods, leaches to heal ailments, and drowning women to prove they weren’t witches all used to be commonplace because people believed in the efficacy of them. Those all seem crazy in hindsight, and so will money, religion, politics, etc. to the humans that survive climate change (a thing that is actually real but humans have decided is made up).
What then is the limiting factor? Of course there won’t be a debt crisis in the true sense of it. No calling in the Note and forcing a liquidation.
But, there is a limit as to how much the USA can print. At some point, the marginal buyer will go away or the inflation rate will spiral, or both. Maybe your point is that we are no where close to the limit and that we should stop worrying. Similar to our brief exchange the other day around the run in gold prices.
“At some point, the marginal buyer will go away or the inflation rate will spiral, or both.”
The word “buyer” doesn’t even make any sense if you understand all of this for what it really is. This whole debate is couched entirely in self-referential gibberish.
Which is why I should know better than to publish articles like this.
Eh, don’t give up on me/us yet. I’m not here to debate, I’m here to understand.
Ok, ignore the marginal buyer comment in my earlier post. That wasn’t really the thrust of the post.
What then is the limiting factor? If the Fed can just print, and transfer dollars to Treasury for bills and bonds, why even have taxes? At some point, there is a limit. It has to be inflation. Dollars become so common that they continue to lose value. Sure, the USA will never default on government issued bills and bonds, but the currency may become increasingly worthless.
I think that what you’ve been saying is that the limit is far off in the future.
No, what I’ve been saying is exactly what I said: The value of money is purely, 100%, a subjective phenomenon. Money’s a figment of our imagination and, more importantly, the collective imagination of billions of other people. That’s the value of the dollar. That network of believers is stronger for the dollar than it is for any other kind of money on Earth. If you think the dollar’s worth more than, say, the Turkish lira, and I do too, and so does everybody else and nothing’s going to convince any of us otherwise, then it doesn’t matter how many actual, physical dollars there are in existence compared to lira. Scarcity isn’t a factor here. All kinds of things are scarce. There’s a Post-it note stuck to my monitor right now that says “Buy capers.” It’s the only one in existence. There isn’t another such Post-it note (with the words “Buy capers,” in my handwriting) anywhere in the world. It’s one-of-a-kind. How much will you pay me for it? Nothing. Why? Because nobody (including me) thinks it’s worth anything despite it being as scarce as scarce gets.
The point here is that it’s occasionally worth reminding ourselves that we order our lives based on a set of myths that we constructed to make our existence seem like something other than what it is: A meaningless, fleeting and tragically self-aware period of consciousness that’ll be snuffed out one day and replaced with nothingness for “the rest of” eternity. The whole idea behind creating the myths was to make this whole, hopeless endeavor a little more enjoyable. The US stumbled upon the single most successful shared myth in the history of our species (the USD, a unit of account which can be issued at will and swapped readily for the entire constellation of creature comforts humans want and need), and instead of enjoying it, we’re letting it constrain us.
I too am inclined to agree with you. Consider a thought experiment, though, where the US printed and distributed $1 billion per citizen. Would this not be mechanically inflationary (newly minted demand chasing comparatively stable goods/services supply) and also erode global collective faith in the dollar (weakening USD relative to EUR etc)?
You nailed it, Amber. Good job. Here’s why: 1) You substituted “demand” for “dollars,” 2) you held supply “comparatively stable” and 3) you noted that irrespective of the impetus, the death knell would ultimately come from lost faith.
Ol’ Milton can preach from the afterlife all he wants, but at the end of the day, it’d be ludicrous to suggest, for example, that if only there’d been less money floating around, energy prices wouldn’t have spiked in the UK and Europe after Putin invaded Ukraine. Energy inflation in that instance had exactly nothing to do with money and everything to do with the specter of acute shortages.
