SHI 10.23.24 – Ebbs, Flows and Trends
October 23, 2024SHI 11/20/24 – The Things We Don’t Yet Know
November 21, 2024
On December 23, 2024, the U.S. Federal Reserve will turn 111.
That’s right, 2 days before Christmas the FED will celebrate 111 years of American central banking.
Perhaps this fact, in itself, is not overly interesting. But consider this: According to Wikipedia, there are 4 people alive, today, who’s birthdates predate the FED’s creation. They are all women, 2 in Japan, one in the UK and one in Brazil. 2 were born in 1908 and 2 in 1909. Now that’s pretty amazing.
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Happy Birthday, Federal Reserve!“
The US presidential election is next week. Yes, everyone knows. Unless you are in a coma. If all goes according to plan, the next president will take office on January 20, 2025. And our next president’s first (or final) term will end 4 years later, in January of 2029.
I find dates and anniversaries interesting. Covid struck about 100 years after the global pandemic known as the Spanish Flu. A human life exceeding 100 years of age is rare today. And inasmuch as our next president will preside over America when 2029 begins — the 100th anniversary of the Great Depression — some fear the US and the world at large will find itself deep in the next economic decline. Especially now that our national debt has reached hard-to-fathom levels; annual deficits feel way too high; and, interest alone on our mountain of national debt, exceeds our annual spend on national defense and is running at or near $1 trillion per year.
So I decided to reread a book I first picked up and read about 7 years ago called “The Mandibles: A family, 2029 – 2047.” The book was published in May of 2016 – 13 years before the dystopian financial events in the book begin. In this book, 2028 was a seminal year. Because in this book, the author paints a rather disturbing and compelling possible future for our United States.
Could the events in this book actually happen? Could our mounting debt levels trigger the second Great Depression in 2029? Might the triggering events already in formation, all around us, even today? Could the continued debasement of the almighty US dollar, post pandemic, already have caused other countries around the world to begin conspiring for the end of US dollar hegemony and the collapse of the US economy?
Welcome to this week’s Steak House Index update.
Why You Should Care: The US economy and US dollar are the bedrock of the world’s economy.
But is the US economy expanding or contracting?
Expanding … according the ‘advanced’ reading just released by the BEA, Q3, 2024 GDP grew — in ‘current-dollar‘ terms — at the annual rate of 4.7%.
The ‘real’ growth rate — the number most often touted in the mainstream media — was 2.8%. In current dollar terms, US annual economic output rose to $29.35 trillion.
According to the IMF, the world’s annual GDP expanded to over $105 trillion in 2023. Further, IMF expects global GDP to reach almost $135 trillion by 2028 — an increase of more than 28% in just 5 years.
America’s GDP remains around 25% of all global GDP. Collectively, the US, the European Common Market, and China generate about 70% of the global economic output. These are the 3 big, global players. They bear close scrutiny.
The objective of this blog is singular.
It attempts to predict the direction of our GDP ahead of official economic releases. Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth. In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending. Consumer spending is clearly a critical financial metric. In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric. I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.
Taking action: Keep up with this weekly BLOG update. Not only will we cover the SHI and SHI10, but we’ll explore “fun” items of economic importance. Hopefully you find the discussion fun, too.
If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.
The Blog:
In 2016, when “The Mandibles” was published, total US debt was $19.5 trillion. Today that number is $35.8 trillion. I don’t know about you, but I find this fact immensely disturbing.
Perhaps that’s why I found this book to be so compelling, interesting, thought-provoking, and, yes, disturbing.
After the financial collapse of the United States in 2028, the wealthy patriarch in the story comments to his son:
“So, you loan me the bucks. I photocopy the bill four times, give you back one of the copies, and announce that we’re square. That’s monetizing the debt: I owe you nothing, and you’re stuck with scraps of litter. For years, the fact that one can swap dollars for tangible goods and services has been a miracle of god. Why do you think I’m invested in the market? In theory stocks entail owning real things. Unfortunately, I didn’t take into account that most of those stocks were denominated in dollars. And I’ve been as vulnerable as the next idiot to the bias that keeping the majority of your funds in American companies is erring on the safe side. So I apologize. Had I had any idea what was in the offing, I’d have diversified quite differently.”
