INTRO
Debts and deficits have been around for so long that they are a fixture in our world. We have monster debts at the individual level, at the corporate level, and our government is certainly no stranger to the red ink. Today, we highlight a new angle inside the debt trap story. We’ll start with a Herbert Stein quote as a baseline:
We can put our debt problems into the known unknown bucket. From there, it feels we are left with two major questions: when’s it gonna blow, and what will it look like?
PRIVATE TO PUBLIC
We all know about narratives, especially when it comes to our “strong economy”. We’ve struggled to understand the disconnect between a strong economy and one that is still on QE life support leftover from the $700B TARP program used to bailout the system during the 2008 GFC (Great Financial Crisis). So, we have the mental challenge of hearing about the greatest economy ever, as we are sitting on a mountain of debt that is almost certain to not be paid back. A volatile riddle that must be solved.
When information moves from private knowledge to public knowledge, weird things happen. We can encounter a host of unintended consequences, as this “new” information is disseminated across a much larger audience. Our beat is risk and volatility, and we want to use this “private to public” lens to highlight a potential risk that may have just entered the party.
THEIR WORDS
Janet Yellen and team recently published this report on the US Financial condition: https://www.fiscal.treasury.gov/files/reports-statements/financial-report/2023/02-15-2024-FR-(Final).pdf
Here are some highlights from this report, and we remind you – these are their charts and their words, not ours.
OUR WORDS
We now have annual deficits around 6-8% of GDP.
The trend is clear.
These numbers/projections are: 1. Rosy as always. 2. Assuming we do not see a recession.
Said another way – these are ugly numbers at best and ruinous at worst.
HERE IS THE RUB
It comes back to the “private to public” thing. Many of us have been talking about the unsustainability of our exploding debts and deficits for years, but now THEY are talking about it publicly and specifically. We see it in print from Yellen, and we also have Jerome Powell, Jamie Dimon, and Larry Fink stating that our fiscal situation is unsustainable.
POWELL: https://thehill.com/homenews/4447860-powell-the-us-is-on-an-unsustainable-fiscal-path/
DALIO: has been talking about this for a while now.
A LOGICAL CONCLUSION
We’ve done a lot of work on inflation. We know inflation carries a major psychological component: if everyone believes prices will move higher in the future, they may rush to buy things today. Think Crack-up Boom: https://dailyreckoning.com/the-worldwide-crack-up-boom/. Let’s take things to their logical conclusion from our new private to public narrative shift:
- People see it is okay to talk about the unsustainability publicly.
- People may start to act on it.
- The psychological impact can quickly feed on itself where buying begets more buying. Think FOMO (Fear Of Missing Out).
AN EYE ON SOLUTIONS
Turkey is the latest country to get ravaged by inflation. Interestingly, Turkey’s stock market (graph below), is marking fresh highs in nominal terms. We can conclude that stocks can offer a hedge against inflation. The key concept is to compare the nominal gains in the market relative to the (actual) inflation rates, not to be confused with the reported and distorted inflation numbers.
It also appears that precious metals and BTC got the memo, as both are trading at/near all-time highs. And let’s not forget about the winning answer of building personal resilience as outlined in our eBook New Vol (download for free here). And here is the New Vol summary for those short on time:
New Vol bridges the gap between financial risk and the solution set of building personal resilience, as advocated by Peak Prosperity. By redefining volatility from a market decline to a systemic shock, New Vol proposes an insurance strategy approach to risk management. It suggests absorbing the smaller risks of a market correction while insuring against the larger systemic risks through the accumulation of wealth across various buckets of capital (financial, material, social, cultural, time, living, emotional, and knowledge). This new hedge aims to provide enhanced protection and improved quality of life by recognizing that all buckets are important, not just the financial one.
THE CLOSE
We have an inflation problem. Can the inflation monster be tamed or will the rate suppression game and 40-years of declining yields come back and bite? We can only guess at the answer. We can also guess on the probabilities.
We have an exploding debt and deficit situation that has been a problem for a while. Now they are telling us it is unsustainable. And it appears the markets are taking them at their word. Maybe this is the time we believe them.
#InflationNation