Even in extreme, stylized scenarios, it’s difficult to say, definitively, what the real problem is. If the US government mails everybody $1 billion, what’s the “cause” of the next day’s inevitable hyperinflation? It’s certainly not “too many” pieces of blue paper with Ben Franklin’s face on it. The “too many” threshold for that was probably reached on the 20th 100 dollar bill ever printed unless you just love that damn portrait so much that you see value in having one of them despite there being God only knows how many other ones just like it floating around out there.
It’s tempting (and not entirely inaccurate) to say “Well, that’s just semantics because Ben represents demand.” But even there, is the problem too much demand, or is it the inability of the economy’s productive capacity to scale up quickly enough, and in the right proportions to keep everything from going haywire?
The problem with answering that question in the post-pandemic/war-era context is that the pandemic delivered simultaneous supply and demand shocks such that both sides of the debate can make their case. If you’re a monetarist, you can point to a chart of explosive money growth and say “Look. Inflation’s a monetary phenomenon.” If you’re a Progressive economist, you can point to any number of charts that illustrate unprecedented shocks to supply chains, and say “It’s ridiculous, bordering on farce, to blame ‘too much money’ for inflation in the face of the single-worst supply shock in modern human history.”
In the end, though, money’s a confidence game. The only way to change that would be to establish a system of money backed by actually useful things with a lot of intrinsic value (so, food and fuel commodities, basically), but you’d run into the same problems we ran into with precious metals-based systems: They’re not responsive to cyclical fluctuations, they can (and inevitably will) amplify busts, they’re plagued by storage problems, food stuffs spoil and (underappreciated) they’d be occasionally inflationary in the event humans stumbled on a massive new mine, a huge new oil field or some innovation that allows us to produce more of, or get more out of, whatever the commodities are that back the money.
So, it pretty much has to be a fiat confidence game. There’s a reason we came to that conclusion in the first place and contrary to popular belief, it wasn’t solely (or even mostly) due to our inherently profligate ways. Historic incidences of dilution were in many cases motivated at least as much by the economic impracticality of hard pegs (and high purity requirements for coins) as by political or wartime expediency.
(The same’s true of banking, by the way. Fractional reserve banking and the business model of borrowing short to lend long were manifestations of humanity’s need to make progress. A safe, solvent banking system on a strict interpretation of the words “safe” and “solvent” wouldn’t be able to function as a facilitator of economic growth.)
I’ll give ya $5 for that post it note. I know someone who will give me 10$ for it……
Do you think that the US abandoning the gold standard in the 70s was a turning point in facilitating this philosophically abstraction? Dalio wrote that he thought the monetary system would end that day when in reality perhaps it had just begun.
philosophical abstraction
Perhaps a limiting factor is how many people believe the myth (the value of the USD in this case). If too much USD is printed/created and most people get the things they need (better healthcare, education, etc) they might stop believing in the myth. “If the government can just create it, why am I being taxed?”
Now that’s very unlikely to happen(enough people figuring this out so it stops working). But it’s theoretically possible if taken to the extreme.
Which group of humans currently don’t believe (in USDs) or in the near term seem like they will stop believing?
FYI, I do not believe the Bitcoiners don’t believe in USD-I believe that bitcoin is primarily a means to exchange into USDs or something people trade in and out of to make some USDs.
Nothing is real man…
To answer @amber greib’s quest for comprehension: economists see Bretton Woods as the turning point, making the USD the world’s reserve currency.
To be blunt: the world war was a reality check about out self-agreed delusions, and countries/governments that lost did not get to print more money. Gold’s only valuable if you can protect it.
We’ll stay atop the rest as long as we can get away with changing the rules, again, when it suits the US. I don’t think it’s far-fetched to say there are some fairly powerful forces around the globe willing to make some very large sacrifices to test our mettle. Some might call that ganging-up on the US. I would call it collaborating to change the rules.
Either way, we’re probably not as ready as we should be. But in our defense, how can we really be ready?
It’s been long enough since the last world war for our citizens to become complacent. It happens.