Interesting. And what does he mean by “monetizing the debt?”
Essentially this term is defined as “when a central bank buys government debt to fund public spending.” One could argue this is precisely what happened in 2020, right after Covid struck. The FED bought a massive amount of government (and other) debt:
As we see above, pre-pandemic, the FED balance sheet held about $4.2 trillion in assets. That number more than doubled by April of 2022, reaching just shy of $9 trillion. Essentially, the FED “printed” US dollars and then bought these assets. About half were US Treasuries. About half was other types of debt instruments. The cash generated from the FED‘s debt purchases entered the US money supply, ballooning cash in circulation by more than 44%. M2 measured about $15.2 trillion when the pandemic began; in April of 2022, it exceeded $22 trillion.
Does this qualify as “monetizing the debt”? Sure. Sort of. However, it’s worth noting that the FED‘s assets are now down to about $7 trillion, and money supply is about a trillion below it’s all time high.
Both presidential candidates are promoting tax cuts and significant additional government spending. Which, once again, I find quite disturbing given the state of our national debt picture. It’s against this backdrop that the “The Mandibles” author paints a fictional but grim picture of life in America after America defaults on it’s debts. In the book, the American president in office in 2028 declared all US debt void. No longer would the US honor either the interest or principal payable on Treasuries. Dismal.
Could America default on its sovereign debt? In theory, no. Repayment of sovereign US debt guaranteed by the 14th Amendment to the US Constitution. Of course, compliance withe the 14th Amendment requires Congress to continuously raise the debt limit — something they’ve done 78 times since 1960. But assuming Congress does its job, the US Treasury can always create and sell new Treasury securities.
“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.“
But what if the Treasury faced inadequate demand? What if they were unable to find buyers for all the debt they needed to sell?
Precisely. That’s the real issue. What if there simply are not enough buyers? Essentially, then, the FED becomes the buyer of last resort. And that, my friends, is when the United States is truly monetizing the debt. And that, I suspect, could be the beginning of the end. That would be the moment the US truly smacks into the “debt wall.” Splat.
Dire, right? Scary? I agree. But I don’t see it happening. For two reasons.
First, many smart people out there find this scary. I have to believe they are talking about this with all our esteemed politicians.
Second, as dire as it looks, it’s not really as dire as it looks. Confused? Let me explain.
In 2016 when total US debt was $19.5 trillion, our US GDP was about $18.5 trillion. This means our debt/GDP ratio was about 105% Yesterday morning, the Bureau of Economic Analysis released the first estimate of Q3, 2024 GDP. The ‘annualized’ number is now almost $30 trillion. And since our national debt is $35.8 trillion, today’s debt/GDP ratio is about 120%.
No, this is not good … but it is manageable — assuming our political and financial leaders decide to manage it. In theory, we can “grow out way out of it”. In other words, if we simply manage our national spending while, at the same time, grow our GDP, in a decade or so we could have this whole thing under control.
🙂
Could it happen? Sure. Let’s head to the steak houses.
When compared to our national debt picture, the steak houses and reservation demand are downright boring.
Clearly, not much new is going on here. 🙂
As I mentioned above, Wednesday morning the Bureau of Economic Analysis released the first estimate of Q3, 2024 GDP.
According to the the BEA, Q3, 2024 GDP grew — in ‘current-dollar‘ terms — at the annual rate of 4.7%. The ‘real’ growth rate — the number most often touted in the mainstream media — was 2.8%. In current dollar terms, US annual economic output rose to $29.35 trillion.
That’s good news, right? Try not to worry too much about that national debt. Eat some candy … you’ll feel better. Happy Halloween!
<> Terry Liebman
