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2023-10-24 Economy
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Debt, Currency Debasement & War‐The Timeless Pillars of Failure
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 [Gold SZ] Below, we follow the breadcrumbs of simple math and bond market signals toward an oft-repeated pattern of how once-great nations become, well...not so great any more.
Debt Destroys Nations
Debt, once it passes the Rubicon from extreme to just plain madness, destroys nations.
Just ask the former Spanish, British or Dutch empires. Or ask the inter-war Germans. Ask the Yugoslavians of the 1990’s or ask a historian of Ancient Rome or a merchant in modern Argentina.
It’s all pretty much the same story, just different a different stage or curtain call.
Like Hemingway’s description of poverty, the process begins slowly at first, and then all at once.
Part of this process involves currency debasement needed to pay down more desperate issuance of IOUs, a process evidenced by rising rather than "transitory" inflation.
Thereafter, comes increased social unrest, and hence increased centralization from the political left or right in the name of "what’s best for us."
Sound familiar?
Centralization—The Last, Failed Act
Centralization never works in the long run, but that has never stopped opportunists from trying.
Just look at our central bankers.
In a centralized rather than free market, the very name "central bank" should be a dead give-away as to their real role and profile.
As private central banks have been slowly increasing their hidden power and control over national markets and hence national welfare, the very notion of free price discovery in bonds, and indirectly in stocks, is now all but an extinct financial creature in the neo-feudalism which long ago replaced genuine capitalism.
How the Central Game is Played—From Temporary Prosperity to Permanent Ruin
When central banks like the Fed repress rates and print gobs and gobs of money, bonds are artificially supported, which means their prices go up and their yields are compressed.
When yields are low, rates are low, which means the cost of credit is cheap, allowing otherwise profitless names in the stock markets to borrow money and time for years of temporary prosperity—like a 600% rise in a post-08 S&P...
In short: central bank repressed rates are a profound tailwind for otherwise mediocre risk assets.
But when central banks like the Fed raise rates (ostensibly to "fight inflation"), the opposite effect happens—and things break. I mean really break.
I’ve written and spoken ad nauseum about what has broken, is breaking and will continue to break; furthermore, I’ve written and spoken at length about the quantifiable irony that Powell’s so-called war on inflation will only end in more inflation.
Yep, the ironies just abound in this world of so-called experts, which is little more than an island of misfit toys.
Postponing Pain Only Heightens It
In normal, free-market cycles devoid of central bank "support," bonds and hence rates rise and fall naturally based on natural demand and natural supply.
Imagine that?
This leads to frequent but healthy moments of what von Mises and Schumpeter described as "constructive destruction"—i.e., a cleaning out of debt-soaked and crappy enterprises in naturally occurring recessions and naturally occurring market drawdowns.
But central banks somehow thought they could outlaw recessions by printing money out of thin air to support bonds and repress yields. You know—solve a debt crisis with more debt. Brilliant...
This was hubris at the highest level, and the stupid just became a habit and even received a fancy name to justify it—Modern Monetary Theory.
Natural Market Forces Are Stronger than Central (Bank) Forces
But the longer central banks postponed pain to win Noble Prizes and ego-lifting acclaim from the un-informed, the greater the natural pain (ticking time bomb) these central planners created as they now slowly realize that the bond market, like an ocean, is more powerful than a band of unelected market stewards.
In fact, a bunch of FOMC officials (Kashkari, Bostic, Waller et al.) are now running around like headless chickens and declaring that higher bond yields may now be more powerful than the Fed Funds Rate.
In other words, after months of hawkish chest-puffing, they are saying that perhaps enough is enough with the "higher for longer" meme...
Central bankers, it seems, are beginning to realize what informed credit market jocks have always known, viz: The bond market is stronger than any central bank.
Price Matters
That is, eventually central bankers lose control of artificial bond pricing.
Which means that eventually the great weight of sinking bonds and hence rising yields and rates becomes more powerful than central bank money printers to keep those bonds artificially "supported."
I’ve been saying this for years despite "journalists" at the WSJ and Financial Times calling math-based realists like me "kooks."
But recently even the fine folks at the WSJ or Financial Times (FT) are beginning to worry out loud as UST supplies far outstrip natural demand, causing bond prices to fall and yields and rates to rise fatally higher than central bankers once thought safely under their control.
We’ve warned of this for years—and this grotesque supply and demand mis-match has only risen exponentially in recent months.
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Posted by Besoeker 2023-10-24 07:04||
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