Credit Bubble Bulletin

Credit Bubble Bulletin2020-05-20T17:01:05-06:00

Presented by Doug Noland

Weekly Commentary

November 27, 2020: Pondering the New Treasury Secretary

The U.S. Goods Trade Deficit jumped to a then record $76 billion back in July 2008. A few short months later, financial chaos unleashed the “great recession” economic crisis. Traditionally, large trade deficits are evidence of loose monetary conditions and resulting unsustainable spending patterns. By May 2009 – only 10 months from the all-time record – the Goods Trade Deficit had shrunk to a seven-year low $35 billion. It’s worth noting, as well, that M2 money supply expanded $253 billion, or 3.1%, during 2009.

Fast forward to the current crisis period. M2 has surged $419 billion in only six weeks. Over the past 38 weeks, M2 has expanded an unprecedented $3.60 TN, with year-over-year growth of $3.785 TN, or 24.7%. October’s Goods Trade Deficit was reported Wednesday at $80.3 billion, lagging only August’s record $83.1 billion. Last month’s Trade Deficit was actually 21% ahead of pre-crisis October 2019.

No doubt about it, this crisis period is unique. More than three Trillion worth of Fed liquidity injections coupled with a more than Three Trillion fiscal deficit has thrown traditional crisis dynamics on its head. In this New Age Crisis backdrop, financial conditions have actually dramatically loosened. Money supply has skyrocketed, and stocks have gone on a wild speculative moonshot. Corporate bond issuance surged to new records. And, as noted above, booming imports pushed the Goods Trade Deficit to an all-time high. At $170 billion, the second quarter Current Account Deficit was the largest since 2008.

The bloated services sector has accounted for a majority of historic job losses. Massive stimulus has bolstered spending on goods – which has fueled the rapid recovery of imports. Home sales have boomed, with the strongest house price inflation in years. It’s only fitting that stimulus-induced “Terminal Phase” Bubble excess now engulfs the housing sector as well. That asset inflation and Bubble excess run rampant in the throes of crisis should have us all worried.

Bear markets, recessions and even crises are fundamental to capitalistic systems. While painful, wringing excess out of both Financial and Economic Spheres is essential to long-term soundness and vitality. And the sooner the better. Wait too long and policymakers won’t risk reining in Bubble excess. Yet such analysis sounds hopelessly archaic these days, as excess, distortion and structural impairment compound in perpetuity. (more…)

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