The last time the U.S. markets faced a drawdown of this magnitude, the U.S. Government defaulted upon its gold peg within the next 24 months.
1933 - Executive order 6102
1971 - Nixon Shock

Today’s debt levels, hyper-financialization, bubble valuations, wealth inequality, deglobalization wave, nationalism, geopolitical fracturing, & rise of authoritarian leaders all say this is not like the 1970s.

 

If you work 40 hrs/wk: at 5% inflation and after 5 years, you need a 28% pay raise or to work 44 more hours (*one full extra week* per month+) to make up the difference. This is inflation. Inflation is time theft. Inflation is value theft without legislation.

 

This says it all to where the world is heading. https://twitter.com/shortl2021/status/1586366953882808321

 

The financial theory of relativity was on display now after the nuclear bombs dropped at yesterday's FOMC meeting. You must look at the big picture to understand what is happening on the ground. The Treasury is now close to war with the Fed. The Fed has the Treasury in a very bad spot. They can bankrupt the USA very easily now and both Institutions want to keep the reality from Americans.
The US Government cannot fund itself at 5% forever. But it can fund itself at 5% for a lot longer than the UK can fund itself at 4.5%, a lot longer than Europe & China can fund itself at 3%, and a lot longer than Japan can fund itself at 1%. The FOMC fears hyperinflation more than markets realize. They understand what they have done, they just do not want market participants to lose faith in their currency. That is how the power of American bureaucracies will be lost forever.

Globalization was deflationary and de-globalization will be highly inflationary for years to come. The era of cheap energy is over globally. All the things I saw in oil are manifesting now in inflation numbers. Financial repression is now a US bond investors' reality. https://pic.twitter.com/QMC3YMPufP

 

Powell said: "If we overtighten, we can use monetary policy tools to support the economy but if we don't tighten enough inflation becomes entrenched" The guy can't be more crystal clear on his intentions and his fear of hyperinflation. He views this risk greater than Treasury default right now.

This point above is important to understand. These psychos in the Fed are so arrogant that they believe they can save the system after they purposefully crash it by letting bond rates rise. This puts the Treasury at risk for default. And there is great risk to both Powell & the Fed itself today and this is another point in why you have to own BTC as insurance against bad monetary policy.

Distilling the topic down to brass tacks: Base 4-5% inflation will be the new normal & stay post recession = financial repression.

Owning bonds during this makes no sense.

 

The base cause of inflation is hydrocarbons.
When their tech devices go dead, they'll understand that you can print money, but not hydrocarbons!
It's as if the energy issue is secondary to something else.......for market participants. Many still do not get how concrete inflation is now because of ESG compliance.

The energy illiteracy idocracy is getting to the point that we can no longer joke about this anymore.
The line between deadly incompetence and outright treason is blurred now.
I said Covid was a compliance test for an economic reset.
The question for investors now: When do we ask if it is intentional?

 

In September 2022, the Fed’s revenues went into negative territory for the first time in years. The Fed is suffering the consequences of its restrictive monetary policy (QT) applied for several months. It is a choice assumed by the Fed which wants to do everything to curb inflation even if it means causing a recession in America.

The Fed knows how to curb a recession, but has not yet found a way to solve the problem of high inflation that would take hold.

Now that the subject of the Fed’s losses is on the table, some people are wondering if these losses may have more serious long-term consequences. By more serious consequences, I mean could the Fed risk bankruptcy as I alluded to above.

But let’s start at the beginning. First, let’s define what the Fed’s balance sheet is and what it is made up of. The Fed’s balance sheet is mainly composed of the following assets:

• Government bonds.
• Mortgage-backed securities.

Here are the details of the assets that make up the SEC’s balance sheet as of October 26, 2022:

 

Government bonds are debts or claims issued by the government. They are used to finance government spending. Mortgage-backed securities (MBS) are valued by a pool of mortgages and the interest rates paid on the mortgages.

What is obvious is that the FED’s balance sheet has grown considerably since 2008 as a result of quantitative easing practiced in an unconsidered, even unlimited manner as was the case in 2020 during the COVID-19 pandemic. As a reminder, quantitative easing means buying government bonds and also mortgage-backed securities.

This monetary policy allows for injecting more liquidity into the financial system. The goal of monetary easing is to bring inflation back to 2% when the economy falls into recession, it is a way to boost growth. That’s why I said earlier that the Fed has figured out how to stop the effects of a recession. The trick is to know how to stop it before it impacts inflation too much. This is what the Fed has missed throughout 2021.

You may have often noticed that the central banks’ objective is to bring inflation down to 2%. This is the inflation rate that provides a margin of protection against deflation and allows price stability. This is the first mandate of the Fed and other central banks. The second mandate after price stability is to ensure full employment.

