Credit Bubble Bulletin

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

Presented by Doug Noland

Weekly Commentary

January 15, 2021: The Reality of Financial Dominance

Please join Doug Noland and David McAlvany this Thursday, January 21st, at 4:00pm Eastern/ 2:00pm Mountain time for the Tactical Short Q4 recap conference call, “Managing in a Mania.” Click here to register.

The federal deficit for the first quarter of the new fiscal year was reported at $573 billion, up 61% y-o-y. Washington borrowed 45 cents of every dollar spent during the quarter. After the passage last month of the $900 billion stimulus legislation, estimates were placing this year’s deficit above $2.3 TN.

The Biden administration Thursday released details of its Covid stimulus package with a price tag of $1.9 TN. Goldman Sachs has since revised its estimate of the eventual size of this stimulus to $1.1 TN from $750 billion. Goldman believes tough negotiations are in store to garner the necessary Republican votes in the Senate. Democrats could push some of this spending through the budget “reconciliation” process requiring only a simple majority, although this would come with delays and other issues. The President-elect also announced a second major package addressing taxes and infrastructure would be coming later in the year.

It appears likely that this year’s fiscal deficit will now exceed even last year’s unprecedented $3.1 TN. The country is hurting, and social tensions are boiling over. I understand the argument that a deeply divided country can’t commence a healing process until our citizens get their feet back on the ground with confidence the economy is moving forward. Yet I dismiss the argument that low interest rates create the opportunity to assume larger debt loads. It’s a tragedy we came into this pandemic with such indebtedness and financial instability.

Our federal government is in the process of expanding debt by more than 30% of GDP in only two years. Hopefully not at double-digit annual rates, yet massive deficit spending is inevitable as far as the eye can see. Importantly, Washington is running massive deficits despite both record stock prices and corporate debt issuance – in the face of about the loosest financial conditions imaginable.

How enormous will deficits balloon when this historic financial Bubble bursts? Are $5.0 TN annual deficits an unreasonable guesstimate? No worries, apparently. There’s always the “whatever it takes” Federal Reserve balance sheet. In the financial and economic crisis scenario, does the Fed boost Treasury, MBS, corporate bond and EFT purchases to, say, $500 billion monthly? (more…)

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