IN-DEPTH: TRANSCRIPTION - UnderTheLens - 08-23-23 - SEPTEMBER – The Realities of Bidenomics
Thank you for joining me. I'm Gord Long.
A REMINDER BEFORE WE BEGIN: DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are COMMENTARY for educational and discussions purposes ONLY.
In this month’s UnderTheLens discussion I want to talk about what has, as recently as June, become known as Bidenomics. Only two weeks before Biden unveiled Bidenomics in a major June 28th public relations campaign in Chicago he stated at a June 17 union rally in Philadelphia.. And I quote: “I don’t know what the hell that is, but it’s working!”
The point here is that it appears that Bidenomics was only then used and quickly cobbled together in an attempt to give some appearance of strategy and structure to Biden’s economic policies.
The general reaction to a bewildered investment and economic community was I felt best encapsulated by this quote:
“This is the bitter fruit of the Bidenomics tree. The seed was trillions of dollars in excessive government spending; it was watered with trillions of borrowed dollars and fertilized by the Fed’s printing trillions of dollars. The results are fast-growing prices, a sluggish economy, and family budgets getting squeezed. “
Obviously there is a lot of truth in this, but are we being fair to President Biden?
In this session I don’t want to neither promote Bidenomics nor debase it. I only want to lay out the facts and let you decide what Bidenomics is really about, what it is achieving and where it is likely to take us.
I will focus on the facts and only where appropriate – consensus reactions & observations
However, from the outset let me state I believe there is a definite strategy at play, but as of yet few have fully grasped!
The strategy implementation is similar to Biden’s policy on immigration and open borders. Though we have been told repeatedly for three years the southern border was secure we have witnessed over 7 Million aliens simply cross into the U.S. illegally with Biden’s tacit sanction—without audits, background checks, vaccinations, and COVID testing, much less English fluency, skills, or high-school diplomas. The strategy is the erasing of the southern border and with it, U.S. immigration law.
It was done without congressional approval, debate or public awareness. President Biden was in direct violation of the constitutional responsibilities of the President. However, it was done and it will have profound impact on every American - eventually.
I believe Bidenomics is similar in approach.
I want to address the subjects outlined here in laying out the facts to see if they support my view that there is a strategy at work here!
Let’s start with what Biden and his economic team have announced. Because it was obviously rushed, the materials and narrative consist of a lot of “word salad”, platitudes, gibberish and gobblie-gook! However, when you actually distill it down it can be seen to be centered on three Pillars, four Goals and five objectives.
The Three Pillars as defined by the White House Press Release are:
- Public Investment,
- Grow the Middle Class,
- Help Entrepreneurs and Small Business Thrive
Without any further detailed plans the general reaction as expected was shown on the right:
- The Government will pick the winners,
- Grow middle class consumption (from an already world leading 68% level),
- Broadened Regulatory Supervision
The Four Security Goals are Economic, National, Energy and Climate
While the five major objectives are best distilled by the partisan Democratic paper the Washington Post are:
- Run the economy hot,
- Make unions stronger,
- Revive domestic manufacturing through green energy,
- Rein in corporate power,
- Expand the safety net.
Again without a lot of specifics these were generally translated to mean:
- More Government Control will deliver Personal Security,
- Elevated Spending,
- Return to Strikes & Labor Strife of the 1970’s,
- Manufacturing Revival in low productivity & less profitable areas,
- Regulations and
- Growth in Entitlements.
So with little announced plans and no supporting legislative action to now come from a new mid-term Republican controlled congress (a reflection of voter reaction to the initial two years comparing Bidenomics to Reaganomics) it appears to come up ‘wanting’.
We therefore should best assess Bidenomics properly from what has actually seen to be occurring over the full three years to date.
Even leaving spiking Covid spending behind us, we see Bidenomics spending over the next 10 years has now been established at levels last seen at the peak of WWII on a GDP basis.
Why? What is the apparent crisis?
The common refrain and spending justification is Climate Change and Green Energy Revolution!
On a 12 months rolling basis US government spending is now running at $6.7T. Saying we are spending like drunken sailors, that as a sailor even I take offensive to!
This would appear to be more than enough money to completely wallpaper the country with Windmills, Solar panels, free charging stations and even subsidized new EV cars for every family … with yet trillions left over!
We all tend to forget under appreciate what a Trillion dollars really is!
Bidenomics has delivered committed plans to spend $5.2B every day for the next 10 years.
It seems fighting Climate Change is an expensive proposition – especially when China, India and others have accelerated the building of coal powered plants to support increased industrial production for the likes of green energy and EV products for export to the US.
Spending this kind of money when Unemployment is so low is if you recall from your collage Econ 101 would be considered a bad recipe. Normally, you would only do something like this when unemployment is at deep recession or even depression levels?
