Blog | CB Investment Management

MMT Deepens The Debt Trap. RisksTo Bonds And The Dollar.

 

Modern Monetary Theory (MMT) is not modern and is not a theory. It has been implemented all over the world and only created massive inflation and poverty.” Daniel Lacaille

 

While the G in C+I+G (in GDP) accounts for 17% of GDP, it contributed closer to 30% of the Growth in 2023.” Keith McCullough 

 

“The S&P is also up almost 1,000 points since the Fed bailed out (by printing money) regional banks via the BTFP last March. The S&P had been falling prior to the Fed’s announcement of the new program.”  David Sommers

What is the story we are told about economic policy?

MMT, or Modern Monetary Theory, is great! “No Limit” economic policy, more government spending, more money printing, and more liquidity can generate growth whenever we want to.

What has actually happened?   A “catastrophic success”.

An ever more distorted economy has boosted asset prices, but growth has deteriorated. This has enriched the top 10% of the wealthy but crushed the Middle and lower classes and small businesses.

What is true for the last 60 years? The chart below shows that MMT does not work. More and more rising debt does not create economic growth. Nominal growth has continued to decline as debt has more than doubled.

Too Late, too difficult, to stop MMT

Policy makers clearly understand that ending MMT would create a collapse in asset prices, so that does not appear to be an attractive option. Continuing with MMT seems like a better option. However, the scale of additional debt needed rises exponentially. The numbers have already become impressive.

There will be $8.2 trillion in treasury debt maturing in 2024. This is a new all-time high.

In addition there will likely be a further $2 Trillion new capital needed to finance the current budget deficit. This means that almost $1 Trillion of financing will be needed per month!

Are Long term Treasuries a safe asset any more?

Investors need to carefully reconsider the core composition of their portfolio. The market is clearly signaling some concerns about long term Treasuries.

For the first time in 45 years, we are now seeing US Treasuries have higher downside volatility than gold. That is a sure sign that the market is signaling a sea change in how the market functions and what is increasingly becoming the new safe haven long term asset.

Volatility Signals: Gold is replacing long term Treasuries as a priority safe haven asset. Wealth is attracted to low volatility.

For most of the 18th-20th centuries, government bonds usually behaved like a risky asset. When equity prices fell, bond yields rose, i.e. bond and equity returns were positively correlated (bond prices move inversely to yields).

But since the mid-2000s, bond and equity returns have been negatively correlated, i.e. bonds became a hedge for risk. Before this, the last time this correlation was near zero for a prolonged period was the long depression in the late 19th century.

Shorter term correlation calculations show that the stock bond correlation has already reversed to positive. This should be expected in more inflationary conditions, even without the record bond supply issue.

This week’s CPI data came out higher than expected and both freight rates and the oil price rose in reaction to international developments.

Investors should notice that the market assessment of expected inflation broke out of a one year downtrend.

Let’s not forget that the yield on US Treasuries provides the benchmark for valuations of US Equities

US equities may eventually also be impacted by the new dynamics in the bond market. Already US equities are in dangerous long term territory on this basis.

‘The yellow bubbles show the rare points in history when estimated S&P 500 total returns were actually below the yield of 10-year Treasury bonds.’

Russia is the host nation for BRICS PLUS in 2024. Gold and the dollar will be discussed.

Given the likely intransigence of the ever expanding nature of US debt, and the uncertainty over longer term inflation, it would seem appropriate to introduce some caution to commitments to long dated Treasuries, or regard long dated maturities as trading positions only.

When we also consider the international outlook for the dollar, it may be an additional reason to shift away from Treasuries and the dollar in favor of gold.

Alasdair Macleod sheds light on the vulnerabilities of fiat monetary systems and the potential consequences they entail. In this eye-opening discussion, we explore why central banks around the world are caught in an inescapable debt trap and examine the historic significance and enduring allure of gold as a stable store of value. With its unrivaled track record, gold has stood the test of time throughout countless monetary fluctuations. Uncover the reasons behind its reemergence as a trusted safeguard against economic volatility and inflation.

Summary

While opinions vary on a daily basis on the outlook for growth and inflation, don’t lose sight of the remarkable dynamics of MMT, which will eventually prove to be decisive.

Policy seems to be in control coming in to this year, with a supportive background for some easing of monetary policy. However. US equity positioning is extreme, supply is extraordinary, and international demand for Treasuries and the dollar is coming under review.

Best Practice is a matter of your Best Interest.


Education and a Commitment to Informed Consent is an Obligation.

Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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