“We’re a creature of Congress, we’re not in the Constitution.” ~ Fed Chair Jerome Powell, December 4, 2024
The transfer of wealth from workers and savers to the government and the big banks rolled on this week with Swiss-like precision. The process is both mechanical and subtle. Here in the USA the automated elegance of this ongoing operation receives little attention.
NFL football. Holiday BOGO offers. Trump’s cabinet picks. Hunter Biden’s pardon by the big guy. You name it. Bread and circuses like these – and many others – offer the American populace countless opportunities for chasing the wild goose.
All the while, and with little fanfare, debts are piling up like deadwood in Angeles National Forest. These debts, both public and private, stand little chance of ever being honestly repaid. The obligations extend well above what the economy can support.
The national debt is now over $36.1 trillion. But that is only a small piece of the picture. Unfunded liabilities – like Social Security, Medicare, federal debt held by the public, and federal employee and veteran benefits – amount to over $221.4 trillion. If you’re a U.S. citizen, your share of this pile is over $645,322.
Nonfinancial sectors household and business debt is now over a combined $41.6 trillion. Certainly, a portion of this private debt will be defaulted on during the next credit crisis and recession. But when it comes to the public debt, Washington will do everything it can to prevent an outright default.
The Federal Reserve is once again cutting the federal funds rate in the hopes of easing the Treasury’s borrowing costs. So far, the rate cuts have been a failure. Since the Fed started cutting rates on September 18, the yield on the 10-Year Treasury is up 47 basis points.
If Treasury rates keep moving against the Fed, you can expect another round of QE to artificially suppress Treasury rates and debase the dollar.
Shrinkage
After Nixon ‘temporarily’ suspended the Bretton Woods Agreement in 1971, the money supply could be expanded without physical limitations. This includes issuing new debts to pay for government spending above and beyond tax receipts. Hence, since 1971, government directed money supply inflation has been the standard operating procedure in the U.S. and much of the world.
Expanding the money supply has the effect of dissipating wealth from the currency. The process allows governments, which are first in line to spend this newly created money, a backdoor into your bank account. Without levying taxes, they get access to your wealth and future earnings and leave you with money of diminished value.
This backdoor into your bank account is how Washington is extracting the $645,322 in unfunded liabilities that you’re on the hook for. When you check your account balance you don’t even see the money is missing. It isn’t until you’re at the checkout counter and you shell out a fortune for a bottle of shampoo that the theft becomes apparent.
This is why, on aggregate, consumer goods cost over 22 percent more than they did just four years ago. Politicians like to blame the price rise on greedy corporations. But to be clear, prices are not going up.
As the dollar shrinks in value the price of goods and services appear to increase. This rise in prices, however, is a function of the dollar’s devaluation. This devaluation is primarily achieved via deficit spending.
And the Fed does everything it can to finance these sky-high deficits…
Rolling the Dice
When deficits are financed by central bank credit creation something downright disgraceful is going on. In the U.S., as in much of the world, this disgraceful undertaking is a matter of policy. This is the world we live in.
It is likely the Fed will cut rates by another 25 basis points following the conclusion of the next FOMC meeting on December 18. This would bring this cycle of Fed rate cuts to a full 100 basis points. This is taking place at a time when consumer price inflation is still well above the Fed’s arbitrary 2 percent target.
In practice, the Fed is helping finance annual deficits of nearly $2 trillion. This $2 trillion is then spent into the economy by Washington for everything from military hardware to food stamps to EV manufacturing. As a result, the dollars in your bank account and those you earn in your paycheck are devalued.
Thus, as the dollar is debased, the process of earning, saving, and building wealth is also debased. These days it has degenerated into gambling and speculation. Yet, at the same time, many caught up in this gambling and speculation don’t recognize it for what it is.
At this point in the late-stage bull market melt up, everyone’s retirement accounts (e.g., 401k’s and IRA’s) are dependent on favorable rolls of the dice.
Passive investors are feeling great. Year-to-date the S&P 500 is up by over 28 percent. Plus, a burgeoning Santa Claus rally is almost guaranteed to bring good cheer through the end of the year.
Another year or two like this and these shrewd indexers, who blindly plow their savings into the S&P 500, will be able to retire a decade early.
Are You Unknowingly on a Suicide Mission?
Edouard Manet (1832-1883), Suicide, 1881.
Burgeoning paper wealth, via inflated stock market indexes, has provided an attractive cover for increasing risk and fragility. Gambling on the market and extrapolating current trends to determine one’s exact retirement date is much more rewarding than sacrificing short term gains to protect against large, portfolio destroying losses.
Why worry when the “Powell put” is already firmly in place before the market has even suffered a slight stumble?
After a fifteen-year bull market run, with hardly a 20 percent correction along the way, U.S. investors have grown complacent. A quick gander at a price chart of the S&P 500 over the last 40 years provides ample evidence that stocks always go up over the long term.
If stocks always go up over the long term, there is little risk in betting your retirement on the S&P 500 index. So long as you don’t need to access your money for several years, you can let your index fund ride with nothing to worry about, right?
Most of the time the answer to this question would be ‘yes.’ But occasionally, the risks are too great for the rewards that are presented.
In summer 1929, for example, in the final months before stocks collapsed 89 percent in less than three years, investors would have been wise to pull their money out of the stock market. Those who didn’t ended up having to wait 25 years to break even. Many died while their stocks were still underwater.
Similarly, when the calendar tipped into the new millennium in 2000, investors were sitting fat and happy. Several months later a long and belabored slide began that pulled the NASDAQ down 78 percent over the following two and a half years. Then it took 13 years to get back to even.
It is important to note that just prior to the 1929 and 2000 bubbles bursting the CAPE ratio was at 31.48 and 44.19, respectively. What is the CAPE ratio today?
It’s 38.81.
While valuations are terrible indicators for market timing, they do provide a very clear window into the future.
What we mean is, unless you’re on a suicide mission with your wealth this is probably a good time to take a few chips off the table.
Written by M.N. Gorden for Economic Prism ~ December 6, 2024
