Remaining Focused

A rousing display of diversions this week assured the American populace was looking every which way but right under its collective nose.  Midterm elections.  White House spats with purveyors of fake news.  The forced resignation of Attorney General Sessions…


Old drug warrior (otherwise recused) on his way home to Alabama…


Sideshows like these, and many more, offered near limitless opportunities to focus on matters of insignificance.  Why stop to really understand what’s behind a headline when hundreds of new headlines pop up by the minute?  Why bother to try and figure things out when real thinking is such an inconvenience?

What’s more, the S&P 500 jumped nearly 3 percent between market open Monday and market close Thursday.  Clearly, the October mini-panic is now a distant memory.  At this rate, we’ll all be rich off stocks by the New Year.

Yet while the mob stampeded from one distraction to the next, we remained focused on the real story: The outright pilfering of the nation’s time, talent, and treasure.  This isn’t the story that’s readily presented by the headlines.  But it is readily evident for those willing to open their eyes and look around at the world before them.

You see, the real story, the story that’s being largely ignored, is three fold.  Rising borrowing costs, a debt crisis, and price inflation are converging with unbearable consequences.  You can’t miss it.


The “thank God it’s over” election celebration in the stock market. This rally is not likely to last. In fact, it could quite easily morph right back into a panic cycle. [PT]


Fake Money

The U.S. Treasury, if you didn’t know, will issue $1.3 trillion in new debt in 2018.  This represents a 146 percent increase in new federal government debt issuance from 2017.  By our rough estimation, this number will significantly increase in 2019 and again in 2020.

But who will buy this glut of Treasuries? Not the Fed. Remember, the Fed is currently reducing its balance sheet. Not China. Remember, China, facing a trade war, surely isn’t eager to buy U.S. debt.

Without the demand of these big debt buyers yields will rise at the worst possible time; when public and private debt are at record levels.  As interest rates rise, credit becomes more and more expensive. So, too, servicing existing debt takes up a greater and greater percentage of the borrowers budget.


30-year bond yields have broken above lateral resistance and so far remain in an intact uptrend. [PT]


Rising borrowing costs will also have the effect of strangling inflated asset prices, including stocks and real estate.  Yet as asset prices deflate consumer prices, thanks to trade tariff policies, will inflate.  This scenario, in short, will be the exact opposite of the wealth effect.  But there is more…

The unfavorable conditions facing the U.S. economy are the product of fake money. Over the past decade, an abundance of fake money has fashioned a world that is greatly at odds with itself.  Take away the fake money and the whole giant edifice collapses.


When Fake Money Becomes Scarce

To clarify, honest money, the kind that cannot be created by making digital notations on a central bank’s balance sheet, is a scarce resource.  It represents accumulated capital, including the time and sacrifices made to earn it. When spent, it is spent wisely.

Fake money, on the other hand, is squandered in the most incredible ways.  Namely, fake money is squandered on fake businesses.  By this, we mean businesses that provide products and services that wouldn’t otherwise exist without a seemingly endless supply of fake money.


In fact, a shockingly large pile of fake money has entered the economy since 2008. This is not going to end well, that much is apodictically certain. [PT]


Fake businesses, like Silicon Valley’s bizarre Ponzi balloon companies, are dependent on fake money for their existence.  Similarly, the abundance of state sponsored credit has transformed University campuses into money sucking country clubs.  Absent fake money, the customer base for colleges would dramatically shrink – along with the glut of fake majors and fake degrees.

The automobile industry is another example of a business that is dependent on fake money. Without fake money, only a small fraction of the current sales would materialize.


The Fed’s “QE” securities portfolio continues to be run down faster and faster, as the amounts no longer reinvested have increased to USD 50 billion per month as of October. This is going to put pressure on all sorts of bubble activities. [PT]


Of course, the granddaddy of all fake money dependent businesses are the deep state lard bucket companies that swig and slurp directly from Washington’s fake money trough. These companies would quickly vanish if not for the plentiful supply of fake money.

Throughout all corners of the economy these fake money dependent businesses persist.  Yet at this point in the business cycle many of them are running on fumes. Employees show up to work each day to move them forward.  Management borrows money to cover the gaps between accounts payable and accounts receivable. But it’s a losing battle.


The credit spread to keep an eye on: BBB-rated corporate bonds. The lowest investment grade rating segment has seen the largest amount of issuance over the past decade; once downgrades begin, many of these bonds will become junk very quickly, which will swell supply in junk bonds unexpectedly and lead to a lot of forced selling by managers tracking credit indexes or working under fiduciary constraints with respect to the rating categories they may own. It is not even a question of whether this will get ugly, it is only a question of when it will happen. [PT]


Credit markets, because of Fed policies of extreme liquidity, have been distorted well beyond what was thought to be conceivably possible over the last decade.  The attraction of fake money was too much to pass up.  Why save and invest when you can borrow and spend?

Yet, now, as credit tightens and fake money becomes scarce, clarity will be delivered with impassive rigor.  Busts, bankruptcies, and bailouts will become the order of the day.


Charts by: StockCharts, St. Louis Fed


Chart and image captions by PT


MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.




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5 Responses to “When Fake Money Becomes Scarce”

  • Great article as usual. I wonder how much of the great balance sheet reduction is nothing more than an accounting exercise in marking bad debt the fed purchased from fantasy to market? They could simply reduce the balance sheet without actual selling anything….

  • utopiacowboy:

    Under the guidance of the Great Leader, Kim Il Trump, nothing shall go wrong and we will prosper forever!

    • GoldenArk:

      No you got it wrong left-wing cowboy. The balance sheet soared under Obama from 900 bl to 4.5 tn. And it was under Obama, that Yellin put into motion the contraction of the balance sheet and which Powell is following. Trump gets that rising rates and contracting balance sheet from such a low level baseline is unprecedented and a major headwind to economic growth – he said as much as was characterized as trying to influence the Fed. Try to learn something before regurgitating left-wing propaganda…. trying thinking without being controlled by your plantation masters. Better yet, try escaping from the plantation min control into the light.

      • utopiacowboy:

        Don’t worry, Biff, I won’t let those commie bastards win. Our Great Leader, Kim Il Trump, shall lead us into a new day. He is our savior!

      • Hans:

        Excellent post, Ark.

        We should be grateful, however, that Cowboy keeps
        it to a simple sentence.

        The free fed money is coming home to roost. GE, is now
        on the verge of bankruptcy, as party chairman and COE
        Jeffro Im(melt) from 2001 to 2017, spent over 152 BILLION
        dollars on now worthless stock buybacks. The stock will
        soon be available at your neighborhood dollar store.

        This is just the start, no thanks to the beltway swamp
        and a complacent society.

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