The latest numbers are out for the U.S. government’s borrowing for the first quarter of 2018. From January through end of March, Treasury was forced to net borrow a whopping $488 billion. Keep in mind that’s for only three months. It represented a new all-time borrowing record for the first quarter. This was simply added to the already around $21 trillion national debt of course.
These are not exactly statistics to be proud of as a nation however you look at them. In fact the government’s (and central bank Federal Reserve’s) balance sheets have been progressively worsening since the 1980’s. The epoch of “Bubble Finance” effectively began as Alan Greenspan took over as head of the Federal Reserve back in 1987 (coincidentally also the same year that the infamous Black Monday crash occurred).
America’s once-fiscally sound finances have never been the same since then. President Ronald Reagan’s Office of Budget and Management Director David Stockman explained the (still ongoing today) process this way:
“They began in a systemic and then a massive way to monetize the debt, buy in the government bonds, and thereby avoid the day of reckoning, thereby sort of putting their big fat thumb on the scale of supply and demand down in the bond pits and the canyons of Wall Street — and for years were able to keep interest rates dramatically lower than they would be if we were honestly financing these massive debts in the market and out of the pool of private savings that’s available. So, that’s why for 30 years the day of reckoning was deferred. It wasn’t eliminated. It was simply parked on the balance sheet of the Fed.”
Before Greenspan got started, the debt to GDP sat at around 30 percent. Now fast forward 35 years. Today’s 107 percent sounds high until you compare it to the shocking 140 percent direct trajectory of the next few years.
Similarly, the Federal Reserve’s balance sheet was a mere $200 billion back in 1987. It had grown to $800 billion twenty years later. After the Global Financial crisis erupted in 2008/2009, this dramatically rose to $4.5 trillion. That is a stunning 21.5 times rise in only 30 short years.
Last week, high ranking Fed official Lorie Logan plainly admitted that the Fed’s balance sheet will never drop below a trillion (much less even $2-$3 trillion) again, as the chart below demonstrates:
Yet the Fed has enough sense to realize that it must at least try to shrink the balance sheet somewhat. They are attempting to offload some of their mostly Treasury bills onto already overly saturated markets even as your read this. The central bank has promised to withdraw $600 billion per year from the balance sheet by dumping the federal government’s Treasury bonds.
This means that instead of removing from the total debt supply the government is increasingly piling on, they are only going to add to the total supplies which somehow must be absorbed. Now for fiscal year 2019, Treasury is looking to float an additional $1.2 trillion in bonds to the markets. At the same time, the Fed pledged to dump its own $600 billion bond bomb on to the identical bond market. This makes the total for the year that must be absorbed a whopping $1.8 trillion.
The good news is that eventually this massive (and heretofore unthinkable) Treasuries supply will be absorbed. This is true despite our major foreign buyers China and Japan pulling back on their overall net new Treasury buying.
The bad news is that they will not be taken for a mere 2.95 percent for 10 year’s. Soon you will watch as they blow through three, three and a half, four, and maybe even five percent. Simple supply and demand dictates that the rates will rise drastically this very year.
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The repercussions of this year’s massive debt issuance will soon boomerang around the U.S. and global financial systems. The end game will be a stock market that comes way down off of its comical overvaluing at today’s 24 times its S&P 500 earnings. The good news is that you do not need to lie awake nights wondering how to save your portfolio from substantially higher interest rates and subsequently lower stock market levels. Gold has proven itself countless times throughout human history as the ultimate hedge for investors against governments’ spending themselves into final financial ruin.
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