Inflation Threatens US Debt Payment

Happy Thursday!

Nearly there…

No less than five WSJ articles read something negative about inflation, the deficit, and money printing.

I’m convinced that the ancient scribes missed a word.  Money isn’t the root of all evil.  Money printing is the root of all evil!

Let’s dig in…

The wheels are coming off. This inflation story just won’t go away.

In The Wall Street Journal, Judy Shelton wrote a scathing editorial about the gimmickry that the Treasury and the Federal Reserve use to finance U.S. deficits.

She was mocking Janet Yellen, who herself called the minting of a $1 trillion platinum coin a gimmick.

Indeed it is, by the way.  And for a Keynesian like Yellen, I’m thrilled she admitted it’s a complete sham.

Shelton threw some pretty scary numbers up in her editorial today.

But before I get to that, the big idea Shelton wrote in her editorial was the possibility of the U.S. government defaulting on its debt.

I’ve always thought that defaulting wasn’t just possible.  I thought and still think it’s probable.

But there’s a world of difference between a writer like me saying it and a policymaker like her saying it.

A USG default would be the most significant financial catastrophe in modern history.

It would be worse than 2008.

It would be worse than the Great Depression.

And the reason for that is everything in our financial system is predicated on the safety of U.S. Treasury debt.

Of course, as with all bonds, interest rate risk may drive USTs down in price. 

Treasury bond prices go up and down all day long, but there is no default risk.

It’s default risk-free, which means you’re always getting your principal back.

Even if the Treasury has to order the Fed to print the money and pay you, which is the equivalent of monetizing the debt.  It’s inflationary, but you will get your money back.

If the U.S. government decides to fold on its Treasury debt, the repercussions would just be too numerous. And to be honest, those are just the seen ones. Who knows what else will happen?

It’s pretty funny thinking back with Hank Paulson, the Secretary of the Treasury, during the Lehman crisis.

Paulson admitted he had no idea that the money markets were going to crash because Lehman went down.

It’s vital to remember Hank Paulson was the CEO of Goldman Sachs before he became Treasury Secretary.

If he didn’t see that coming, who the hell is going to see it coming?

So that’s the kind of stuff we’re talking about.

Why is this conversation so pertinent all of a sudden?

It has to do with the monetization of U.S. debt.

The Federal Reserve essentially prints money to buy U.S. Treasury debt and other forms of bonds right now.

According to Shelton:

Consider that $6.3 trillion of the $28.4 trillion in total public debt is Treasury debt issued to federal trust funds and other government accounts. The interest paid on those securities is treated as an “intragovernmental” transaction that has no effect on the budget deficit. The payments and receipts are both recorded in the same category of spending in the federal budget.

It is the cost of financing the remaining $22.1 trillion in federal debt held by the public—of which the Federal Reserve holds $5.4 trillion—that bears on the size of the federal budget deficit. Given that the Congressional Budget Office estimates net interest expense at $413 billion this year, the remittances transferred to Treasury by the Fed have a significant effect, offsetting the government’s interest expense (i.e., its net interest outlay) by some 25% or more.

In short, with the Fed owning roughly one-quarter of the federal debt held by the public on which the Treasury must pay interest—and with the Fed’s practice of sending weekly remittances to Treasury—it’s clear that monetary and fiscal policy are conflated.

Obviously, for people with any sort of common sense between their ears, the Global Financial Crisis was never truly sorted out.

It was papered over with band-aids to keep the party going for the boomers and Wall Street.

The only people who’ve benefited from all this are asset owners.

And that is if they could unload their assets at the top and wind up buying cheaper houses somewhere else later on.

Nobody ever really gets the timing right, especially with illiquid assets.

So this is disastrous.

Inflation crept up again to 5.4%, over the last six months, according to The Journal.

If you haven’t figured this out yet, this inflation is not transitory.

Even the dumbest of the dumb in Washington now see that this inflation story is real and persistent.

Joe Biden has ordered Long Beach port to stay open around the clock. I can’t believe that port wasn’t open for 24 hours already.

There’s absolutely no reason for that port to be closed when you’ve got nine days’ worth of delays going on.

But there you go, that’s California for you nowadays.

And here comes the bribes, of course.

Social Security benefits will rise by 5.9% in this coming year, which is a chunk.

Anybody who has parents on Social Security, or if you’re on Social Security yourself, inflation is never covered by the cost of living increase. And suddenly, we’ve got nearly a 6% rise.

That still won’t cover the cost of living increase.

But it’s a significant rise compared to previous years. And, of course, just in time for the 2022 midterms, in which Joe Biden should get trounced.

So this is a little bribe out there to get those AARP voters to stay blue.

One article that had me laughing talked about how trillions of dollars were coursing through the U.S. economy. And that was one of the reasons why costs rose so rapidly, but many workers remained at home. Well yeah, that’s because of the federal benefits, you numbskulls.

It cracks me up how these financial journos, and even some political journos, have no basic understanding of economics. They don’t get how the world works at all. And unfortunately, these are the people who are the mouthpieces for the ones running policy.

As long as the accurate knowledge never gets down to the populace, most people won’t act.

Here’s what I think: if you live near a city, especially a major financial center like New York or London, I would do everything I could to get out of there.

Those prices are going to be so, so high. They’re already ridiculously expensive.

Living in places like that is financial suicide by paper money.

Now we’re seeing younger professionals in their 30s and 40s, moving out into the countryside. 

Broadband has a lot to do with this because people realize that they can work from home now, and they don’t need to be in the office all the time.

But it’s going to be interesting is when places like New York and Chicago, already deeply submerged in debt thanks to entitlements to police officers, firefighters, and public school teachers, have far fewer residents in their cities to pay for those entitlements.

I don’t think this ends well at all.

As you well know, we talked about crypto yesterday.

I still think that’s a great bet, but moving away from these humongous population centers that left-wingers poorly manage is probably the smartest thing you can do.

Until tomorrow.

Have a great day,

Sean

You May Also Be Interested In:

Sean Ring

Around the World in 22 Years with Sean Ring

Okay, let's take it from the top.

Joisey!

For something I did in a past life, I was born in New Jersey. I haven’t figured out what that was yet. Joking aside, I loved growing up in Hasbrouck Heights. It was a fun town.

I was...

View More By Sean Ring