In his offering at RealClearMarkets this morning Jeffrey Snider is more than usually scatological. Suffice it to say that he is highly critical of Ben Bernanke, Janet Yellen, Jay Powell, and Haruhiko Kuroda (long-time governor of the Bank of Japan). In the process he uses up every synonym for “excrement” that he (or I) can think of. Here’s a nice, sanitary excerpt:
Only two rate hikes in to what is supposed to be a prolonged and ultra-aggressive inflation-fighting campaign, a bottle of elixir we’re told to take ultra-seriously for its purported otherworldly properties, instead the market is more and more disavowing the fairy tale for the growing reek of monetary reality.
We have markets experiencing dangerous “volatility†– ironically, the media spins it as if the rate hikes are the cause! – combined with growing real money shortfalls and the dastardly imbalances they conjure. That’s the thing about getting covered in it; having been lied to and suffered the smelly consequences before, the faintest whiff of a repeat sends you running for the exits no matter how confident the officially encouraging talk comes at everyone.
Eurodollar futures have been experiencing inversion for nearly six months already, inversion that has spread in breadth as well as depth. It began, like always, including 2006 or more recently 2018, in the far-off contracts. Before too long, the inverted futures prices weren’t so far off.
Putting these into chromo-graphic terms of specifically this market’s color scheme, thankfully no brown, the curve distortion began in the blues and has worked inward from there; infecting next the greens before taking down the reds. The latter was a huge warning over how traders were already defying Fed hawks as the entire series of rate hikes had fallen under serious doubt.
If they’d kept his ashes Milton Friedman would be frapping in his urn.
Gas on the fire:
https://www.project-syndicate.org/commentary/jerome-powell-paul-volcker-inflation-interest-rate-contrast-by-stephen-s-roach-2022-05
At least Biden is contemplating student loan forgiveness. Now that will cure inflation…..
10% of the sitting members of Congress have student loan debt in their households, so those votes for student loan forgiveness are a lock.
I have been trying sort out the implications of student loan forgiveness on the Federal Budget / balance sheet.
AFAIK, while the loans were “paused”; they still counted as an “asset” (offsetting the debt the Federal goverment took to write the “loan”); after cancellation, only the debt remains.
On the income statement, that should count as a one-time “loss” — and a readjustment of future budgets because loss of projected principal repayment / interest.
And how one would account the likelihood there will be more forgiveness in the future? Right now, issuing more loans is actually profitable to the government on an accounting basis but in reality its likely to be a net outlay.
I’m not an accountant, CO, but I think what you wrote is correct. However, this issue is not new. The government assumes full repayment in its asset valuation, which in practice is not the truth. In other words, it is routinely writing off assets and dealing with the liability and income implications. A forgiveness program would simply make this happen as a single event.
Worse: both Medicare and Social Security trust funds are empty, yet projected Medicare and SS obligations are not accounted for as liabilities. If they were the US debt to cash flow (GDP) measure would look far worse.
There is no law of financial physics that says that the US debt need be zero. Every entity has a “debt capacity.” The problem comes when debt service expands beyond cash flow. We are close. IMHO the current inflation is not viewed as dimly by Washington as Main Street. We place an inflation tax on Main Street while we devalue the debt of Washington.
This almost Madoff-like scheme of government can go on a long time if you have an economic engine like the US. But not forever, and not when you harm the engine with tax, regulatory, income redistribution from productive to unproductive and other dead weight burdens. That’s how you get Venezuela.
If I was a cynic and I looked at the progressive agenda I might almost think we have an inverse Hanlon’s Razor situation. If I was a cynic.
That’s technically true but misleading. The funds are empty by law—they have IOUs in them.
As of the last trustees’ report both funds will be empty in truth in 2033. I suspect we’ll find out it’s a bit sooner when the next report comes out. The last report was four months late, issued in August 2021. When the 2022 report will materialize is anybody’s guess. If I were President Biden I would want it to come out sooner rather than later.
C’mon, Dave. IOU’s. (Lend me 50 shillings to mend the shed, and I shall surely repay you next Tuesday.) Jeez, I’m an LBO guy. Cash, and only cash, reveals truth. There is no cash in any way shape or form in reserve to service the looming cash flow deficits in SS or Medicare obligations. Period.
Its a sham, and a disaster.
That’s the way the law is constructed. The trust fund isn’t allowed to hold actual money or investments and the Treasury is required to cover the benefits up to the amount in the trust fund’s books. The books get a credit based on FICA received; they are debited based on benefits paid. By law the Treasury Department pays the benefits by issuing itself credit to do so and Federal Reserve is required to buy the debt. If there’s a Ponzi scheme it’s in the Treasury Department-Federal Reserve link.
There’s a problem but it’s not the one you’re highlighting. The problem is assumption failure: the benefits are too high and wages are too low. If wages had continued to rise at the rate they were, say, 50 years ago, the trust fund would be in fine shape. But they didn’t they rose much more slowly.
Focusing the economy on minimum wage jobs and personal spending has been a disaster.
If the Social Security trust fund had been allowed to put FICA revenues into DJIA-indexed funds, that would have been another solution but it would have raised holy hell—the Social Security Trust Fund would own a big chunk of the economy. I can already hear the complaints about socialism. Beneficiaries would have complained if the investment had fallen short, which it would have from time to time.