What this does is drive Inflation through the roof, interest rates up like a rocket launch and cripple mortgage rates to such a level to make housing and rents out of reach for the America worker and family.
Frankly, what Bidenomics on the surface is doing is potentially de-stabilizing the US Economy!
It’s like the Captain has gone stark raving mad and no one will tell the emperor he has no clothes.
Unless of course there is more going on than we realize or that the period between now and the hell Climate Change will deliver is more immanent than most realize?
Inflation having shot up is now appears to be falling but can be soon be expected to shot even higher for the same reasons as the 1970s which we have laid out in other videos and our weekly newsletter.
Why? Because Inflation is still compounding at high rates and it is only because Energy costs have recently come down. This is primarily being driven in the short term by Bidenomics choosing to sell-off the US Strategic Petroleum Reserves (SPR) to drive energy cost down.
Other areas are NOT coming down and just keep on compounding!
We need to remember that the impact of US and Global Anti-Fossil Fuel policies are still ahead as a result of the lag effect from these strategic policy decisions.
.. Soon energy is likely to again rise strongly as Saudi Arabia and OPEC+ require higher prices economically as their costs escalate..
The IMF and the FAO are currently strongly warning about Food inflation and shortages which few are paying any attention to.
Government Tax receipts are rapidly falling, while interest on the government new expanded debt levels is quickly approaching $1T/year.
US employment can be expected to plummet if the US experiences a long overdue recession which will only make all these numbers worse.
This is certainly a lot of bad news to digest! It would appear Bidenomics is shouldn’t get to good of marks if we are honest.
However, the expected recession hasn’t yet arrived? US employment is still strong by historical standards, consumers are buying, and retail sales are strong.
Somehow this all just doesn’t seem to make any real sense? Almost everyone I talk to is confused and baffled?
Maybe Bidenomics is actually working and we just don’t realize it?
If that is a possibility, why would that be and how exactly did this confusion occur??
This forced me to put this simplified schematic together to try and get to the root of the misunderstanding. The schematic reflects the Federal Reserve’s Balance Sheet to illustrate how money has been created since the 2008 Financial Crisis. It shows the Fed’s major Assets and Liabilities.
Assets above zero must equal the liabilities that are negative and below zero.
Major Fed Assets currently held are Government Bonds and Mortgage Backed Securities or MBS’ are on the positive side. On the negative side are Major Fed Liabilities such as Loans to Banks, The US Treasury General Account (or TGA), Reverse Repurchase Agreements, Currency and Bank Reserves.
Since the 2008 Financial Crisis in the Era of Quantitative Easing the Fed bought back bonds and MBS from the market thereby we have a rising black Government Bond line and a rising orange MBS line. These purchases corresponded to an increasing Bank Reserve liability balance shown by the falling red line.
With Covid these all rose along with the size of the US Treasuries TGA shown in turquoise.
However, starting in January of 2021 the Fed increased the attractiveness of Reverse Repos such as they subsequently increased liabilities dramatically to ~$2.4T (the grey line). Meanwhile Treasury Secretary Janet Yellen drew down the TGA account significantly as the Debt Ceiling approached.
To allow us we to see better what has happened in 2023 as a result of the banking crisis in March and the Debt Ceiling leading up to June, we need to look inside that red elongated circle on the right.
Here I show only the liabilities side of the balance sheet all the way back to 2008 for easy comparison.
You can see the corresponding gyrations in some of the liabilities relative to each other as Quantitative Tightening (QT) is implemented, the use of the Bank Term Funding Program (BTFP) to stem the Banking Crisis is put in place and the Debt Ceiling increase is agreed upon.
I know your eyes are glazing over trying to figure out what it means, so to make easier to fully grasp what is really happening here, I put the following illustration together.
I have cautioned many times to pay more attention to Treasury Secretary Janet Yellen remembering she is the former Federal Reserve Chair and long time Fed member.
In my studied opinion she has craftily orchestrated an effective stealth liquidity pump.
How this pump is now working is that the Bank term Funding Program (or BTFP) on the left was implemented during the March SVB banking crisis to effectively neutralize the loss of bank deposits fleeing the banking sector and heading to higher paying money market funds.
The Money Market Funds becoming flooded with money instead of placing it in Reverse Repo deposits bought Yellen’s much needed (due to the Debt Ceiling debacle) and orchestrated higher paying short term bills. As the debt ceiling was resolved and the TGA could sell Treasuries the amounts and duration increased as increased money flowed from the RRP accounts to the TGA. The RRP has consequently fallen from $2.4T to ~$1.7T.
What this means is that the US Treasury is currently flooding the market with money which is not going through the banking system in terms of new loans. It is going directly to consumers, corporations or any entity the government so desires.
This is where the confusion arises on why there is so much liquidity when the Fed is raising rates, executing QT, all while bank lending standard are tightening.
