The scenario with high inflation without substantial tax increases or spending cuts isn't plausible for the US. We might get the inflation, but that won't delay the tax increases / spending cuts by more than a few months. The reason is simple -- even if you ignore debt payments, the US would still be running a large budget deficit (i.e., the US has a primary budget deficit). Sufficiently high inflation can reduce or eliminate the burden of debt payments, but the primary budget deficit still needs to be financed, and inflation will make this more difficult via higher nominal interest rates. This is what happened in countries that experienced hyperinflation (e.g., Zimbabwe 2007-2008, several former Soviet-bloc countries in the early 1990s, and several Latin American countries in the 1980s) -- high inflation didn't stop the fiscal realignment, and didn't even delay it very much. The same thing will happen in the US -- much of our debt is short-term and we have a large primary budget deficit, which means inflation (or even default) buys very little time.
This is a very strong thread on a critical issue affecting not just the United States but the globe. When the U.S. financial system collapses, there will be nowhere to hide. I've linked to this piece on my own Substack: The Debt Dispatch. I increasingly believe that the only way out that avoids a severe debt crisis doom loop scenario is to empower a fiscal commission with real authority; one modelled after the successful Base Realignment and Closure commission (BRAC). This would mean that a majority if not all commissioners should be independent experts, instead of members of Congress, and that the commission recommendations should be adopted with silent approval from Congress, meaning no up-or-down vote but a reflection period (say 45 days) during which Congress can reject the commission proposal but never has to affirmatively vote for it.
"Volatile," i.e., variable inflation might be the optimistic view. I fear that inflation tends to feed on itself, and that as people scramble to escape its ravages, it accelerates as it did in Weimar Germany or Zimbabwe. Economic disorder ensues, and real output falls even though it is expressed in ever larger numbers. This leads to social disorder and political turmoil. Envy, resentment, and scapegoating get out of hand. In a modern democracy, demagogues and their grifter supporters enact broad entitlements beyond what can be paid for by any politically feasible system of taxation, leading to central bank monetization of government debt. Financial repression (artificially depressed interest rates resulting from central bank purchases) holds off the reckoning for a while. This channels the inflation into asset prices, while consumer prices remain relatively stable, so it is painless for those with capital. But the recent spending binges have now brought inflation to the consumer. Eventually, rates can no longer be repressed, resulting in even larger deficits to be monetized. No one wants to face the pain of stopping the game, but eventually there is a revolutionary crisis. Many assume it is just a matter of some tax increases and a bit of cutting back on spending, but the numbers needed are far greater than recognized. Our clueless ruling and managerial class continues on its merry way, thinking "I'm alright, Jack," oblivious to impending disaster from which they won't escape.
There is a good book out there that details the decline and despair caused by hyperinflation and flawed policies to address it in Weimar Germany. Check out When Money Dies by Adam Fergusson
What are the right strategies for an individual investor to adopt in the face of these policies? Generally speaking, I avoid US govt bonds, but what other actions make sense? If any?
It's always the same answer: diversify, diversify, diversify. I also don't think there will be many places to hide should the U.S. financial system go bust. I once curated a conversation with a group of investors and some of the nonobvious recommendations they pitched were: invest in high-end property in resort towns because wealthy people will always exist and they need places to live and play in; buy into mining operations as in don't just buy gold, own the mining operation. These are both hard to do for smaller scale investors but could be useful at the upper income end.
"There is no “in-between” regime in which investors have medium confidence in the sovereign’s debt,"
I'm not sure this is true.
Maybe there is no middle state only because your definition doesn't recognize it.
Maybe Sweden (~1990s?) would qualify, maybe not. Maybe another country I'm not thinking of.
Maybe it has happened elsewhere and moved to failure without consensus recognizing the middle state. Or was righted, again without consensus recognizing the middle state.
But even if it has never happened, it doesn't mean it can't.
At this point, "US Households" are the big new buyers of T-Bills. We're acting like DIP lenders to ourselves . . . skimming some vig off a loan to a distressed borrower before the whole ship goes down (with us on it). We are smart.
Lyn is dead on. I also agree with "no middle ground". If you don't trust a borrower, an extra 1% on the rate for 30 YEARS isn't going to do it. You can play around with rates on the short end when there is less duration risk, but who loses confidence and then loans for decades? Look for the term structure to shift way more to short term loans in the years to come.