The opposite situation, which is quantitative tightening, consists in withdrawing money from the financial system by not renewing a certain number of bond maturities. In parallel, we know the most used tool of the Fed, the management of rates and therefore, the increase of rates during a monetary tightening. This process has been going on since the beginning of 2022. This involves reducing the Fed’s balance sheet:

 

2022 will be the first calendar year of decline in the Fed’s balance sheet since 2018. The Fed’s balance sheet more than doubled in 2020–21 and is now down 2.5% from its April 2022 peak. At the current pace, it would take 4 years to unwind the 2020–21 increase, but few expect quantitative tightening to last that long.

In reading these various elements, one question remains: how does the Fed make money?

The Fed earns its revenue from the bonds it holds, but also from the services it provides. Of course, it also has operating expenses that it has to cover with its revenues, and once it has covered them, it gives the government the surplus/profits. For example, we can see that in 2020, the remittances to the government were 86.9 billion, and in 2021, 109 billion. These are not insignificant amounts for the American government.

 

The last time the Fed increased its balance sheet during 2020–2021 to stimulate the economy, it purchased bonds with then-low rates and long maturities. Because rates were low, the Fed is earning an average interest of about 1.7%. However, this interest is less than what it has to spend since the short rates for reserves are about 3.15%.

Therefore, since income is negative, there are no remittances to the federal government:


In the face of these self-inflicted losses by the Fed in an attempt to bend inflation in America, you might ask if this is a problem for the Fed. After all, is the Fed in danger of going bankrupt?

 

That’s when you remember the game you played when you were younger: Monopoly. And then you remember Rule 11:

 

This passage is of particular interest to you: “The Bank never goes bankrupt.”

With the Fed, it’s the same thing as you might expect. The Fed has its advantages because it can set its own rules that are different from a traditional bank. So the Fed does an accounting operation where they declare the negative income as a deferred asset.

This implies that this loss will be covered in the future when the Fed can generate profits again. This is based on the assumption that the Fed will lower rates again in the next few years. If we want to be more precise, we can look at the projections for the Fed’s remittances to the federal government. We can see that from 2025–2026 onwards, the rebates should be in place again:


This is just a projection of course.

At the same time, deferred assets over the next 3 years should return to normal by 2026 to 2030. Normalizing monetary policy will take time. The question we have to ask ourselves is whether the Central Bank can fail. If the situation were to worsen, the Fed could go back to printing money by creating more debt to cover the losses. However, unlike in the past, this created money has no collateral such as gold for example. The only collateral is the credibility of the Fed.

However, it is known that the Fed’s unlimited money injections in 2020 and 2021 created a lot of inflation afterward. These injections were intended to bring inflation back to 2% by stimulating the economy during the 2020 crisis.

Today, the tools that were used to stimulate the economy are also the cause of the economic slowdown and in good part the cause of inflation. This suggests a failure in the system that will take time to normalize again.


This is why BTC is ideal insurance right here.

 

In the coming months, you should expect the Fed’s losses to continue. The Fed does intend to continue its quantitative tightening policy, which means continuing to raise rates. Raising rates encourages traditional banks to place their money with the Fed because rates are more attractive. And as a result, there is less money available in the financial system.

The other thing you need to know is that the profits generated by the Fed are redistributed to the government to fund spending and reduce the deficit. So there may be an issue in that the government doesn’t receive those profits for several months.

But even if the Fed were to go into the red for many months, or even years, the risk of the U.S. central bank going bankrupt is non-existent. Remember that the Fed makes the rules of the game…

By the way, if you want to get out of this game in which the Fed has been trapping you for several decades, you should probably be interested in the following card that should be added (I hope) to the next versions of Monopoly:

 

The Fed just gave *big* guidance They plan to take rates to 5%+ And hold them there for most of next year, until they've "defeated" inflation Here's why this won't work (according to basic math)
In 2019, pre-pandemic, debt service accounted for 13% of our federal budget #4 biggest line item 2019 Budget:
1. Healthcare: $1,240bn
2. Pensions: $1,100bn
3. Debt Service: $580bn
4. Welfare: $370bn
5. Education: $150bn
6. NASA: $22bn

This was up from 10% in the prior decade Previously #5 biggest line item 2009 Budget, for comparison:
1. Defense: $790bn
2. Healthcare: $760bn
3. Pensions: $730bn
4. Welfare: $420bn
5. Debt Service: $350bn
6. Education: $90bn
7. NASA: $18bn

That increase in debt service costs wasn't great It meant fewer and fewer of our tax dollars could go towards the things that are actually supposed to add value to our lives But it was at least manageable And for the most part, we learned to live with it.

But then 2020 happened We had a crisis And went a lil' spend-crazy We may or may not have maxed out our credit card, to the tune of a whopping 135% debt / GDP. It was fun while it lasted But 2 years later, that bill is finally coming due

Don't get me wrong, zero interest rates were a goddamn good time It felt amazing.
But, sadly, nothing good lasts forever 0% turned into 4% On its way to 5% Really, really quick



Now let's fast forward to today, and take a look at the planned 2023 federal budget And assume we have to pay for this budget at these new higher interest rates That $31 trillion of debt we racked up might start to get a lil' spicy. This should be good.

