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Intensifying Economic, Fiscal and Financial-Market Crises. As this article is put to bed in the first week of August 2019, the U.S. financial markets are in some turmoil, with the Federal Reserve under criticism for doing too little, too late in monetary accommodation in order to counter an unfolding recession in the United States. 

That circumstance has been exacerbated by an escalating trade war between the United States and China. At the same time, the U.S. Congress and the Trump Administration have agreed recently to explosive growth in U.S. federal spending and the budget deficit, until well after the November 2020 federal election. That means continued rapid and otherwise unsustainable growth in U.S. government debt, in conjunction with the U.S. federal debt ceiling having been waived.

Together, recession, Federal Reserve actions and an exploding budget deficit sharply exacerbate the risks of massive U.S. dollar debasement by the Treasury and/or unfettered money creation by the Federal Reserve, ultimately collapsing the exchange rate value of the U.S. dollar and severely disrupting the global financial system, as we know it. Those factors are reviewed separately.


In the context of recent reporting and benchmark revisions, headline U.S. Gross Domestic Product has yet to show an inflation-adjusted current quarterly contraction, as of initial second-quarter 2019 reporting. Nonetheless, economic and employment series tied to such industries as retail sales, industrial production and construction all have shown recession, along with a number of private indicators and surveys of business activity and consumer behaviour.  

The Federal Reserve triggered the current new recession, by too rapid a tightening of consumer liquidity and hiking of interest rates in the year or two coming into December 2018. Those Fed actions reflected the U.S. Central Bank’s efforts to escape the systemic costs of the Quantitative Easing (QE) used to bailout the failed domestic banking system in 2008.  

Subsequently, the Fed’s Open Market Committee (FOMC) cut its targeted interest rate by a quarter-point on July 31st, with more easing likely to follow, potentially including a new round of QE, providing expanded liquidity to the banking system. If QE is reintroduced, such likely will become a permanent feature of the U.S. banking system.

Formal calling of the recession by the defining and deliberative National Bureau of Economic Research likely will not happen before late 2020, but its eventual calling should time the downturn from peak economic activity in November 2018. Accurate estimates of first-quarter 2019 GDP (presently showing annualised real growth of 3.1%) likely never will be seen, given data and survey disruptions from the partial shutdown of the U.S. Government, including key elements of the Commerce Department involved in tracking and reporting the economy. Yet, both second- and third-quarter 2019 GDP growth rates likely will show quarterly declines in their final reporting (initial second-quarter growth slowed to 2.1%).


Discussed previously in Executive Global Spring 2019 [Executive Global Spring 2019,“Yield Curve and Recession, Unfettered Money Creation and Hyperinflation”], “A confluence of unusual factors promises an unusually interesting year ahead for the U.S. economy, politics and financial markets....the [U.S.] economy appears headed into its first formal recession since the Great Recession, as signalled by an ‘inverted yield curve’ among other indicators...”

“If you were to plot a graph of market yields on Treasury instruments against their maturities, from left to right, from shorter-term to longer-term, the plot of yields or the ‘yield curve’ normally would have a ‘positive’ or increasingly rising slope, from left-to-right, from shorter-term to longer-term maturity. That circumstance reflects yield risk perceptions in the markets, where generally longer-term investments command a higher return than the shorter–term investments. With a pending recession, the risk shifts to the near term, with higher yields upfront and relatively lower yields in the longer term as flight capital seeks the longer-term rate stability...”

In the first week of August 2019, not only was the U.S. yield curve sharply inverted, signalling market perceptions of imminent recession, but also there was talk in the credit markets of U.S. Treasury yields turning negative for the first time in U.S. history, as has been seen recently with some German and French bonds.

Unless you are playing pricing games with bonds, where dropping yields boost prices, holding a bond at a negative yield makes no sense. Why not just hold cash, rather than be penalised financially for lending to the government?  If your investment goal is safety, consider holding physical gold. A negative yield curve signals financial-market and economic dangers at hand, as certainly does the potential for negative yields.


Also discussed in the Spring 2019 issue: “with U.S. federal debt levels up against the debt ceiling [now suspended], a euphemistically entitled Modern Monetary Theory (MMT) has generated some political turmoil in Washington. Largely dismissed out of hand by mainstream economists and politicians, MMT offers a rapid downhill ride into a U.S. hyperinflation. In contrast, mainstream U.S. politicians already have the U.S. on a slower, albeit just as calamitous downhill ride into hyperinflation....”  

“MMT centers on the concept that a sovereign state, such as the United States, can print its money at will, no need to balance a budget or to sell bonds. The theory goes that the U.S. cannot default on debt denominated in its sovereign currency, the U.S. Dollar, since the U.S. simply can print any dollars needed to cover its obligations.” 

“Applied to the United States, the theory advocates that the government simply print whatever dollars it needs to provide a guaranteed minimum income and/or employment to the general population. There is no need to issue bonds. Should inflation pick up and become a problem, the U.S. government simply has to take excess cash out of the system to contain it, by raising taxes or then by selling bonds, per MMT.”

In the existing circumstance, the U.S. government has no practical way of covering its current long-range obligations for Social Security and Medicare, other than having either an extra $80 trillion cash in hand, today, or by massively cutting future benefits and/or expanding mandatory Social Security and Medicare contributions.  The first option is not possible; the second simply is not politically feasible. 

MMT effectively is non-accountable government money printing, which camouflages existing, dangerous and otherwise unsustainable economic policies, specifically having the same effect as the currently unconscionable monetisation of unsustainable federal debt, which promises eventual systemic bankruptcy or the more likely event of full U.S. dollar debasement and hyperinflation. MMT simply is designed to accomplish unfettered government spending without constraint or accountability. 

The current system has some constraints placed on it by the financial markets, where funding is handled by the issuance of U.S. Treasury bonds, given some credence and discipline by the bond market and rating agencies. The open-ended MMT, however, is at the pleasure of the government, with no spending constraints on it other than its political needs. That explains why the MMT concept now is so popular among those hoping for massive expansion of new and existing government social programs.


Also previously discussed, the credit rating of U.S. Treasury securities was downgraded in 2011, by the Standard & Poor’s rating agency. “Then former Federal Reserve Chairman Alan Greenspan noted at the time that there was zero risk of the U.S. Treasury defaulting on its obligations. He noted that Treasury obligations were denominated in U.S. dollars, and that the U.S. always could print as many dollars as it needed. [That comment appears to be the underlying concept that triggered the MMT school of thought.] Dr. Greenspan was correct, where unbridled printing of U.S. dollars would not be an event of default for Treasury securities, such likely would be considered an implicit default, likely triggering massive flight from the U.S. dollar. Nonetheless, such a circumstance would lead eventually to runaway domestic inflation and full debasement of the purchasing power of the U.S. dollar.”


Discussed regularly in these articles, the practical protection for investors in these extraordinarily volatile and dangerous times and financial markets, remains the investment in and holding of physical gold.   EG

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