I have a very irresponsible aunt whose family is constantly maxing out credit cards, borrowing whatever they can, and stiffing anyone who they feel they can stiff. This despite making $500k a year in income.
For such people it's really all about the monthly payment. The principal is just a concept. Either the credit card companies will later forgive the debt (this has happened before) or they simply won't pay. Unsecured debt of course is meaningless. Secured debt they have mostly used their home which has appreciated in price enough to keep up. They are locked on a low 30 year rate now unlike the federal government.
Even if inflation and interest rates rise in turn and the real rate doesn't change, the minimum monthly payment in a 5% world is very different than the minimum monthly payment in the 0% world. I suspect it is the same with our government. The size of the principle doesn't matter in the 0% world, it does in the 5% world.
If you can quietly pivot to "Canadian Healthcare" (a euphemism for killing government patients in the Soviet style), you can fix the government's budget problem and spend the money on some other set of stupid things.
It's certainly easier to have CMS pass new regs then get a bill through congress. But both insurers and doctors are the recipients of that money and they are powerful lobbyists to keep the Medicare gravy train rolling. They tried to reduce trend on Medicare Advantage a year ago and they started running ads that CMS was secretly cutting Medicare.
Per capita medicare spending is in the short term going to be dominated by baby boomers retiring. Most Medicare spend comes at end of life so having more 65 year olds will temporarily lower per capita spend, but it can always go back up as they age.
Also, Medicare is subsidized by commercial insurance so eventually Medicare pay rates will have to rise as there are more Medicare members and fewer commercial payers.
Yeah, I hate olds and while I'm ideologically committed to entitlement reform I'm pragmatically cognizant of the fact that any savings won't go to young families but get pissed away on bullshit even less useful then entitlements. At least now my mother can support herself with SS and Medicare rather then me having to do it.
Next year the Democrats will take the House and hold the Senate so that during Biden’s second term it is not unreasonable to expect IRAs and other retirement savings vehicles to be raided to fund reparations and other progressive priorities. We probably can also expect the notion of equity to be introduced to Social Security and Medicare with race-based equity benefit structures.
The scenario with high inflation without substantial tax increases or spending cuts isn't plausible for the US. We might get the inflation, but that won't delay the tax increases / spending cuts by more than a few months. The reason is simple -- even if you ignore debt payments, the US would still be running a large budget deficit (i.e., the US has a primary budget deficit). Sufficiently high inflation can reduce or eliminate the burden of debt payments, but the primary budget deficit still needs to be financed, and inflation will make this more difficult via higher nominal interest rates. This is what happened in countries that experienced hyperinflation (e.g., Zimbabwe 2007-2008, several former Soviet-bloc countries in the early 1990s, and several Latin American countries in the 1980s) -- high inflation didn't stop the fiscal realignment, and didn't even delay it very much. The same thing will happen in the US -- much of our debt is short-term and we have a large primary budget deficit, which means inflation (or even default) buys very little time.
Lynn is correct. We are going to have financial repression & volatile inflation.
This is a very strong thread on a critical issue affecting not just the United States but the globe. When the U.S. financial system collapses, there will be nowhere to hide. I've linked to this piece on my own Substack: The Debt Dispatch. I increasingly believe that the only way out that avoids a severe debt crisis doom loop scenario is to empower a fiscal commission with real authority; one modelled after the successful Base Realignment and Closure commission (BRAC). This would mean that a majority if not all commissioners should be independent experts, instead of members of Congress, and that the commission recommendations should be adopted with silent approval from Congress, meaning no up-or-down vote but a reflection period (say 45 days) during which Congress can reject the commission proposal but never has to affirmatively vote for it.
I am curious what you think about that proposal.
"Volatile," i.e., variable inflation might be the optimistic view. I fear that inflation tends to feed on itself, and that as people scramble to escape its ravages, it accelerates as it did in Weimar Germany or Zimbabwe. Economic disorder ensues, and real output falls even though it is expressed in ever larger numbers. This leads to social disorder and political turmoil. Envy, resentment, and scapegoating get out of hand. In a modern democracy, demagogues and their grifter supporters enact broad entitlements beyond what can be paid for by any politically feasible system of taxation, leading to central bank monetization of government debt. Financial repression (artificially depressed interest rates resulting from central bank purchases) holds off the reckoning for a while. This channels the inflation into asset prices, while consumer prices remain relatively stable, so it is painless for those with capital. But the recent spending binges have now brought inflation to the consumer. Eventually, rates can no longer be repressed, resulting in even larger deficits to be monetized. No one wants to face the pain of stopping the game, but eventually there is a revolutionary crisis. Many assume it is just a matter of some tax increases and a bit of cutting back on spending, but the numbers needed are far greater than recognized. Our clueless ruling and managerial class continues on its merry way, thinking "I'm alright, Jack," oblivious to impending disaster from which they won't escape.