 

At 4% interest, our debt svc cost grows to 22% of the planned federal budget #3 biggest line item 2023 Budget (@ 4%):
1.Healthcare: $1,640bn
2.Pensions: $1,370bn
3.Debt Service: $1,250bn
4.Defense: $1,170bn
5.Welfare: $510bn
6.Education: $240bn
7.NASA: $26bn
Worth noting: w/ 22% of Fed budget consumed by debt service, to get the same level of services the government provided you pre-pandemic, your taxes have to go up by ~12% (unless of course, the gov't wants to pay for it with even more debt, making the problem worse in future years)

Now let's try 5% interest rate.

Debt service grows to 27% of the planned federal budget #2 biggest line item 2023 Budget (@ 5%):
1. Healthcare: $1,640bn
2. Debt Service: $1,560bn
3. Pensions: $1,370bn
4. Defense: $1,170bn
5. Welfare: $510bn
6. Education: $240bn
7. NASA: $26bn

Now let's do 5.5%, since the futures market is pricing in a small chance the Fed tries to take us there by middle of next year:


At 5.5%, debt service grows to 30% of the planned federal budget Line item numero uno
2023 Budget (@ 5.5%):
1. Debt Service: $1,720bn
2. Healthcare: $1,640bn
3. Pensions: $1,370bn
4. Defense: $1,170bn
5. Welfare: $510bn
6. Education: $240bn
7. NASA: $26bn

$1.7 trillion, just to pay the interest on our debt, for a single year Fun stuff. Your taxes go up by 24%
By now, it's probably becoming clear how difficult it would be for the Fed to hold rates much higher than ~5% for any significant period of time Go much above there, and stay for long, things break badly Now, let's move on to the part about the Fed's plan to defeat inflation.

You already know the Volcker Fed had to go to great lengths to defeat our last major inflationary episode in the 70's to early 80's But let me remind just how far they went Each time inflation spiked up, they had to raise rates well *above* prevailing CPI @ the time to beat it.
In fact, in Jun 1981, to finally kill the 70's inflation for good, Volcker had to raise Fed Funds to a peak of 19.1% Nineteen-point-one percent Roughly *double* the 9.7% CPI at the time

 

Now, just for fun, let's see what Fed Funds at ~double the current CPI would do to our future federal budget CPI has been hovering around 8%, so we'll use 16% as our inflation-annihilating Fed Funds Rate for this example.
At 16% interest, debt service would become 86% of the planned federal budget 2023 Budget (w/ 16% Treasury yields):
1. Debt Service: $5,000bn
2. Healthcare: $1,640bn
3. Pensions: $1,370bn
4. Defense: $1,170bn
5. Welfare: $510bn
6. Education: $240bn
7. NASA: $26bn

It should be clear to you now why bond yields are a big problem.

And just for some comic relief If you want to get the same services from your government, your taxes *sextuple* The avg American, earning the median household income of $78,000, would need to pay $116,000 per year in taxes.

To stay in a first-world country you're going to need Orange insurance against fiat failure.

With $31 trillion in outstanding debt, there's a fundamental ceiling on how high rates can go before everything breaks At > 100% debt / GDP, that ceiling isn't very high, and we're already close to it now So yeah - in short, Jay Powell's job is shittier than yours

 

The same thing that drove record profits sparked runaway inflation: Free Money Takes a long time to whittle away $7.3 trillion, especially those 2021 tranches but you will be happy to know profits are falling. Biden wanted oil to go higher -blaming Russia should insult your intelligence.

 

In the coming months, you should expect the Fed’s losses to continue. The Fed does intend to continue its quantitative tightening policy, which means continuing to raise rates. Raising rates encourages traditional banks to place their money with the Fed because rates are more attractive. And as a result, there is less money available in the financial system.

The other thing you need to know is that the profits generated by the Fed are redistributed to the government to fund spending and reduce the deficit. So there may be an issue in that the government doesn’t receive those profits for several months.

But even if the Fed were to go into the red for many months, or even years, the risk of the U.S. central bank going bankrupt is non-existent. Remember that the Fed makes the rules of the game…

By the way, if you want to get out of this game in which the Fed has been trapping you for several decades, you should probably be interested in the following card that should be added (I hope) to the next versions of Monopoly:

The CBO originally expected debt costs to become the largest line item in the federal budget by 2050, but they didn't expect a fed funds rate above 2.5%. The debt trap singularity is being pulled forward the longer rates stay elevated.

 

The Fed is going to be forced into some type of yield curve control over the next year to 18 months. This Fed action will be a hard asset heaven maneuver when it happens. The interest payment burden on UST debt is unsustainable. Simple math.

 

Why did I cancel my NYT subscription many years before? They never do their homework