The Financial Conditions index from Goldman Sachs would make no sense otherwise.
.. nor would the Fed’s own Financial conditions Index.
This isn’t speculation --- this is a fact!
What is happening here is we are seeing the early stages of money creation increasingly fiscally driven versus solely monetarily driven.
This is a profound shift which can prove to be highly dangerous for Fiat Currencies! This is actually what Bidenomics is about!
What Bidenomics is doing is implementing its version of Modern Monetary Theory or MMT
As I said it is still early but the earmarks and thinking are clearly there.
MMT is fundamentally about ignoring government debt, minimizing money having to be loaned into existence by private lenders and having the government place it directly in the hands of the spender for immediate consumption.
During Covid-19 we had in many ways already adopted MMT.
Through the use of Forbearances for rent, mortgage and student loans we made money available that should have went to the lenders to be used for direct consumption.
Additionally in many of the recent natural crisis’s the government has given tax deferrals to those impacted which was also used for consumption. This helped those impacted during difficult times but also was about keeping the economy from stalling.
In these examples the facts are we have kept the programs going for periods well passed their originally intended period thereby continuing to add liquidity to the system.
This in my opinion is why Bidenomics is so intent on Student Loan forgiveness. It is about keeping consumption going in a 70% US consumption economy. Almost every consumer today has some form of student loan outstanding.
The reality is that instead of saving the money to pay back the unpaid mortgaged, rents and student loans the natural tendency is to spend the money.
This is exactly what people have been doing with all the money not spent (but still nevertheless owed) from Covid. They have been spending it which has kept the economy flush with liquidity.
Unfortunately this gig ends unless new methods to distribute money are engineered.
Yellen and Powell are acutely aware of this and this is why the new FCI-G reporting was created. I have written about this in our weekly newsletter and how it is suggesting the window is quickly closing and explains Biden’s obvious urgency with Student Loan forgiveness. He appears to even be willing to move against the courts if need be. It will not be the first time he has defied the court indirectly and directly.
Student Loan forgiveness is more than just about President Biden’s altruistic values.
So what can we conclude?
The Stealth Liquidity Pump can still run further but there are some terminal issues with it.
Money Market Funds want shorter duration dated bills which the Treasury must issue if it is to successfully further pull more money from the Fed’s Reverse Repo pool currently at ~$1.7T. This is expensive for the Treasury on an already rising debt servicing load.
The Banking industry continues to weaken as S&P Global Rating just joined Moodys and Fitch in downgrading US Banks. Loan losses are likely to increase and many banks are going to potentially forced to begin selling their currently underwater bond portfolio. The Fed will be forced to to greatly expand the BTFP to keep banks solvent which will fly directly in the face of its current QT program. Fleeing deposits could panic directly to Bond ETF’s, but still rising rates would make this currently unattractive and risky. If the fed drops rates immediately that could help both the banks and fleeing depositors. How that unfolds will soon be evident.
The Liquidity Pump is likely to soon start sputtering when it is needed the most.
However, never underestimate Janet Yellen to come up with another sly game – it seems that is her real raison d’être!
My guess is the US government will soon shift to using loan guarantees in the form of contingent liabilities. These will never be announced but quietly used on a large scale to likely attract foreign capital so not as to jeopardize the US dollar and US banks.
We are increasingly moving towards increasing government dependency with more and more citizens and “paroled” aliens living off government largess.
We can expect free enterprise to increasingly become more and more about successfully operating within a large government regulatory state.
Overall, we can expect the US standard of living to fall as we “get less and less, for more and more!”
“Bidenomics is nothing new. Advocates of industrial policy in the 1980s used to latch onto Japan as a model for industrial policy, arguing that it contributed to Japan’s emergence as an economic power after World War II. But since the last three lost decades in Japan, the industrial policy advocates have gone radio silent. It’s hard to imagine a more misguided way to make decisions than to put them in the hands of those who pay no price for being wrong.”
The only thing that is new about Bidenomics is its version and adoption of Modern Monetary Theory!
As I always remind you in these videos, remember politicians and Central Banks will print the money to solve any and all problems, until such time as no one will take the money or it is of no value.
That day is still in the future so take advantage of the opportunities as they currently exist.
Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically.
The powers to be are now effectively trapped by policies of fiat currencies, unsound money, political polarization and global policy paralysis.
I would like take a moment as a reminder
DO NO NOT TRADE FROM ANY OF THESE SLIDES - they are for educational and discussions purposes ONLY.
As negative as these comments often are, there has seldom been a better time for investing. However, it requires careful analysis and not following what have traditionally been the true and tried approaches.
Do your reading and make sure you have a knowledgeable and well informed financial advisor.
So until we talk again, may 2023 turn out to be an outstanding investment year for you and your family?
I sincerely thank you for listening!