There is a good book out there that details the decline and despair caused by hyperinflation and flawed policies to address it in Weimar Germany. Check out When Money Dies by Adam Fergusson
What are the right strategies for an individual investor to adopt in the face of these policies? Generally speaking, I avoid US govt bonds, but what other actions make sense? If any?
It's always the same answer: diversify, diversify, diversify. I also don't think there will be many places to hide should the U.S. financial system go bust. I once curated a conversation with a group of investors and some of the nonobvious recommendations they pitched were: invest in high-end property in resort towns because wealthy people will always exist and they need places to live and play in; buy into mining operations as in don't just buy gold, own the mining operation. These are both hard to do for smaller scale investors but could be useful at the upper income end.
"There is no “in-between” regime in which investors have medium confidence in the sovereign’s debt,"
I'm not sure this is true.
Maybe there is no middle state only because your definition doesn't recognize it.
Maybe Sweden (~1990s?) would qualify, maybe not. Maybe another country I'm not thinking of.
Maybe it has happened elsewhere and moved to failure without consensus recognizing the middle state. Or was righted, again without consensus recognizing the middle state.
But even if it has never happened, it doesn't mean it can't.
At this point, "US Households" are the big new buyers of T-Bills. We're acting like DIP lenders to ourselves . . . skimming some vig off a loan to a distressed borrower before the whole ship goes down (with us on it). We are smart.
Lyn is dead on. I also agree with "no middle ground". If you don't trust a borrower, an extra 1% on the rate for 30 YEARS isn't going to do it. You can play around with rates on the short end when there is less duration risk, but who loses confidence and then loans for decades? Look for the term structure to shift way more to short term loans in the years to come.
I have a very irresponsible aunt whose family is constantly maxing out credit cards, borrowing whatever they can, and stiffing anyone who they feel they can stiff. This despite making $500k a year in income.
For such people it's really all about the monthly payment. The principal is just a concept. Either the credit card companies will later forgive the debt (this has happened before) or they simply won't pay. Unsecured debt of course is meaningless. Secured debt they have mostly used their home which has appreciated in price enough to keep up. They are locked on a low 30 year rate now unlike the federal government.
Even if inflation and interest rates rise in turn and the real rate doesn't change, the minimum monthly payment in a 5% world is very different than the minimum monthly payment in the 0% world. I suspect it is the same with our government. The size of the principle doesn't matter in the 0% world, it does in the 5% world.
It's not politically feasible to pass legislation that does this, but it is feasible to weasel around with medical treatment protocols and the regulation of how much is paid for what procedures. The propaganda tack can be seen in this NYT article: https://www.nytimes.com/interactive/2023/09/05/upshot/medicare-budget-threat-receded.html
If you can quietly pivot to "Canadian Healthcare" (a euphemism for killing government patients in the Soviet style), you can fix the government's budget problem and spend the money on some other set of stupid things.
Sort of.
It's certainly easier to have CMS pass new regs then get a bill through congress. But both insurers and doctors are the recipients of that money and they are powerful lobbyists to keep the Medicare gravy train rolling. They tried to reduce trend on Medicare Advantage a year ago and they started running ads that CMS was secretly cutting Medicare.
Per capita medicare spending is in the short term going to be dominated by baby boomers retiring. Most Medicare spend comes at end of life so having more 65 year olds will temporarily lower per capita spend, but it can always go back up as they age.
Also, Medicare is subsidized by commercial insurance so eventually Medicare pay rates will have to rise as there are more Medicare members and fewer commercial payers.
Yeah, I hate olds and while I'm ideologically committed to entitlement reform I'm pragmatically cognizant of the fact that any savings won't go to young families but get pissed away on bullshit even less useful then entitlements. At least now my mother can support herself with SS and Medicare rather then me having to do it.
Next year the Democrats will take the House and hold the Senate so that during Biden’s second term it is not unreasonable to expect IRAs and other retirement savings vehicles to be raided to fund reparations and other progressive priorities. We probably can also expect the notion of equity to be introduced to Social Security and Medicare with race-based equity benefit structures.
Lordy, i hope not!